Author
Mitch BallChief of Insolvency Operations & ASIC Registered Liquidator
(02) 9220 7117
Understanding taxation is important when you are running a business. There are usually a number of different taxes your business needs to pay and a range of obligations that you are required to meet.
Unfortunately, as revealed by the snapshot below, not everyone gets it right all the time.
Read our comprehensive list of common mistakes and Contact Us for professional advice if any of the following apply to you.
Claiming deductions and GST input tax credits for personal items that are not related to business activities
This includes claiming a deduction for phone or computer use, such as claiming 90% business use and 10% personal use, when it is actually the reverse.
It also includes claiming GST tax-input credits for purchases that are not partly or solely intended for use in the operation of your business.
You can purchase items intended for both business and private use, but you can only claim a GST credit for that part of the purchase that relates to your intended business use.
You must also have a tax invoice for all GST credit claims on purchases costing more than $82.50 including GST.
Incomplete and missing tax invoices
As stated previously, you must have a tax invoice for all purchases costing more than $82.50 including GST where a GST credit is being claimed. To constitute a valid tax invoice, the document must contain the following pieces of information:
- he words ‘Tax Invoice’ printed at the top of the page
- he seller’s identity or business name
- Their ABN
- The date the invoice was created
- A description of the item(s) being sold including quantity and price and the GST amount (if any) that is payable.
As is the case with other tax-related records, you must keep your tax invoices for a period of at least five years.
Read our comprehensive list of the best invoicing apps.
Regular reconciliations not being completed
Bank reconciliation is where you or your bookkeeper compare the figures in your accounting records with those on your bank statements. The purpose of this is to spot any discrepancies between items in each and reconcile them.
These discrepancies might include things like:
- Differing cheque amounts recorded (known as over or under casting)
- mounts that appear on one statement but not the other (a possible indication of fraud).
Not only is reconciliation vital for maintaining an accurate financial picture of your business, but in taxation terms, failure to do so can impact your legal reporting requirements. Ideally, you should perform a bank reconciliation at least once a month.
Treating employees as subcontractors
Some businesses treat their workers as contractors when in fact they are employees. Reasons for doing this can include:
- Trying to avoid the obligations relating to employees such as superannuation
- Sick leave
- Holiday pay
- Payroll tax
A worker is generally considered an employee rather than a contractor if they:
- Perform work under your direction and control,
- Work standard or set hours,
- Have an ongoing expectation of work
- Bear no financial risk for the tasks they perform.
You should visit the ATO website for definitions of employees vs contractors, as finding out retrospectively you’ve been doing it wrong can involve steep financial penalties.
Failing to pay superannuation for contractors paid under a labour contract; even if the contractor quotes an ABN
Whether a contractor quotes an ABN number or not is irrelevant when it comes to your superannuation obligations.
According to the Superannuation Guarantee, a contractor is considered an employee (and therefore entitled to superannuation) if the contract between you and them is wholly or principally for their labour. In other words, they are considered employees if they perform the work on their own without delegation, are not being paid to achieve a result and are being paid mostly for their personal labour and skills (at least 50% of the invoice value).These employees are entitled to a super contribution made by you on their behalf.
It is important to note that personal liability may apply to PAYG and superannuation.
Not recording all sales through the cash register
If you’re operating a business, you need to keep records which explain all transactions relating to your tax affairs. These records include:
- Sales and expense invoices and receipts,
- Credit card statements,
- Bank deposit books,
- Cheque butts,
- Bank account statements
- Cash register tapes
If you take money out of your cash register to pay refunds, for personal use, or put money in without recording a sale, these amounts will not appear on your cash register tapes. In order to accurately reflect your sales, your takings must be reconciled at the end of each day and all discrepancies accounted for.
Wages and business expenses not being recorded and paid in cash
In the case of business expenses, paying in cash can be a matter of convenience (i.e. buying the milk for the office lunch room)However, in the case of wages, it is often an attempt by an employer to avoid attention from the ATO and Fair Work Australia.
Some employers tell workers they are doing them a favour by paying them in cash, when in fact they are merely denying them their rights to penalty rates, superannuation, sick leave, holiday pay and general workplace rights.
