Think no one will notice the Netflix bill claimed on your tax return? Think again.
Every year, the Australian Taxation Office (ATO) uses third-party data sources to verify more than 600 million transactions reported to them. Armed with this powerful fraud-detection capability, the ATO says it will be scrutinising the following five most common mistakes on small business tax returns.
1. Claiming of private expenses in the business.
EOFY sales are a tempting opportunity to spend big as you justify, "I can claim it on tax" but the rules are straightforward: Business expenses should be exactly that; money spent on your business.
You should be able to show how any claimed deduction was directly related to earning your assessable income.
The traffic fine you incurred on the way to the office and the childcare fees that allow you to attend meetings– these are private expenses and cannot be included.
2. Failing to properly attribute personal and business use.
For expenses that are a mix of business and private use, you can only claim the business portion.
For example, say you buy a new mobile phone that includes a call and data bundle. You use the phone every day to call suppliers and respond to work emails. When you finally switch off boss-mode late at night, you might quickly check your Facebook feed.
Should you claim the handset and your monthly bill as a tax deduction? Yes, but not all of it.
Even if you are using the device for personal reasons 10% of the time, you can only claim 90% of the spend as a business expense.
3. Misunderstanding how tax applies for different business structures.
There are four commonly used business structures in Australia - sole trader, partnership, company and Trust. It's important to understand that tax responsibilities change for each.
Sole traders have a $18,200 tax-free threshold and then pay tax at the individual income rate.
A company is a separate legal entity and is obliged to pay income tax on its profits at the company tax rate of 30%. If you're a small business with an aggregated turnover less than $10 million, you may be eligible for the lower company tax rate of 27.5%. There is no tax-free threshold for companies.
If you are in a partnership, each partner must pay tax on the share of the net income you each receive from the business. A partnership business structure needs its own Tax File Number (TFN) that is used to lodge a business income tax return.
If the business is being run through a trust, any income earned must be shown on an annual trust tax return, which also details the distribution of income to each beneficiary.
4. Omitting income
Include all income you have earned as a business; including investment income, crowdfunding income and even that mate's-rate fee you charged your cousin's neighbour for fixing his laptop.
The ATO verifies information you provide against the income that's been reported against your TFN. If there is a discrepancy, you may receive a letter requesting further information and re-assessment.
5. Not providing the necessary records for substantiating expense claims
Good record keeping makes it easier to manage your cash flow and can help make tax time a breeze.
As a business owner, it is essential to keep as many details about your business activity, including:
• Sales records
• Purchase/expense records
• Year-end income tax records
• Banking records
• Payments to employees and contractors
• PAYG withholding for business payments
• Fuel tax credits
By law you must keep business records for a minimum of five years after the record is created, updated or the transaction is completed (whichever is most recent).
If the thought of shoeboxes filled to brim with receipts is the stuff of your nightmares, simply scan your paperwork or snap a photo. You can store your records electronically as long as they are a true and clear copy of the original. There is a lot of record-keeping software available, for both desktop and mobile devices, to help you archive electronic records.
The ATO also has a Record Keeping Evaluation Tool to help assess how well you are keeping business records.
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