Tax represents a large cost for most SMEs and it undoubtedly contributes to the failure of many small businesses.
Australian Tax Office statistics show that more than 800,000 micro-, small- and medium-sized businesses represent about two-thirds of outstanding collectible tax debt. This amounts to over $9 billion in taxes.
At any point in time, about 150,000 micro, small and medium business special payment arrangements are in place with the ATO to manage these debts.
However, with small business representing such a large proportion of outstanding tax debts, this is an important business segment for the ATO.
They have shown that they will take action against businesses that are no longer viable and, in their opinion, are unable to pay their debts. In the 2011-12 compliance program the ATO has pursued 55,200 recovery actions against small businesses.
Given this reality for many small businesses, it’s important for start-ups and SMEs in general to take the right approach to tax planning and tax management for the financial year ahead.
Here are my three rules for effective tax management:
1. Plan to manage your tax and you’ll improve cashflow in the process
Knowing your tax obligations and factoring them into your budget will enable you to be ready and able to meet your tax and other compliance payments when they are due.
The onus is very much on businesses being aware of and working to meet their compliance obligations. Knowing them at the outset enables you to build reporting requirements into your systems, so that it’s quicker and easier to extract and deliver accurate information required to meet statutory deadlines.
While the ATO is willing to work with SMEs and give businesses in difficulty a fair extension of time to enable them to pay taxes, interest and penalties will apply for late payments and many businesses are still unable to meet these payments and extended deadlines.
The repercussions for failing to meet tax obligations can include:
- Garnishee orders against a business and its bank account to seize money and have it redirected towards paying a tax debt.
- Penalty notices to current and past directors.
- Claims and statutory demands.
- Commencement of bankruptcy or wind-up proceedings in extreme cases.
If you think you can get away with claiming you weren’t aware of your obligations, that won’t wash. The buck stops with you.
Ultimate responsibility for making tax payments, meeting reporting obligations and providing accurate information lies with the individual signing the annual return, or in the case of a business operating under a company, all of the directors of the business.
Getting on the front foot and planning to have the cash and time available to understand and meet your obligations is a far better approach to managing tax.