While the actual preparation of a business tax return is almost always handled by the trusty accountant, that doesn’t stop people from making big mistakes when it comes time to doing the tax return for their business. With that in mind, here are the top four mistakes commonly made by businesses at tax time. Despite the focus on companies, much of this will also apply to those trading as partnerships, sole traders or trusts.
This has to be number one with a bullet! When it comes time to do your company tax return you’re going to hand over your records to the tax accountant who runs through everything, cleans stuff up, makes necessary adjustments and then enters the resulting information into the tax return. Sounds easy enough, but this whole process can be stymied by low quality bookkeeping which results in higher than necessary accounting fees and it may result in audit drama should the ATO come knocking.
What does good bookkeeping look like? It is kept in a cloud service like Xero, all the bank accounts are reconciled properly, trade receivables are checked for any bad debts, trade creditors are reviewed to make sure the list is accurate, wages and superannuation is all paid up, expenses have been correctly allocated, directors’ personal costs aren’t muddied in with business expenses and it is delivered in a timely fashion. Sometimes it really is the basics that make all the difference.
Most SME company tax returns aren’t due until the middle of May after a financial year ends. That’s right, you’ve got almost 11 months to get your company tax work prepared and lodged if you want to stay on the good side of the tax man. Sounds like a lot of time to get your affairs in order, but plenty still fail to get things in on time. Failing to lodge on time may result in penalties, interest and lead to an earlier due date for your company tax work the following year.
Getting your company tax affairs in order on time is really easy if you’ve got a good process in place to manage your bookkeeping and really, there is no reason everything shouldn’t be ready once the June BAS is lodged in July/August. Save yourself the stress and get the work in early! Not only will it get it off your plate, but it also means that any potential tax bills can be planned for well in advance.
If you run your own company you’ve no doubt heard about Division 7A. These are the rules that say you, as a shareholder of the company or someone related to a shareholder, cannot borrow money from the company as you see fit. A common issue that accountants see is people setting themselves a low wage to help with cashflow when it comes time to pay the BAS and superannuation each quarter, but then borrowing from the company during the year to cover living expenses.
This kind of behaviour can result in some nasty tax consequences and is best avoided wherever possible. While it can sometimes make sense to borrow money from your company, there are ways to go about it that will help ensure you stay on the right side of the tax rules. Don’t get caught out – speak with your accountant before taking the cash, not after.
Last, but certainly not least, is a perennial headache of small business owners the country over – superannuation. Most of us understand our super obligations when it comes to our employees, but not always when it comes to contractors. Broadly speaking, if you’re paying a sole trader contractor principally for their time and they are earning over $450 a month from you then it is likely you’ll need to make a superannuation contribution on their behalf. There are some subtleties to these rules so it’s always wise to get professional advice. You can also check out the ATO employee/contractor decision tool as a way of determining whether you need to pay super or not.
Once you know who it needs to be paid for, you need to make sure the superannuation is paid on time. Failing to do so can result in penalties, interest and losing the tax deduction altogether. Our advice is to pay each quarter’s super obligation well before the due date (28 days after the end of the quarter) except for the June quarter payment, best to pay that a week or so early. This way you’ll maximise your tax deductions for the super being paid this year.
Seek professional advice and stay on top of your tax obligations throughout the year to avoid any nasty surprises at tax time.
Written by Ben Fletcher, managing director at Generate.
Generate are not your typical accountants. We provide operational and strategic support to creative and innovative businesses of all stripes and colours.