SMEs have a lot on their plate. But tax strategy mistakes can be costly in more ways than one. How many of these mistakes are you making?
You may have carefully researched the best tax strategy for your company. And why wouldn’t you?
All for-profit businesses, including SMEs, can save money on taxes. That, in turn, can help with the business’ cash flow.
However, having the wrong strategy can result in a host of problems. You may focus on tax minimisation strategies. But you may miss out on other areas of your tax liability.
Who has time to worry about taxes until it’s time to file them, right?
However, this out of sight, out of mind mentality can prove detrimental to your livelihood.
At the very least, you could lose money. An egregious strategy can also result in legal issues.
Tax debts and penalties may take a toll on your business’ bank accounts. But things like payroll tax and super guarantee contributions can steamroll over a business and drive them under, too. So maybe it’s time to take a closer look at your strategy.
Think about optimising your strategy before the end of the tax season and save yourself potential problems in the future. Make sure your strategy doesn’t include some of these common tax mistakes.
Some items on this list require a simple fix. Others, though, may require a revamped tax strategy. You may want to speak with a professional if you need to overhaul your strategy.
#1 Failing to Adapt to Changing Tax Laws
First, it’s hard to keep up with changes. But failing to adapt to changing tax laws can have some serious repercussions.
Imagine if you were a business owner who didn’t know that there’s a new payroll tax rate this tax year. If you have employees and you’re not using a payroll service, this can be a big deal. Especially if you didn’t withhold enough to cover the rate change.
If you’re in that boat, you’ll face a tax penalty come tax time because your books weren’t right. Your tax agent may warn you. But the warning may come too late for you to do anything about it
So what can you do?
It may be hard to track changes in tax law. However, you can sign up for newsletters that let you know about changes that affect SMEs.
#2 Keeping Poor Records
How well are you keeping your business records? Consider enlisting a software package or an office assistant if your record or bookkeeping is poor.
Why? You could miss out on valuable tax credit or deductions come tax time. So make sure to keep track of the finer details of your business. Or have someone do it for you.
#3 Choosing the Wrong Status for Employees
Choosing the status of your employees should be a simple endeavour. But accidentally getting the engagement status wrong may land you in hot water.
For example, if you hire contractors for simple taxes, you still have to pay into their super. Not doing so may land you in trouble with the law.
#4 Mistakes with Deductions
Eligible business deductions can be a murky area. And many SMEs make the mistake of claiming things that they shouldn’t. So how can you figure out which deductions to claim?
Follow these simple rules:
- The money needs to go towards business expenses only.
This rule seems self-evident. You can’t claim business deductions for private expenses. That may include clothes for your family. Or even childcare expenses while you’re at work – but you may be eligible for the Child Care Tax Rebate.
- For mixed-use, only claim the business-related portion.
Do you have something for business and private use? You can only claim a portion of that expense.
If you do business at home, you can’t deduct your entire home. However, you can claim tax deductions for a portion of the costs of owning, maintaining, and using your home.
Keep in mind, though, that you have to have an area exclusively for your business activities.
- Keep records to prove your expense.
You also need to have bank statements or receipts to prove how you calculated your claim. The ATO may not simply take your word for it. If requested, you need to be able to substantiate your claims, including how you worked out the business portion of the expense.
#5 Failing to Account for Depreciation
Did you know that you can claim deductions for depreciation over time of your business assets? Items like furniture, equipment, and machinery lose value year after year.
There are different approved methods for calculating depreciation. However, it’s a simple way to claim deductions come tax time. Just remember to reduce the claim if any of the following is true for a depreciable asset:
- ownership for last than a year
- used for business and personal purposes
- existed before you started the business
Some small businesses may be able to choose a simplified depreciation. This allows you to claim the full cost of most of the assets within the same year that you bought them. There are cost caps, though, depending on the tax year.
#6 Superannuation Issues
Are you guilty of leaving superannuation guarantee payments to the last possible second? If you do, you aren’t alone. But it isn’t a good habit to keep.
Sometimes SMEs put off these payments when cash flow becomes an issue. However, this can lead to penalties from the ATO. To avoid these penalties, pay your employees the superannuation when you need to.
