End of financial year (EOFY) is fast approaching and that means getting ready for tax. No tradie or other small business owner likes spending too much time on paperwork, but here are some tips to make sure you get the most out of doing it, while importantly not incurring the wrath of the Australian Taxation Office (ATO).
Keep organised or lose deductions
A recent Xero study of 400 accountants showed the two most common mistakes made by businesses at tax time are not keeping financial records up to date, and not preparing a budget for the next financial year.
If you have neglected to keep an organised file of receipts and expenses it’s very difficult and time-consuming to claim them as tax deductions from your income tax. If you frequently use a vehicle for business purposes but don’t keep track of your fuel expenses (and throw out all your receipts), you may not be able to claim the tax back. The same goes for tools, equipment, protective clothing, home office bills, work-related seminars or publications, and more.
If you are claiming more than $300 in tax deductions the ATO may ask for proof, and that proof must be kept for up to five years.
Stay on top of super
Many businesses put off paying the Superannuation Guarantee when cash flow problems strike, but failing to pay the tax owing by the due date can result in a Superannuation Guarantee Charge, plus interest and administration fees on top of the original fee owing.
Another advantage to being proactive with super is payments are tax deductible in the financial year they are paid. Paying your super obligations before the due date will boost your tax return, but putting it off pushes those deductions back another 12 months.
Don’t forget FBT
Fring Benefits tax (FBT) is payable on specific benefits you provide your employees. It is often missed as it has its own tax year ending March 31, and often employers are unsure about which benefits are taxable and which are not.
If your employees use company-owned vehicles for personal use, or you provide them with food or entertainment, or reduced-price goods, you may be liable to pay FBT. Failure to pay FBT can result in hefty ATO fines, so keep track of the benefits you provide to staff.
Employees or contractors?
Mislabelling employees as contractors can land small businesses in serious trouble. If you hire a ‘contractor’ who works regular hours, does not supply their own tools, is paid for their labour and not towards a specific outcome, and works on a continuing basis and not on a contract-by-contract basis, they are likely to legally be considered an employee. Getting this wrong in your tax reporting can cripple you with fines, interest and backdated taxes.
Taxes are not expenses
A common post-tax mistake made by small businesses is the incorrect designation of taxes, according to Jumpei Morita, director of accounting firm Global Hub.
“We often see small businesses designating tax payments made to the ATO as expenses,” Morita said. “Each tax payment should be allocated within the applicable balance sheet item.
He also warns small business owners to claim only the interest portion of borrowings and not the principal, while only the business portion of an asset such as a motor vehicle should be claimed and not its private use.
Finally, Morita says owners should check on a monthly basis whether bank balances are reconciled with bank statements, to avoid missing out on income or expenses at tax time.
EOFY need not be painful, providing you pay attention to detail throughout the year and where necessary, seek specialist help.
You can also consider taking advantage of the Federal Government’s $20,000 small business tax break. If your business is profitable and turned over less than $2m in revenue, you could be eligible to claim spend on assets as an immediate tax deduction under the simplified depreciation rules. Meaning it’s a great time to speak to the team at Prospa and reinvest into the growth of your business. Speak to your tax advisor for advice and information and call Prospa for a small business loan to help fund your assets purchases.