As a small business owner, you deal with a multitude of obstacles. Throw taxes into the mix, and it can be a minefield trying to navigate in conjunction with your everyday business activities. We understand it’s not easy and sometimes mistakes are made, which can be costly for you and may also put you on the Australian Taxation Office’s (ATO) radar.
To help you avoid the traps and pitfalls of tax time, here are the five most common tax mistakes businesses make and what you can do to try and steer clear of them!
1. Using business owned assets for personal use
A common mistake to avoid is overclaiming on expenses where private usage hasn’t been adjusted for. Usually, your accountant would make any necessary year-end adjustments to account for personal use. However, if this adjustment is only made at tax time, this means your expenses have been overstated and you most likely have claimed GST credits you were not entitled to. Therefore, any year-end adjustments that have been made to your accounts will affect the net profit, which might end up being higher, and result in a higher tax payable.
Also, those GST credits claimed will need to be paid back to the ATO. We recommend you examine your expenses, especially if you use a business asset for personal use, and make necessary adjustments throughout the year to avoid any surprises at tax time.
2. Deductions – Do you know what you can claim?
Don’t get tripped up by deductions. Often business owners don’t know exactly what they are entitled to deduct, so they end up deducting more or less than they should. As accountants, we understand what a ‘typical’ deduction may be for a business and why it is easy to spot when something is amiss. At tax time, you might be asked to confirm your deductions because, on many occasions, not all deductions have been captured within the business accounts and potentially there are more deductions to be claimed.
There are so many deductions available for businesses, so keep a record of all your business expenses. These deductions will reduce your business’ taxable income, which can lower the amount payable to the ATO. Just note, if you’re claiming any deductions you’ll need to have a tax invoice and hold onto those invoices for at least five years. If you are not sure if something is deductible, let us know! We want to make sure you are claiming all allowable deductions so you can reduce your tax bill.
3. Incorrectly claiming a deduction for super payments when paid late
As a business owner, you can claim a tax deduction for Super Guarantee (SG) payments you make for your employees in the same financial year you make them. These SG payments are due 28 days after the end of each quarter. If you pay SG payments late, you can’t claim a tax deduction for these late payments. Furthermore, if super payments are even one day late, you will need to prepare a Super Guarantee Charge (SGC) statement for the quarter and lodge it with the ATO – this includes the SG shortfall amount (calculated on gross earnings instead of ordinary time earnings), nominal interest (10% per year which is calculated on a daily basis) and a $20 administration fee per employee.
It can work out to be an expensive exercise and an additional cost to the business that could be avoided. Additionally, since the implementation of Single Touch Payroll (STP), the ATO and superannuation funds have improved their detection of late SG payments – there is a lot more transparency now. We highly recommend you set those calendar reminders and make sure your employees’ SG payments are made on time.
4. Gifts for employees and FBT consequences
Many business owners may reward their employees for their hard work, or give a gift at Christmas time. Before giving a gift, consider the tax implications — the gift may not be eligible as a tax deduction and there might be further tax consequences.
Generally, gifts below $300 are a tax-deductible expense, provided they are classified as a ‘non-entertainment’ gift and are ‘infrequent’. Gifts of $300 or more will be subject to Fringe Benefit Tax (FBT) but can still be deductible, just at an additional cost. It is important to note when planning on giving a deductible gift, you ensure the gift meets the ‘non-entertainment’ classification. Gifts such as gift vouchers, a bottle of alcohol, hampers, or flowers all fit the ‘non entertainment’ classification. Gifts that are considered ‘entertainment’ are not deductible and include theatre shows, concerts, movies, sporting event or amusement park tickets.
You can still give a gift of $300 or more, which a tax deduction and a GST credit can still be claimed. However, FBT will be payable at the rate of 47% on the grossed-up value (currently 2.0802). This will be less tax effective and an additional cost to your business. The best tax outcome for your business is to give staff ‘non-entertainment’ type gifts that cost less than $300 (+ GST) per employee, as this is fully tax deductible with no FBT payable as long as they are given infrequently.
5. Treating employees as contractors
A common mistake business owners make is classifying employees as contractors. If you engage a contractor to perform work under your direction and control, who has a standard or set hours, has an ongoing expectation of work, and doesn’t bear financial risks for the work they do, then most likely they would be deemed an employee.
The risks of getting it wrong are high for your business, as you could be breaching your obligations with the ATO in regards to superannuation as well as workers compensation requirements. Because this could lead to a costly mistake, it would be a good time to review your arrangements and make sure that you have correctly engaged employees and contractors. If you need some further guidance distinguishing between employees and contractors, click here.
We’re Here to Help!
The team at Hoffman Kelly is always here to help if you need a better understanding of how these common tax mistakes may impact your business and how to avoid them, so don’t hesitate to reach out. Contact us today!