Claiming tax deductions on school fees, alcohol and parking fines are just some examples of the costly tax mistakes made by businesses. Two accountants share eight of the most common SMB tax pitfalls and how you can avoid them at this end of financial year.
The end of the financial year is always a busy time for SMBs, but paying attention to these eight common tax mistakes could save you hours in time and thousands of dollars in money.
1) DON’T use an Excel spreadsheet
If you are running your business on a manually updated Excel spreadsheet, now is the time to move to a cloud-based accounting solution, such as Xero, says Heather Smith, owner of ANISE Consulting and author of Xero for Dummies.
Many small businesses think cloud-based accounting systems are too expensive or that their business is not big enough to justify using one. But, says Smith, moving to a cloud-based system has immediate benefits.
“Accounting solutions are really cheap,” she points out. “They start from $49 for a monthly subscription, and most solutions are automated, which means you can do things like have your bank account or e-commerce system feed directly into the accounting system.”
Smith adds that having a clear, complete view of your figures is a major stress reliever for small business owners and often leads to cost savings for their business.
Moving to a cloud-based accounting solution enables real-time access to your business numbers, she says. “One of my clients found he was paying a lease payment on a car that he hadn’t used for a year – he got $3,000 back. Another client found out that all his GST payments on an inbound shipment had been calculated incorrectly – he got the money back instantly.”
2) DO keep track of your figures
Numbers might not be your “thing”, but knowing exactly how your business is performing is vital, according to Emma Petroulas, Small Business Lecturer at University of Technology, Sydney (UTS) and Director (or “Client Happiness Director”) of Nudge Accounting, a specialist accounting firm for start-ups and small businesses.
Petroulas believes that “knowing your numbers each month” is the most important, year-round accounting habit for SMBs.
“You need to know how much comes in and how much has gone out,” she adds. “The more you know how the business is going, the better your decision-making will be.”
Plus, when it comes to submitting your tax returns to the Australian Taxation Office (ATO), business owners are responsible for their figures, even if an outsourced accounting company has prepared the return.
“You need to be happy with all the numbers and information that is being submitted on your behalf, and you need to really understand the numbers – you cannot ignore that responsibility,” says Smith.
3) DO know what is deductible
If you think you can wine and dine your clients and simply claim those expenses as a tax deduction, think again.
“Processing restaurant expenses though the business will attract a fringe benefit tax,” warns Smith. “It depends on what the expenses are, but you need to be very clear on who was at the meeting, what was discussed – and remember, alcohol is not tax deductible.”
Other deductions that business owners have tried to process through their companies include parking fees and school fees.
“If it is a personal expense, don’t put it through the business,” says Petroulas. “And if you have a motor vehicle, which is used for both business and personal reasons, only claim deductions for the business use.”
4) DON’T be afraid to minimise your tax
“Some business owners need to get over the fact that tax minimisation is legal – although tax avoidance is clearly not,” says Smith.
Your tax adviser should be constantly reviewing and updating a tax minimisation strategy that works best for your business.
You may still have time to meet with your tax accountant before the end of the tax year – make sure you forecast your performance to 30 June, so your accountant has the full picture and can develop a strategy for you accordingly.
5) DO pay superannuation contributions on time
Both Petroulas and Smith emphasis the importance of paying superannuation contributions on time – otherwise you could face severe penalties.
“Super is due on the twenty-eighth day of the month after the end of the quarter,” says Petroulas. “If the payment is late, you need to declare it and pay the penalty. Depending how late you are, you might have to pay twice.”
This is particularly important in 2014, where 30 June falls on a Monday.
Smith says: “Superannuation expense is a tax deductible expense – to claim it in the 2013/14 financial year, the payment needs to be received by the superannuation fund by 30 June 2014, so you will need to process that payment by 25 June 2014, or earlier. A lot of people will get caught out this way and time is running out for that.”
6) DON’T ignore GST
GST costs can make a significant difference for a small business, so it is worth paying attention to them, says Petroulas.
“Many small businesses think a lot of expenses include GST when they don’t,” she says. “For instance, if you use a freelancer to do some work, some business owners assume the freelancer’s costs will include GST. That will only apply if that freelancer is registered for GST. Don’t assume that they are – it is important to check invoices from all suppliers carefully.”
Another GST stumbling block is people claiming GST on overseas expenses that are not eligible. For example, if you buy a piece of equipment online from overseas, that supplier may well not include GST, so you can’t claim the GST.
7) DO push forward expenses before 30 June
You can claim deductions on expenses incurred in this tax year, so if you were thinking of buying a new laptop or piece of equipment, doing so before 30 June might be a good idea.
However, Petroulas warns changes to the rules around tools and equipment were proposed to change as of 1 January 2014. While these changes still have not been passed (it will depend on the composition of the Senate in July), if they are passed, you will only be able to claim an outright expense for purchases from 1 January 2014 if the value of the item is under $1,000. You will need to depreciate any equipment costing over $1,000. Previously you could claim the whole expense, up to $6,500, so bear that in mind before you go shopping.
8) DO talk to accounting and tax experts
Australia has one of the most complex tax regimes in the world, so it is vital that business owners meet regularly with their tax accountants.
Your tax accountant needs to know of all changes to your business – for instance, if your turnover is likely to exceed $2 million for the first time, that will have a major impact on your tax strategy, as you will no longer be treated as a small business.
Similarly, if your turnover has changed dramatically from the previous year, you should speak to your accountant and the ATO, as your pay as you go (PAYG) tax instalments may need to change.
“If your profits have gone up, you probably need to be paying more, otherwise you could face a big tax bill at the end of the day,” says Smith. “This strategy can dramatically help to improve your cash flow.”