Therefore, the law requires that employers issue a pay slip within one working day of payday with the appropriate tax deduction recorded and remitted to the ATO and there are heavy penalties for not doing so.
Using unreported cash sales to fund personal expenses
A business is a separate entity from its owner and it must be treated that way, especially when it comes to finances. If you make a cash sale which you have not yet recorded and you use that money to buy your dinner or fill up your car with petrol, then you are creating loose ends that could come back to haunt you later on.
If the cash sale involves an invoice (which it should), there will be a discrepancy at reconciliation time. If it didn’t, there will be a stock discrepancy at stocktake time.
In the event where you use cash for personal use without obtaining a receipt, you will have no idea where the money has gone.
Compulsory superannuation guarantee payments not made on behalf of employees
If your business employs staff, then you are usually required to make Super Guarantee contributions on their behalf.
An employer must pay super contributions if their employee is paid at least $450 in gross salary or wages per month, regardless of whether they work casual, part-time or full-time. You must also pay super contributions for contractors being paid by you primarily for their labour.
The amount you must pay is currently 9.5% of their regular income and payments must be made at least every quarter. If your employee doesn’t specify a preferred super fund, you must pay their super into a default fund with a MySuper option for contributions.
For further details, refer to the ATO superannuation guidelines.
Directors' fees paid without making PAYG deductions
Director’s fees are considered to be salary and wages for the purposes of PAYG withholding. PAYG must:
- Be withheld from the gross director’s fees
- Reported on the IAS or BAS used to report the salary and wages
- Remitted to the ATO within the appropriate time frame
Because directors fees fall within the definition of Ordinary Times Earnings, superannuation contributions must also be paid at the relevant rate. While there may be a difference between when the directors fees are paid (i.e. quarterly rather than monthly), the related PAYG reporting and payment must still be made by the standard deadlines which apply for all other employees.
Inadequate vehicle log books maintained (employer FBT issues arise)
Failing to maintain adequate vehicle log books is another common mistake by business owners.
The car log book is an important tax substantiation record if you use your vehicle in the course of performing your duties. It allows you to claim the business-use percentage of each expense, based on the records of your vehicle’s usage. For a logbook to be considered valid, it must contain:
- The start and end date of the logbook period
- The odometer readings at those dates
- The total kilometres travelled
- The business-use percentage for the logbook period
- It must also contain the odometer readings and kilometres travelled for each journey, the start and finishing times and the reason for each journey.
Visit the ATO website for detailed information on the types of fringe benefits and the specific rules which apply to reporting.
Claiming self-education expenses when there is no nexus to earning income
Self-education expenses are deductible when they have a relevant connection to your current income-earning activities. In other words, if the subjects you undertake can maintain or improve the skills or knowledge you require in your current work activities, then the self-education expenses are deductible. You will be able to claim your course tuition fees, textbooks, stationery, student union fees and travel expenses to and from your place of education.
A common mistake employees make is claiming self-education expenses without this link to their current income. You cannot claim a deduction for self-education that only generally relates to your current employment or is undertaken for the purpose of gaining new employment.
Claiming home office expenses where the house is not a place of business
A common mistake made when claiming home office expenses is failing to have a clearly designated business area in your home, meaning it is a residential property and does not qualify as a place of business.
For your home to qualify as your principal place of business, it must have a room or separate area set aside exclusively for business activities. You can then legitimately claim home office expenses include a portion of your utilities, such as your business phone costs (rental and calls, but not installation), depreciation on your office equipment, computers and printers and possibly a portion of your occupancy expenses such as your rent or mortgage.
Claiming a tax deduction for superannuation guarantee payments that were paid late
In normal circumstances, you can claim a tax deduction for super guarantee payments you make for your employees in the financial year you make them. But if you are late making your SG payments, you cannot claim a deduction for those late payments.
Furthermore, you will have to provide the ATO with an SG Statement the following month and pay a non-tax deductible SG Charge, which includes the SG shortfall, a % p.a. interest calculated on a daily compounding basis and a $20 administration fee per quarter per member.
However, you may be able to use the late payment to either offset the SG Charge or carry it forward as prepayment of a future contribution for that employee.
Claiming repairs on rental properties which are clearly improvements or renovations
A common mistake is claiming renovations or improvements as repairs to your rental property.