Also, you want to be able to claim a tax deduction for super payments. In order to make the claim, you have to pay into the super before June 30. Otherwise? No tax deduction for you.
#7 Late Payment
Are you tempted to put off an employee’s super payments? If you do, you’re liable for a super guarantee charge (SGC). This applies even if you pay later.
However, you may have a couple of options:
Option #1 Late Payment Offset
Can you offset late payment amounts? Generally, yes. Offset payment amounts against the SGC if the following are true:
- you made a payment to the employee’s super fund
- you paid before the SGC assessment
- you lodge the offset election within 4 years of the original SGC assessment date
Option #2 Carry Forward the Late Payment
Another option is to use the late payment towards the super guarantee contribution in the current or a future quarter. This may apply if:
- it’s for the same employee
- a new quarter starts within a year after the payment date
#8 Mixing Up Personal and Business Expenses
Do you keep one bank account for everything? It seems a simple solution to keep one account, right? But it can lead to more problems, not less.
Keep your business account separate. Having a separate account allows for more accurate record keeping. It can also help avoid tax issues when someone takes business money out for personal use.
#9 Not Using a Tax Agent
Do you need a tax agent? Many small businesses don’t believe so. Especially when they’re just starting out.
However, tax agents can point out major deductions that you may miss. You may want to consider a professional the next time you prepare your return. Even sole traders with modest revenue can benefit from professional advice.
#10 Forgetting About Fringe Benefits Tax (FBT)
It’s easy to forget about the fringe benefits tax (FBT), especially since it has its own tax date. But if you provide any of the following, you may be liable for FBT:
- company-owned vehicles for personal use
- food or entertainment for employees
- reduced-price goods
Remember that the FBT tax year ends on March 31. Forgetting about FBT can result in some hefty ATO fines.
#11 Not Including All Your Income
How diligent are you about reporting income? Do you declare all your cash and online sales? You need to report other income sources as well.
Basically, anything that your business does for a fee counts as income. At the end of the tax year, you need to make sure to include them on your return.
#12 Not Keeping Track of Smaller Deductions
Lodging your tax return isn’t the first time you see your deductions. Keeping track of smaller deductions throughout the year can help keep everything in order.
Enter them into your bookkeeping software as soon as you can. This way you don’t have to worry about remembering every deduction later.
#13 Not Prepaying Expenses
SMEs may think that having the funds in their own bank account is better than prepaying expenses. However, there are some advantages to paying early.
One of the main advantages of prepaying is getting a deduction sooner (in the current tax year rather than the next). But this applies to anything that you can pay before June 30. Take a look at the expenses that you can prepay, such as:
#14 Spending Money for the Wrong Reasons
Can you get a tax deduction for new assets? Yes. However, don’t start spending for the wrong reasons. Incurring expenses simply for claiming deductions can at best result in unnecessary spending.
Instead, only buy as needed. Sure, new equipment can boost productivity. That may also lead to higher profits. However, if you do need to do this, try to make the purchase before June 30. This way you can receive an immediate deduction.
#15 Incomplete or Missing Tax Invoices
Lastly, you need to have tax invoices for purchases over $82.50. This also includes GST if you’re claiming a GST credit.
Valid tax invoices have to contain the following:
- the words “Tax Invoice” at the top of the page
- seller’s identity or business name and ABN
- invoice creation date
- item description, quantity, price, GST amount (if any)
Make sure to keep these invoices for at least 5 years or more in case there is a question later.
Taxes can be a minefield. Having the proper tax strategy is only one part of navigating annual returns properly. However, frequent regulatory changes can shake up the soundest strategies.
So, keeping current on the latest tax regulations that affect SMEs is one way to reduce return mistakes. Another way to avoid mistakes and audits is by hiring a tax agent.
A skilled tax agent can help point out deductions you may have missed or penalties you may be liable for. In addition, keeping track of small deductions throughout the year can help minimise problems come tax time.
If you can’t hire someone to help with your bookkeeping, there are plenty of software packages on the market.
If you need more help with your finances, feel free to contact us. The Coral Horizon team can answer any questions you may have about your financial obligations and taxation. And what’s more, we’d absolutely love to help you.