Category: Tax Planning

1. COMMON TAX MISTAKES THAT BUSINESSES MAKE

   Posted on 12:00pm Monday 27th Jul 2020

   Meeting tax obligations as a business owner can be stressful and potentially expensive if done wrong. Certain mistakes warrant severe action, so you can expect the ATO to take a closer look at them if you’ve failed to identify these errors before lodging tax returns for your business. Most mistakes made with regards to tax filing often revolve around poor administrative knowledge of tax laws. Ensure that you are aware of potential mistakes you could be making that might cost you your business.

   Inconsistent declarations

   The ATO gathers data from numerous businesses across a particular industry to create a benchmark showing a band of percentages within which businesses in that industry should typically fall under. Businesses that fall outside this band can expect delays and a closer look from the ATO inspecting reasons for inconsistencies within your business’ declarations. However, these can also be sources of mistakes from the ATO’s part as some inconsistencies can be very real – such as demographics or personal situations – that can cause variations in data. Ensure that you are declaring all your sales, and that any inconsistency can be justified to the ATO.

   Poor bookkeeping

   A majority of tax mistakes committed by small businesses revolve around poor bookkeeping. Businesses are required to maintain all financial transactions made – but forgetting to put the purchase through the register or taking money out of the register for personal use without replacement of the difference can show varying cash register tapes that can be problematic when filing your tax returns. You may be missing out on valuable tax credit claims by not keeping proper records of your financial transactions.

   Employee payments

   Businesses may assume that superannuation payments need not be made if they are employing subcontractors. This can be an expensive mistake, as if the worker has standard hours and is expected to work consistently for your business under your direction, they need to be treated as employees. Businesses may leave superannuation guarantee payments until the end when cash flow becomes restricted – but avoid late lodgements to prevent penalties from the ATO.

2. ARE YOU ELIGIBLE FOR THE SMALL BUSINESS INCOME TAX OFFSET?

   Posted on 12:00pm Thursday 9th Jul 2020

   The small business income tax offset can be used to reduce the tax you pay by up to $1,000 a year. Also known as the unincorporated small business tax discount, the offset is worked out on the proportion of tax payable on your business income.

   The rate of offset is 13% for the 2020-21 financial year and 16% for the 2021-22 financial year and onwards. The offset is only available to entities with an aggregated turnover of less than $5 million (from 2016-17 financial year onwards) and is capped at $1,000.

   The ATO will work out your offset based on your income tax return and uses your:

   • Net small business income you earned as a sole trader, or
   • Share of net small business income from a partnership or trust.

   Conditions for sole traders

   The offset is calculated based on net small business income for sole traders (which is the sum of your assessable income from carrying on your business, minus any deductions). Sole traders are not entitled to the offset in the event that their net small business income is a loss.

   Income and deductions that you need to include in your net small business income include:

   • farm management deposits claimed as a deduction,
   • repayments of farm management deposits included as income,
   • net foreign business income related to your sole trading business, and
   • other income or deductions such as interest or dividends derived in the course of conducting your business.

   Conditions for partnership and trust distributions

   You may be eligible for the tax offset if:

   • you have a share of net small business income distributed from a partnership or trust that is a small business entity,
   • you were a partner or beneficiary of that small business partnership or trust,
   • the business income was derived by the small business partnership or trust from carrying on its own business activities, or
   • your assessable income includes a distribution or share of net income from that partnership or trust.

   Keep in mind that there are income and deductions that you cannot include when working out your net small business income for the small business income tax offset. Such income amounts include wages, government allowances and net capital gains you made from carrying on your business. Discuss with a financial advisor or accountant for more information on the offset conditions for your business.