Selling your work: declaring it, claiming depreciation, GST etc

[rsser]

Hi folks,

I turn for recreation, and won't admit publicly to having sold anything anywhere anytime.

However, a corporate recently bought a bowl and since I'm registered for GST for my day job with an ABN I invoiced them and charged the GST.

That GST I can offset many times over on purchases for turning last fin. year. Of course, I can't claim more credit than what I charged.

For those of you who travel this route often maybe you can help:

With years of purchases of hardware and consumables, none of which I've tied to any particular product, and assuming more sales are coming :rolleyes: , how do I claim depreciation and GST credits?

I know there's been crackdowns by the ATO on bogus craft claims, and that's fair and doesn't concern me.

Any advice appreciated,
.

[seriph1]

Hi Ern,

I feel that what you need to do is clearly explain your situation to an accountant who is well versed in the GST and depreciation implications of your particular activities - no one here is qualified to advise you about your situation even if their's appeared to be the same..... unless of course, they happen to be fully qualified to do so :D:D:D:D:D

[manoftalent]

I know this sounds a bit weird, but try ringing the ATO, and ask them ...I have in the past and found them to be very helpful, they also told me it is their job to make YOU aware of the if's but's and maybe's as far as claiming is concerned ...you dont have to give your name or anything and nobody will be pounding down your door the next day ..lol......they are simply there to help with any concern.

[Calm]

Ern,

The basic concept of tax is that if you claim the expences as a dedution then you must declare the income from that same business venture.

There are fairly complex rules relating to "hobbies" but the same basic rules apply. Yes if you are registered for GST you can charge GST on sales and claim the GST on purchasers. But at the same time it must be a "business venture".

The following is an exert from the ATO website.

<TABLE borderColor=#00ff00 height="100&#37;" cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR><TD vAlign=top><TABLE borderColor=#0000ff height="100%" cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR><TD style="PADDING-RIGHT: 8px" vAlign=top><TABLE borderColor=#ff0000 height="100%" cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR><TD vAlign=top width="100%">Am I in business?


</TD><TD vAlign=top><TABLE borderColor=#ff0000 border=0><TBODY><TR><TD vAlign=center>http://www.ato.gov.au/images/email.gif

</TD><TD><HR align=center width=1 SIZE=19></TD><TD vAlign=center>http://www.ato.gov.au/images/icon_print.gif (http://www.ato.gov.au/print.asp?doc=/content/66884.htm)</TD><TD><HR align=center width=1 SIZE=19></TD><TD vAlign=center>http://www.ato.gov.au/images/fontdecrease.gif (http://www.ato.gov.au/common/process.asp?action=Decrease&ReDirectURL=)</TD><TD><HR align=center width=1 SIZE=19></TD><TD vAlign=center>http://www.ato.gov.au/images/fontincrease.gif (http://www.ato.gov.au/common/process.asp?action=Increase&ReDirectURL=)</TD><TD></TD></TR></TBODY></TABLE></TD></TR><TR height="100%"><TD vAlign=top colSpan=2><STYLE type=text/css> SPAN ?? font-size: 105% } </STYLE>How do I tell whether I am in business?

There is no simple answer to whether you are in business or not, it depends upon the facts in each case. However, you can use the following questions to help you determine whether your activity is actually a business:

Does your activity have a significant commercial purpose or character?
Do you have more than just an intention to engage in business?
Do you have a purpose of profit as well as a prospect of profit?
Is there is repetition and regularity to your activity?
Is your activity carried on in a similar manner to other businesses in your industry?
Is your activity is planned, organised and carried on in a business-like manner?
Does your activity have characteristics of size, scale and permanency?
Would it be true to say your activity is really better described as a hobby, recreation or sporting activity?Each time you answered ‘yes’ to the questions above, it increases the probability that you are in business.


back to Dave

I doubt that most "woodturners" would be in business as the intention is not to make a profit.

If you were in business then the deductions that you could claim would include, power, turning supplies, all travel expences associated with turning, entry fees to shows, selling expences - phone, advertising, ebay charges etc. Any tools with a usefull life of more than 1 year are depreciated over the expected lifetime. Simple example :- if your lathe costs $5,000 and you expect it to last 5 years then sell it for $1,000 then your depreciation claim would be 5 x $800 per year = $4,000.

Against all these expences you would declare all your income and i think if you have a good study of the resulting "business loss" then the ATO would not buy into your "hobby " being a business.

