Making errors when dealing with tax, whether it's income tax, GST, FBT or PAYG, can be costly. So, it pays not to make errors in the first place but, with the increasing complexity of our tax laws, that is a lot easier said than done.
In an effort to assist SMEs to avoid making errors, here's a brief overview of common errors that have come to light. I also note a change that is happening for businesses about getting details of what tax to deduct from employees' wages.
GST errors
Tax Office stats for 2007-08 show that the industries in the SME sector with the highest number of GST reporting adjustments were:
- retail trade - accounting for 17% of adjustments;
- rental, hiring and real estate services - accounting for 14% of adjustments;
- construction - accounting for 13% of adjustments.
Common causes of GST errors were:
- when preparing activity statements, claiming GST credits without a valid tax invoice. This is a basic requirement of the GST law, but clearly some businesses are not doing this. It pays to be methodical about this because if an ATO audit catches you out, the penalties will hurt;
- understanding GST law - incorrectly classifying sales or purchases. The classification of goods and services is another basic element of GST but can cause some difficulties. GST is imposed on what are called taxable supplies. Supplies classified as non-taxable supplies include GST-free supplies, eg. food, child care, exports, farm land, cars used by disabled veterans. GST is not payable on these;
- processing - incorrectly offsetting GST credits against GST on taxable sales;
- changes to business structure - claiming for business entities that are not eligible to form a GST group;
- classifying supplies - incorrectly recording transactions as GST-free or non-taxable.
Property developers
In the coming months, the ATO says it will focus on helping property developers comply with their GST obligations by providing more information to developers about those obligations and entitlements. The ATO will distribute information via government and private organisations within the property sector, such as local councils, finance companies, real estate agents and other professional service providers.
For property developers, whether a property is residential premises used predominantly for residential accommodation is a key factor in determining if GST is applicable and therefore, if a purchaser of such property who is registered for GST can claim input tax credits. There is some uncertainty about this issue as, among other things, it involves a consideration of the intention of a purchaser. As I mentioned in my recent column, a Federal Court decision has affirmed that a company was not entitled to claim an input tax credit for the acquisition of a property. The case highlights some of the uncertainty surrounding this issue and an apparent conflict of views between the Commissioner and the courts. Care is needed here.
PAYG errors
In August and November 2009, the ATO contacted business operators, tax professionals and bookkeepers to discuss PAYG (Pay-As-You-Go) instalments returned in quarterly BASs. The focus was on:
- small businesses with a $2 million to $10 million annual turnover;
- a range of industries, including construction and manufacturing;
- instances where the amount of PAYG instalment the ATO received for the quarter under review was significantly different to the amount it received in a previous quarter.
The ATO found three main errors that preparers made when completing PAYG instalment details:
- instalment income amounts were adjusted rather than instalment rates varied;
- no PAYG instalments were returned in the first two quarters, then added to the final two quarters;
- only one month's instalment income included instead of the income for a quarter (this occurred in some cases where GST sales equalled PAYG instalment income).
FBT time is near
The end of the FBT year is only just over a month away. While FBT has been around for nearly 15 years, it still causes its share of problems for SMEs. One of those problems concerns when an employee's use of a motor vehicle is exempt from FBT.
If an employee uses a taxi, panel van, utility or other commercial vehicle (that is, one not designed mainly to carry passengers), it is exempt from FBT if the employee's private use of the vehicle is limited to:
- travel between home and work;
- travel incidental to travel in the course of their employment;
- non-work related use that is minor, infrequent and irregular, eg. occasional use of the vehicle to remove domestic rubbish.
Similarly, if an employee uses a motor vehicle that is not a car, it is also exempt if any private use is restricted to these circumstances.
Regardless of whether or not the vehicle is a car, the FBT exemption also applies to any non-work related use by the employee's associate that is minor, infrequent and irregular.
While special records are not required to be kept to be eligible for this exemption, SMEs will need to be able to demonstrate that at all times, the use of the vehicle meets the eligibility criteria.
If the vehicle is a car, the employee's use of the car exceeds the limitations set out above, and the SME elects to use the operating cost method, then the SME employee's use of the car is a car fringe benefit and all of the private use of the car, including travel between home and work, is taken into account in determining the business percentage to work out the FBT.
As the vast majority of FBT returns are prepared by tax agents, SMEs should raise any queries with their accountant.
Deducting tax from employee wages
SMEs generally use withholding tax (PAYG) tables that come from the ATO to calculate the amount they need to deduct from employee's wages.
However, the ATO has advised that it will no longer mail tax tables to businesses when tax rates change. Instead, it will contact businesses telling them that rates have changed, and advising how they can access PAYG tax tables on the ATO website. While the ATO says this will be quicker and easier, it says if businesses still need paper copies of the tables, they will still be available.
Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions. For more Terry Hayes features, click here .
