The left hand side of the business quadrant.
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Robert Kiyosaki’s Rich Dad Poor Dad books are now famous everywhere and well worth reading if the series is new to you. They give any budding entrepreneur or even any budding person a chance to see how money is earned from different angles. There are two sides to the quadrant, the left hand side and the right hand side and the overall diagram looks like this:
Each part of the quadrant can be looked at from different angles but particularly earning potential and tax advantages. E would be limited in earning as the person is usually restricted by a salary or weekly wage and gets a heavy slug from income tax.
Bed & Breakfast would be in the S self-employed square. Kiyosaski says that this is the quadrant where people gather who want to do it their way, like the old Frank Sinatra number. He also believes that the S in self-employed could stand for psychotic as the person often slaves away for hours with little return doing it his or her way, with the reward being that at least you get to be your own boss and the feeling that nobody does it better, again reminiscent of an old number.
This interpretation may be brutal although when you are really working long hours in the Bed & Breakfast it can seem horribly accurate. Yet tax advantages are still better than the E Employee quadrant. Let us look at the tax advantages.
Kiyosaki points out that U.S. tax advantages are not what they once were in the S quadrant and that is probably true for Australia as well. But there are still positives on the tax side for the small Bed & Breakfast owner. You can claim the running of a car or a proportion of its running against tax, depreciation of furniture and fittings, swimming pool maintenance and chemicals, all surface cleaners, laundry powders, lawn mowing, computer rental, internet etc. In other words try and make as many expenses as possible legitimate tax claims against your business.
In Australia you can apply for an income tax withholding variation through the Australian Taxation Office to reduce tax paid on other income by including the loss incurred from a business activity. In other words if you and/or your partner kept their day job whilst running the Bed and Breakfast it is possible to reduce income tax payable from the day job through offsetting loss from the business. Business activity must have an assessable income of at least $20,000 (Section H, Loss Code 1) which should not be a problem in Bed and Breakfast. Certainly you can consider it as a possible safety net because it is during the first 2 years in particular that small businesses struggle to survive and knowing that there is a safety net adds to your confidence.
Further safety can be found under the same ruling where there is loss claimable if ‘the particular business activity has resulted in a profit for tax purposes in three out of the last five years’ (Section H, Loss Code 2); therefore, as long as there has been some profit in the following three out of five years, you have an additional safety net for 2 years of lean times if they come. For full information go to www.ato.gov.au and key 5423 into the search box at the top. This will take you straight to the information.
So what is the difference between the self employed S part of the quadrant on the left hand side and the B Business Owner on the right? As we have seen, Kiyosaki tends to look at each quadrant according to tax advantages and earning potential. The earning potential of the Bed & Breakfast is limited by the number of rooms you have, the number of guests you can attract each year and your own ability to keep going. A B Business is limited by none of those factors. How can this be? Read the next article for a discussion of this revolutionary idea, entitled not surprisingly, ‘The right hand side of the quadrant.’
References
Australian Taxation Office. Instructions for completing the 2008 PAYG income tax withholding variation (ITWV) application. Australia Government: Canberra.
Kiyosaki, R.T. (1998). Rich Dad Poor Dad. TechPress: Scottsdale, AZ.
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