Money Strategy #10: Manage Surplus Funds

November 27, 2008

This article is part of a series of eleven short articles on managing money. It is aimed at freelancers and independent contractors. Before you read this article, make sure you have read the disclaimers etc. in the introductory article about my money management rules.

Strategy #10: Manage any surplus funds

If you have few expenses, steady clients (and thus a steady income stream), or an income stream that has some very high peaks, you should be in the position of having surplus funds in the bank account. This is a good thing.

Make sure you set aside any money required for expected expenses such as taxes, insurance premiums, known bills, replacement of equipment, a three-month salary buffer, and the like.

In Australia, company tax is calculated on the profit you’ve made for the financial year, taking into account any taxes already paid (such as the GST) and remitted to the tax office. If you haven’t made a profit, then you shouldn’t get a tax bill. But you’re not in business to make a loss—the whole point of business is to make a profit (see Rule #1). So, if you’re in a position of profit, how can you reduce the profit on which you’ll be taxed?

In the profession of technical communication, there aren’t a lot of deductible expenses if you’re working from home or from the client’s site. Obviously your salary, equipment, software, insurances, internet connection, phone etc. are deductible, but you may still be making a tidy profit. Well, you could pay yourself more, but then you could push yourself into a higher income tax bracket (Australian company tax is 30% but personal income tax may be more).

One option if you don’t need the extra income for yourself right now or in the foreseeable future is to is to ‘salary sacrifice’ into your retirement fund (called Superannuation or Super in Australia). Contributions to Super are taxed at 15% and you’re building up your retirement nest egg. This is not the required Superannuation Guarantee Levy; rather, an extra pre-tax drop into Super. If you’re getting close to retirement age, this could be an effective strategy for legally reducing tax all round — your personal income is less, thus keeping you out of a higher tax bracket; your company profit is less, thus reducing the amount you have to pay in tax; and you get the benefit of the lower tax break in Super as well as putting money away in a compounding interest environment. [Note: This article was written before the Global Financial Crisis of 2008/2009.]

What you do with surplus funds is up to you, but your age, future plans and the like will have an impact on your decision. I strongly recommend that you seek advice from your accountant in the first instance (see Strategy #1). They should understand the implications of using business funds to invest, or can refer you to someone who does.



  1. […] Strategy #10: Manage any surplus funds […]

  2. […] to wait some 6 weeks for ABC to start paying me, then 30 days for each subsequent payment. I had sufficient funds to cover a 6-week shortfall, otherwise I wouldn’t have taken on the contract, or at least not […]

  3. […] Strategy #10: Manage any surplus funds […]

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  6. […] you are doing well, you may find you have a quarterly tax bill in the thousands of dollars. Keep a buffer to make sure you meet this obligation. If you’re not sure whether you can be disciplined […]

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  10. […] that all that $80,000 was hers, not the company’s. When she hit some lean times, she had nothing put aside to pay the bills and eventually had to fold her business and go back to a permanent […]

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