A repair is classified as an ongoing expense, which generally has short-term rather than long-term value. It is relatively inexpensive and is often a case of replacing like for like. Ongoing repairs can be claimed as tax deductions, but if rather than repairing something, you upgrade or install a new item, this is considered a capital expense, which cannot be claimed as an outright deduction (unless it costs less than $300).
However, such improvements can be claimed under depreciation over a period of years, once you have obtained a depreciation schedule from a licensed quantity surveyor.
Claiming work-related expenses without having receipts
Work-related expense claims are one of the least understood and most error prone areas of personal taxation. Most people are eligible to claim for some work-related expenses, which are expenses incurred while performing your job as an employee.
These can include
car-related expenses such as fuel and maintenance,
- Travel costs,
- Clothing expenses,
- Education expenses
- Union fees
- Home computer and phone expenses
- Tools and equipment ournals and trade magazines
However, you must be able to substantiate your claims for deductions with written evidence such as receipts and invoices if the total amount of deductions you are claiming is greater than $300.
For further details on deductions you can claim, visit the ATO website or contact an accounting professional.
Employees not reimbursing employers for private use of cars or employers paying FBT (if no reimbursement)
Many employers are unaware that if they make a company vehicle available for private use by an employee, they are liable to pay Fringe Benefit Tax (FBT).
A vehicle is considered available for the private use of an employee if they use it for private purposes (which includes travel to and from work) or if the vehicle is garaged at or near your employee’s home, even if only for security reasons and regardless of whether or not they have permission to use the vehicle privately.
If, on the other hand, the employee reimburses you for the private use of the vehicle, then no Fringe Benefit Tax is payable.
Claiming loan repayments on rental properties instead of the interest portion only
Interest on loan repayments for rental properties can be claimed as a tax deduction, but many property owners are also, unwittingly or otherwise, attempting to claim for their loan repayments as well.
There is a lot of confusion amongst property investors over this matter, but the bottom line is, you can only claim the interest portion of your loan repayments and not the principal repayments, which would be equivalent to claiming the purchase price of the house as a tax deduction.
You can claim a deduction for expenses such as management and maintenance costs (including interest on loans), but borrowing expenses, depreciation and capital works spending must all be depreciated over a number of years.
Claiming 100% of GST on purchase of vehicles or other equipment which are partly used for private purposes
A common mistake made by business owners is claiming the GST paid when they purchase a motor vehicle, when that vehicle will only be partially used for business purposes.
The only time you’re entitled to claim a 100% credit for the GST included in the price of the vehicle is when it will be used solely for the operation of your business. Part of the confusion surrounding this issue may lie in the fact that you are often entitled to a reduced GST payment (decreasing adjustment) for the business use portion when you dispose of a motor vehicle, if the vehicle was used for both business and private purposes.
Not paying GST on vehicles or items of plant sold by a business
GST is required to be paid when you sell a company vehicle or item of plant, but some businesses are either not aware of this or simply ignore this requirement. The only time you don’t have to account for GST on disposal of a capital asset such as a company vehicle is when it was not used for business purposes (i.e. your family car) or if it was sold as part of a GST-free going concern.
However, while you are normally liable for GST when you sell a company vehicle, you may be entitled to a reduced GST payment if you used the vehicle partly for business purposes.
Quarterly BAS not reconciling with accounting records
There are several steps involved when preparing and lodging a BAS and the most important of these is reconciling your financial records. Unfortunately, failing to do so is a common problem which could be easily overcome if business owners followed these four basic steps:
- Step One – examine and compare your financial records and ensure that your bank statements match your accounting information
- Step Two – record any missing transactions for which you have receipts and invoices
- Step Three – total your records to determine what amount of GST you owe or are owed and calculate your PAYG
- Step Four – update your records with the new information and lodge your BAS.
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Not making adequate payments on director debit loans for companies (Div 7A)
Minimum repayments must be made by the 30th of June each year on director debit loans or else Division 7A of Part III of the Income Tax Assessment Act 1936 applies. When minimum loan repayments are not made, a deemed dividend is taken to be paid in the year the shortfall occurs.
Some companies are failing to make the minimum payments and incurring a Division 7A penalty as a result. Division 7A is a measure designed to prevent companies from making distributions to shareholders or their associates at the corporate tax rate of 30% instead of the shareholder rate of 48.5%.