That is the world of taxation from the eyes of Dave. Sorry but yes it is my day job. Probably explains the personality aye!!


</TD></TR></TBODY></TABLE></TD></TR></TBODY></TABLE></TD></TR></TBODY></TABLE>

[jisk]

rsser,

I'm not an accountant, or a wood turner, but have run a small business in the IT field back in NZ. Most of the rules are the same. I manage my own tax affairs, but you might want an accountant if you're not sure. The ATO's website is very comprehensive but expect to spend a lot of time reading their rules and brochures.

You can only "claim" depreciation and whatnot if you are carrying on in business. The ATO have some specific measures to determine if this is the case. Check out the Getting Started section at this link: http://www.ato.gov.au/businesses/pathway.asp?pc=001/003/039&mfp=001/003&mnu=841#001_003_039.

Depending on whether you run your business as a sole trader or registered company changes the way you do your tax. Sole trader is the easiest, as it's not a separate entity to *you*. Companies are a separate entity and have their own TFN and pay tax separately. I'm assuming you'll be a sole trader.

I'll tackle GST first. GST is paid separately to your normal tax. Once you've got an ABN and are registered for GST, you collect GST on each sale you make. Every three months or so (this varies) you file a GST return and then pay your GST. The GST you pay will be the GST you charged less the GST paid for purchases in your business. For example, if you charged $1000 in GST on your sales, and paid $300 in GST on your supplies and asset purchases, you'll pay $700 to the ATO for GST. Keep in mind that you may not need to register for GST unless your earnings are over a certain amount.

For the main component of the business, you'll need to get some financial records together. When transferring your existing tools and machinery to the business you should do so at the current depreciated value of the equipment. That link I pasted has a PDF explaining depreciation rates. Depreciation for small businesses is 30% per year on most equipment. Once the equipment has been "transferred" in title to your business (you don't need to do anything to transfer it - just record it), you can start to claim depreciation.

Claiming depreciation is pretty much the same as any other expense, except you work it out at the end of the tax year with the ATO. For example, if you work out that in a year:

Your income from business was $10,000;
Your expenses were $3,000; and
Your equipment depreciated in value by $2,000.
Your net profit from the business would be $5,000, so you'll only get taxed on the $5,000.

Cheers,
James.

[Bleedin Thumb]

Of course, I can't claim more credit than what I charged.

.


Who says.

I have been doing exactly that for the last several years whilst being a home dad and working rather sparodically (sp?).

Your tax account is like a bank account you can have tax credits. however I don't think you can carry them over to the next financial year unless your a Pty Ltd Co.

As others have said ask an Accountant........not that this is a particularly pleasant way to spend ones time....:roll:

[jisk]

Any tools with a usefull life of more than 1 year are depreciated over the expected lifetime. Simple example if your lathe costs $5,000 and you expect it to last 5 years then sell it for $1,000 then your depriation claim would be 5 x $800 per year = $4,000.


Depreciation in small business is at 30% per annum for most items from 1st July 2007; and the diminishing value method is always better than the straight line method regardless of the system. The case you describe would be more like this in practise:

First year: Lathe value, $5,000 at start of year; Depreciation, $1,500
Second year: Lathe value, $3,500 at start of year; Depreciation, $1,050
Third year: Lathe value, $2,450 at start of year; Deprecation, $735
Fourth year: Lathe value, $1,715 at start of year; Deprecation, $514.50
Fifth year: Lathe value, $1200.50 at start of year: Depreciation, $360.15

That leaves a residual value of $840.35 on the lathe. If Ern went on to sell it for $1,000, a gain on sale of $159.65, which would add to his profit in the sixth year.

Also, you can immediately write off the full amount of a lot of asset purchases under $1,000. Check out page 30 of that pdf on the page I linked to.

[jisk]

Your tax account is like a bank account you can have tax credits. however I don't think you can carry them over to the next financial year unless your a Pty Ltd Co.

I'm pretty sure you can offset a loss of a previous financial year if you're a sole trader as well. But don't quote me on that.

[Calm]

My apologes for trying to keep it simple to understand. :rolleyes: :?

[jisk]

My apologes for trying to keep it simple to understand. :rolleyes: :?

OK, Sorry mate, didn't mean to seem so aggressive! I'm just pedantic. Don't mind me :wink:

[journeyman Mick]

I'm pretty sure you can offset a loss of a previous financial year if you're a sole trader as well. But don't quote me on that.

