Tax time trauma – Don’t frighten the bank unnecessarily!


If you have a business or bank loan, and you submit your tax return through a tax agent don’t frighten the bank with a tax return that shows you are losing money. The Biblical phrase “The borrower becomes the lenders’ slave” can be avoided with some wise loan management, including the points below.

Taxable Income
Taxable income comes from the receipts that the Tax Act says are taxable in that year less the expenses that the Tax Act says are deductible against that income in that year. One of the first things I learned when I started work with Price Waterhouse as a junior was that the tax figures did not necessarily reflect the profit of a business or a farm. I have been lucky enough to work with some of the biggest businesses and agricultural companies in Australia as well as running my own property development and equipment hire businesses, a Merino Sheep property in the centre of NSW and a beef cattle property in the Southern Tablelands as well as my national Chartered Accountancy/CPA practice and my bank loan solutions consultancy.

Net Profit
Profits come from what you receive minus what you spend running your farm or business during the year in question. That sounds the same as taxable income but in fact can be very different. The Tax Act is a political football doing  favour to some and disadvantaging others. Sometimes the accountant will burn the midnight oil to show that as far as the Tax Act is concerned, you earned very little taxable income during the year, while a true set of financial statements might show that you earned a fortune.

The Bank
The figures you show the bank up front should reflect the actual profitability of your enterprise and then be reconciled back to the tax return and assessment if you want to maintain a frank and truthful relationship with your bankers. They then are fully informed of how you a really going. It often happens when they are only given a tax return, that they get the impression that you are going broke and may not be able to repay your debt on time.

EOFY purchases
Many farmers and business owners heed the retailers and buy tax deductible equipment and supplies in the latter part of June just to get a tax deduction. To the bank that can make the figures look like a disaster. If you do that then your accountant should, in your Profit and Loss Statement, reduce the expenditure for the year by the cost of the stock of unused items that you purchased at year end to get the tax deduction. Again that allows the bank to see your true trading result instead of what your tax accountant or the EOFY sales pitch encouraged you to do.

Honesty pays
Always be honest with your bankers. But do get a qualified specialist accountant like those at GBAC to review your final financial statements for presentation to the bank. If you have had a bad year, and some will have this year, that specialist will spend some time carefully explaining what caused it and how it will improve in the years ahead. That particularly applies if you have been affected badly by Covid, drought, bushfires or floods . Banks will usually go out of their way to help you when you do the right thing and explain your circumstances to them.

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