Claiming donations with inadequate receipts or claiming non-deductible gifts as donations
This is another common mistake made by both individuals and businesses. Individuals claiming donations of more than $2 should have a receipt for each donation, although bucket donations can be up to $10 without receipts. You also can’t claim for donations where there is a personal benefit involved (i.e. a raffle or art union tickets). And for a business to claim a deduction for donations made to an organisation, the organisation must be a deductible gift recipient (DGR), endorsed by the ATO.
While claims for donations must generally be in the same year the donation was made, you can choose to spread a deduction over several years where the gift to the DGR is money or property valued at over $5,000.
Not disclosing interest earned or dividends received
Failing to disclose any interest you earned or dividends you received can easily come back to haunt you, as every company is required to lodge a Dividend and Interest schedule.
This shows the names, addresses, dates of birth, gender and tax file numbers (TFNs) or Australian Business Numbers (ABNs) of all shareholders to whom dividends were paid during the year. They must also lodge the names, addresses, dates of birth, gender and TFNs or ABNs of all investors to whom interest of $1 or more was paid or credited during the year and the amount of interest that was paid or credited to each investor.
Claiming travel expenses which are clearly personal
A mistake that employees often make is claiming for travel expenses that are not considered by the ATO to be directly work-related.
This can include everything from claiming because you have to stop to pick up the company’s mail on the way to work, to claiming for personal sightseeing excursions made during interstate or overseas business trips.
Travel expenses you can legitimately claim for include:
- Meals
- Accommodation
- ncidentals while away on company business (i.e. an interstate conference),
- uel costs when using a borrowed vehicle for work purposes
- Airfares, taxi fares and car hire fees when travelling for work purposes
Claiming GST on entertainment expenses
Many businesses seem unaware that GST credits cannot be claimed on entertainment expenses.
An activity is classed as ‘entertainment’ if its main purpose is for people to enjoy themselves or it takes place in a social setting.The cost of an activity such as wining and dining a business client is normally considered an entertainment expense. The key is in what defines entertainment. If a meal with a client does not include alcohol, is not overly expensive or elaborate, is consumed on company premises during business hours - then it can be classified as refreshment rather than entertainment.
Claiming entertainment expenses as staff amenities
Following on from the previous mistake, some businesses also try to claim their entertainment expenses (for which no GST credits can be claimed and for which Fringe Benefit Tax may be due) as staff amenities expenses (for which GST can be claimed).
The two categories are quite different however, as staff amenities expenses are clearly defined as the cost of tea, coffee and biscuits etc made available in the staff tea room for the benefit of employees.
Entertainment expenses are costs associated with client dinners, especially those where alcohol is involved. So, trying to claim the office Christmas party as a staff amenity expense is not going to have much credibility with the ATO.
Claiming home electricity and telephone expenses 100% as business
This is another error that some small businesses make, attempting to claim 100% of their home phone and electricity bills as business-related expenses. If you run your business from home, it is obviously where you live as well as where you work, so you are obviously going to consume a percentage of electricity while you are not working and in those areas of your home not dedicated to your business.
Similarly, all your phone calls are not going to be business related, so you need to work out the percentage that are work-related and those that are personal, rather than trying to claim everything as a business deduction.
Not paying for goods taken from stock for personal use
This is a problem that occurs frequently in a number of food-related businesses such as butchers, bakers, delis, grocers, restaurants and cafes.
Stock is consumed or taken by staff and/or management for personal use without being paid for or recorded in any way. The ATO is familiar with this recurring problem, which has the effect of turning business stock into taxable income, so in order to simplify the reporting problems surrounding this issue, they now publish and regularly update a schedule of standard values, so that business owners can estimate for tax purposes the value of the stock being taken.
Claiming ineligible donations – some where you receive a benefit
Some businesses make the mistake of claiming for donations that are ineligible for a tax deduction. As mentioned earlier, in order for a donation to be an eligible deduction it must be a purely charitable gift, with no reward or benefit being accrued by the donor. It must also be made to a Deductible Gift Recipient (DGR) approved by the ATO. An example of a donation that would not qualify for a tax deduction would be a donation by a business to a political party. In the first instance, the political party is not a DGR and secondly, a reward or benefit is implicit in such a donation.