In certain cases you can. I'm not sure how it's worked out, but I'm carrying forward losses from previous years.

Mick

[hughie]

Ern,

Its quite a complicated business that has spawned a whole new industry.
You can either read and read via the web site....see links..:U

Or talk to your favourite accountant


Some of the basics are that you may need a ABN re turning. Also volume of sale [in $ terms] effects your reporting requirements for GST and claiming of it. If aint a business and you have just started selling this year, past years may not count re asset depreciation.

In my case cos I had a ABN inexisitence for 3-4 years but claimed no income it could not claim any depreciation, :C so the capital expenditure was lost, so to speak.
But power,tools,travel,depreciation,phone etc will be a cost to the business and therefore have thier place for claiming

Me, I leave it to SWMBO.....my resident bean counter CPA etc.



below is some reading that should drive you to the bean counter...:U

GST
http://www.ato.gov.au/content/downloads/nat1908.pdf

http://www.ato.gov.au/businesses/content.asp?doc=/content/13266.htm

http://www.ato.gov.au/content/downloads/N3014072007.pdf

depreciation
http://www.ato.gov.au/content/downloads/n10709.pdf

http://www.ato.gov.au/content/downloads/NAT1996_07.pdf

[cedar n silky]

I used to have an ABN, as a sole trader, (building days) but relinquished it this year, as I hadn't realy used it lately, (quite a few nil returns in the last few years because I worked in the public service more recently.)
The ATO said I was about to get a letter anyway, because there is basically a lot of "dead wood" out there (excuse the turning pun)
So, use it or loose it, cause they are tightening up.:D

[smitthhyy]

My home and contents insurance covers my tools etc because it's a hobby. The moment it stops being a hobby and you get an ABN, your home and contents insurance also stops as I found out. So then your looking at getting some sort of business insurance which costs a hell of a lot more than home and contents.

So while, like myself, it looked attractive to be able to buy at trade, claim a level of GST, etc etc, doing the maths very quickly made it not such an attractive alternative.

So now I get most of my stuff by negotiating best price possible, getting builder mates to buy it for me etc etc.:)

[rsser]

Thanks all for your generous replies.

There's a lot more to it than I had thought ... and kind of catch 22:

Got to intend to make an income, so you buy the gear, and make then sell items. In my case, the order has been the reverse.

Oh well, will do the reading and doubtless reflect on the grey economy. Annual visit to the accountant is about to happen anyway.

[Sturdee]

One aspect of the depreciation that is being overlooked is the apportionment of private use vis avis businesss use.

It is true that you can claim depreciation on assets used to generate income but private use must be deducted.

In your case you would need to prove that it was firstly for business use and then deduct your non business use of your tools. You would need to keep a log of the hours used to produce income and the hours used for private use, similar to the motor car depreciateon system.

Once you do all that you'll be a professional bookkeeper and only an occasional turner rather than the other way around.:D


Peter.

[munruben]

But isn't it fact that the profit made from a hobby is not taxable?:?

[Sturdee]

But isn't it fact that the profit made from a hobby is not taxable?:?


But he charged GST on the sale hence it moved out of the hobby area and became part of his taxable income.

Peter.

[munruben]

But he charged GST on the sale hence it moved out of the hobby area and became part of his taxable income.
Peter.
Gotcha !

[rsser]

LOL.

I only did this me'lud cos it was my main day-job client and they wanted a distinctive gift for a visiting dignitary. And of course it could only be paid by invoice.

Sigh.

[Calm]

Ern

That is fine, your accountant will just put it in your tax return as income. Now you need to estimate the costs of producing the item you sold. Include materials, overheads, incidentals etc to end up with a figure the same as the selling price less GST. That way the whole exercise is revenue neutral.

As for all the other comments in this forum regarding selling items everyone is close to being factually right but i still think the biggest hurdle to overcome is provng the whole venture is actually a "business". Proving that the intention when woodturning is to make a profit could be difficult. A hobby seems more likely to be the decision of the ATO.

I wouldnt let that stop you from trying. They dont hang you for innocent mistakes. Ask Glen Wheatley.

[rsser]

Thanks David.

I've kept a load of receipts last couple of years thinking the hobby might evolve. It will be hard though attributing costs accurately to one sold item.

And actually, I'm not sweating on this one item. Happy for forward the GST and claim modest production costs even if it needs a stat. dec.