Failing to disclose shares or other assets subject to CGT
Tax laws require that you keep records of every transaction or event that might be relevant to working out a capital gain or loss from a CGT event. Despite this, some people are still failing to declare shares and other assets that could be subject to CGT.
Penalties can apply if you don’t keep records of the shares or assets for at least five years, so to avoid falling foul of the ATO, you should maintain records using a code that identifies the company the shares were acquired in, the class of shares acquired, the date on which they were bought or sold and the price that was paid in each case.
Failing to add-back capital works deductions on sale of an asset for CGT purposes
Capital works deductions can be claimed on assets such as rental property. The may include deductions for construction expenditure such as adding a room, garage, patio or pergola to a building or extension, making alterations such as removing or adding an internal wall and making structural improvements such as adding a gazebo, carport, sealed driveway, retaining wall or fence.
When such an asset is sold for CGT purposes, the cost of these deductions must be added back to determine the actual value of the asset and failure to do this, either knowingly or unwittingly is a mistake the ATO sees all too frequently.
Claiming expenses paid by cash and without receipts
Claiming for expenses paid for in cash and for which you have no written evidence is a common error committed by taxpayers.
Written evidence is required by the ATO for expenses valued at more than $300. This can be a document from the supplier of the goods or services that shows the supplier’s name, the amount of the expense, the nature of the goods or services, the date the expense was incurred and the date of the document.
Written evidence could also be another document or combination of documents containing the information listed above, such as bank statements, credit card statements, BPAY reference numbers or email receipts.
Giving employees interest-free loans subject to FBT
Another common mistake some businesses make is giving low or interest free loans to employees, without being aware they may be subject to Fringe Benefits tax (FBT).
A loan is defined as any transaction that, in substance, involves the lending of a sum of money. For it to be subject to Fringe Benefits Tax, it must be provided to an employee and it must be provided in respect of the employment of that employee.
It will also attract FBT if there is no interest charged or the rate is less than the relevant statutory interest rate and the employee is under no obligation to repay the loan (i.e. repayment is not enforceable by law).
Claiming a deduction for work clothes that are not distinctively a uniform
There is still a lot of confusion about what you can and can’t claim as work-related expenses and a common error relating to work clothes is uniforms.
To be able to claim for purchase and cleaning of a uniform, it must be distinctive to the organisation you work for and be compulsory to wear as a condition of your employment.
A uniform is distinctive to the organisation you work for if it has been specifically designed for them, bears the company logo and is not available to the public.
The only circumstance in which you can claim expenses for a non-compulsory uniform is if your employer has registered its design with AusIndustry.
Claiming laundry or dry-cleaning as a deduction for regular work clothing
Following on from the previous misnomer, some people continue trying to claim laundry and dry cleaning costs as a deduction for their regular work clothes.
The perception is possibly that because what they wear is used primarily for work purposes that its cleaning and maintenance should be a deductible expense. Unfortunately, you can only claim for actual uniforms that are distinctive and unique to your employer and which you are required to wear.
You must have written evidence of their cleaning schedule (i.e. diary entries or receipts) if your claim for laundry and dry cleaning is more than $150 a year.
Claiming depreciation on home office furniture or fixtures which is partly used for private use
Just as you can claim depreciation on a PC or laptop used in a home office environment, so you can claim depreciation on home office furniture and fixtures such as desks, chairs, curtains, carpet and the like. In both cases however, you can only claim 100% depreciation if they’re used exclusively for business purposes. if they’re only used partly for business purposes and are partly for personal use, then you must work out the percentage of business vs private use and only claim for the business percentage. To claim depreciation, you must have written proof of purchase for the items being depreciated.
Replacing items in rental properties and claiming them as repairs rather than depreciating them
There are two kinds of expenses that property owners can claim on their rental properties. These are ongoing expenses and capital expenses and you can potentially claim both types, as long as you know how to go about claiming and don’t confuse one with the other.
This is a common mistake that landlords can make, replacing rental items when they wear out or break and then claiming them as ongoing repairs, rather than what they are, which is capital expenses. Such capital expenses cannot be claimed as outright deductions (unless they cost less than $300) and must instead be depreciated over several years.