But the issues of insurance of equipment is a worry and apportioning costs between hobby and income a joke. Sunk costs?! You should see the size of the well ;-}

Hey ho ... all this might force a choice. Not a bad thing.

[soundman]

the whole thing becomes a pain in the kneck if you are just fiddling about and selling the odd item...... I don't think the tax department want to know if its only a few hundred dollars.

For those of us with an established business activity... particularly if it has a timber related component, it is a awfull lot easier..... you just make it an adjunct to your existing activity.

If you are starting from scratch....
keeping records
costing your work
profit & loss statements
business activity statements
public liability insurance
different footing for other insurance
a whole bag of worms associated with regulations you are now subject to because you are a business.

OMG....:oo: don't do it unless you are seriously going to make good money out of it.

cheers

[RETIRED]

OMG....:oo: don't do it unless you are seriously going to make good money out of it.

cheersWhen?:wink:

[journeyman Mick]

When?:wink:


Well, if you're smart enough you're never going to show too much of a profit.:wink: :D

Mick

[soundman]

Most people I know who have "a wood craft business" have some sort of alternate, complimentary income AND have some means of..........leveraging....... the woodcraft operation:;
I think the consensus is that it is very difficult to make a profit from woodcraft running what would be considered........"a conventional model"

cheers

[Calm]

I would divide the costs into 4 groups.
Direct
Indirect woodworking
Depreciation
Indirect overheads

Then calculate the total of the last three groups for a year "business related".

Estimate the hours that you would spend each year eg 2 hours each night, 5 hours Sat & Sun, total 20 hours pewr week x 52 = 1040 hours. if you are in business the non business portion (private use) would be around 10 - 20 &#37; so less 15% = 884 hours per year.

The total of each of the last three groups is divided by 884 hours to give you a per hour figure.

Estimate the total hours you have taken to produce the product sold and there is the cost.

Remember that you then need to add profit which will cover your wages that have not been included below.

Direct would be the actual piece if wood you made it from, the sandpaper, and any other items only attributed to that article.
Total these costs.

Indirect Woodturning include all other purchases for the year that are used for woodturning include any tools costing under $1000. This will include polishes, oils, sharpening stones, chisels, lights, woodturning shows or expo,s (education) etc.
Total all these items and divide it by the total hours per year eg 884 hours.

Depreciation if your turnover is less than $5,000,000 you are better to be in STS (Simplified Tax System), most of us turners would fit that category, i'm not sure about . Add all tools over $1000 into a STS pool and depreciate that pool total by 30% each year. When you purchase another tool over $1000 add that to the pool total. When you sell a tool that is in the STS pool you just decrease the STS pool value by the amount received for that item. When the pool goes into negative figures you actually pay tax on that amount. That is what used to be profit on sale of an asset.
So get 30% of the total STS pool value and divide it by the total number of hours each year Eg 884 hours

Indirect Overheads This is the hardest to work out. These are the costs that apply to the house and the business. Total the power, phone, car expences, insurance, computer use, rates, pens, paper, envelopes etc for the year and estimate the portion that applies to woodturning.
Total all these for the year and divide by the total number of hours each year eg 884 hours

Total the per hour costs for the last 3 catagories,multiply by the hours to produce the article for sale add the direct costs and there you have the cost of item sold.

Remember there is no wages in this figure.

If you are registered for GST prices used above are GST free and you can claim the GST portion of each item used in the manufacturing of products you sell. If you are not registered for GST it is left in the price and becomes part of the above calculations.

I hope this is explaned well enough for non accounting persons to understand.

[Calm]

sorry about the typos above.

[Alastair]

Hi All

Bloke I did the woodturning course had gone down this route, with ABN etc, and he mentioned that he found himself in a lot of strife regarding all the additional regulation around running a manufacturing business, eg OHS, Workcover, insurance etc,

Never discussed the detail with him, but perhaps those here may have some input?

regards

[rsser]

David, thanks for that rundown. V. comprehensive.

Alastair, more things to think about.

[Mulgabill]

Start out with a large fortune!!!!!!:D:D:D:D

[hughie]

Start out with a large fortune!!!!!!:D:D:D:D


I'll pay that! :U :U :U :U :U :U

[rsser]

... sigh.

Think I've spent mine ....

Lasseter's reef?

[ian]

I would divide the costs into 4 groups.
Direct
Indirect woodworking
Depreciation
Indirect overheads

Then calculate the total of the last three groups for a year "business related".

snip

Indirect Overheads This is the hardest to work out. These are the costs that apply to the house and the business. Total the power, phone, car expences, insurance, computer use, rates, pens, paper, envelopes etc for the year and estimate the portion that applies to woodturning.

I hope this is explained well enough for non accounting persons to understand.I'm not an accountant but my brother-in-law's a tax accountant and my wife's a financial auditor. (makes for fun conversations at time)

We've found that in general, indirect overheads like workshop/office space and power are not worth claiming as to do so potentially exposes you to partial capital gains tax on your principle residence.

In rsser's case it might be easiest to "cost" the item sold on the basis of the raw material plus a making cost based on the hours involved and the hourly rate he uses for his day job, and just ignore all the other costs.


ian

[Calm]

Thats fine, call it what you like but how do you determine the "markup" figure in the first place. To pick a figure out of the air would not be reliable. Using this system you come up with a reliable hourly rate. You do not need to let anyone know how it was determined. But at least you know that it will cover the expences involved in production.

[soundman]

When trying to determine a selling price you can get all boged down with various acounting..... BS...... and spend more time working thru that than you do working......the shiny bums don't understand thats no what we can afford to do.

If you are thinking profitable business, in the terms the shiny bums will understand.

1 You need to make a margin on your materials.....a lot of people don't understand this. dont forget to include consumables.
This margin covers the costs of buying, storing and having money tied up in materials.
I believe it is unreasonable to make less than 30% on materials Inretail the margin is usulay 50% or more.
2 you need to cover the cost of your labour...
You cant get a labourer for less than $25 an hour a decent one will want $30
It is reasonable to cost out your labour at $50 an hour or more
3 you need to cover costs of machinery & electricity and may be rent.

so that puts a basic pen at
$10 for the material costs
$25 for the labour content
$5 for machinery and other overheads
$40.....
now add normal retail profit margin
$60
or gift shop type margins
$80

Now under normal business model estimations can we make money out of turning pens and selling them for $15:no:

cheers

[Calm]

The point i am trying to make is we are talking about making woodturning a business not about making money from a hobby.

If you want to sell a few items you turn up then how you arrive at the selling price does not matter. Profit is not the motive.

If you are trying to make turning a business proposition then the old rules apply

"FAILING TO PLAN = PLANNING TO FAIL"

If you want to convince the ATO that it is a business then you need to prepare it as a business would. If you want to make money (profit) then all costing must be done thoroughly otherwise you dont know until the bank is empty that you have your margins wrong. (too late)

Workcover, OH&S, Supperannuation really dont apply as much unless you are employing someone or starting a "Company" which then makes you an employee.

The post higher up from Mulgabil is right "how to make a small profit!!!

[soundman]

As I mentioned before it is almost imposible to make any money out of wood turning unless you have some sort of leverage or complimentary business activity.


OH as far a OH&S...... in QLD it most certainly does apply to you if you make it a business, even if you work alone. Thy well and truely bunged up that loop hole a munber of years ago.


cheers

[rsser]

This is a terrifically useful thread, and thanks again for all the good insights and tips.

I don't have a problem costing my work. A pro once advised: cost of materials x 5. If it's fussy work like a nat edge bowl or lidded box I multiply by more.

The hourly rate this returns I don't dare calculate ... and in fact don't need to since I work first and foremost for my own pleasure and a downstream sale is welcome if only to get some kind of return as well as pay for the next interesting blank or the next tool I want to learn about.

I'm in favour of the kind of business discipline David has worked out and the experience Soundman can relate about congruence of activities.

Happily I don't have to make a living out of my hobby - at the moment at least. I'd prob. need to sell five or more pretty flash bowls to match a day of day-job income so I'm sticking with that while work offers continue to roll in :D

That said, the reason for the original query is that it irks me that as I must collect GST and pay income tax on an invoiced turning sale, without a mountain of paper work I can't effectively claim the cost of producing that income. (In passing, I am registered to collect GST for my day job and will I expect be able to claim input tax credits for the few invoiced sales.)

[hughie]

The hourly rate this returns I don't dare calculate ... and in fact don't need to since I work first and foremost for my own pleasure and a downstream sale is welcome if only to get some kind of return as well as pay for the next interesting blank or the next tool I want to learn about.


This is the secret, the rest are the annoying details foisted upon us by the bureaucrat's etc.