Claiming items as medical expenses (for offset purposes) that are not medical in nature
Net medical expenses are your total medical expenses minus any Medicare or private health refunds that you received or are entitled to receive.
Medical expenses include:
- The cost of disability aids
- attendant care
- Aged care
They do not include things like:
- Contributions to private health insurers
- Travel or accommodation expenses associated with medical treatment
- Inoculations for overseas travel
Vitamins, health foods and cosmetic medical and dental procedures are also not eligible medical expenses, so it is important to make sure your claims for medical expenses are legitimate before including them in your tax return.
Not treating working directors as ‘employees’ for FBT purposes
To qualify as a fringe benefit and attract Fringe Benefit Tax (FBT), a benefit must be provided to an employee or associate in relation to their employment.
As far as company directors are concerned, unless they are also shareholders in the company, they are treated like normal employees. That means any benefit they receive from the company in the form of free or discounted items or services is subject to FBT.
The only time this is not the case is if they are also shareholders, in which case, rather than attracting FBT, they are taxed personally on the value of the benefit they have received.
Spending too much on Christmas parties and not paying FBT
As mentioned previously, you can’t file the staff Christmas party under ‘staff amenities’, and inviting your clients to your party will not remove your obligation to pay Fringe Benefits Tax (FBT).
If you really want to splurge on your Christmas party to thank your staff for all their hard work, you can legitimately avoid paying Fringe Benefit Tax by hosting your party on your own premises during business hours. If this seems a bit stingy, you can still celebrate at an after-hours offsite venue and avoid paying FBT if you keep the cost per employee for the evening (meals, drinks, entertainment and taxis) to under $300 (including GST).
Failing to keep stock records and valuing stock at cost
Because an increase in your stock’s value over the year is assessable income and a decrease is an allowable deduction, some businesses value their trading stock at cost to minimise their tax and have an inventory value as low as possible.
There are penalties for undervaluing your trading stock, just as there are for not keeping stock records at all, which is another common mistake some businesses make. By law, you must keep records for five years and they must be in English or in a form that the ATO can understand in order to work out the tax you are liable to pay.
Claiming legal expenses that have no relation to income and are capital
A common mistake made by some small to medium businesses is in claiming a deduction for legal expenses when the expense is actually of a capital nature. The ATO allows you to deduct all losses and outgoings that are incurred in the process of gaining or producing assessable income, but you are not allowed to deduct a loss or outgoing when it is of a capital, private or domestic nature, which is classified as a general deduction. There must be a tangible connection between the expense and the earning of income (i.e. the legal costs must be relevant to that end).
Inadequate record maintained to substantiate the cost base of assets
The cost base of an asset must be known in order to be able to determine the amount of capital gain or capital loss it incurs, and the failure by some businesses to keep adequate records in regard to this has led to problems at tax time. An asset’s cost base consists of a number of components; all of which require accurate record keeping to determine.
These include:
- The cost and incidental costs of acquiring the asset
- the non-capital costs of owning the asset
- The costs of enhancing the asset
- any costs related to preserving ownership of the asset
- The incidental costs of disposing of the asset
Lodging BAS on a cash basis rather than accruals for businesses with a turnover of over $2m
If your business turns over more than AUD $2 million a year, the ATO will put you on Accrual GST automatically.
The only time you have a choice between Cash and Accrual GST is if you earn less than this, so those $2 million+ businesses still on a cash basis will encounter problems when they lodge their BAS. For most businesses earning under this amount, their GST on Debtors is greater than their GST on Creditors, so being on a Cash Basis for GST is the best choice.
Exceptions to this where a business could be better off on an Accrual Basis are those businesses with few debtors such as cafes, restaurants and retail businesses with not many sales on account.
Failing to register for GST when your business income has reached $75,000 pa
Registering for GST is only compulsory if your business earns more than $75,000 a year. You can still register if you earn under this amount, but there are good reasons why many businesses choose not to do so. The first is the amount of paperwork that is required. A registered business must balance their role of trying to run a business with being a tax collector for the ATO, which adds to their administrative costs.
The other main reason not to register is because you can undercut your GST registered competitors by 10% or sell at the same price and pocket the GST difference. However, no matter how attractive the alternative, once you hit the $75,000 pa annual turnover, you must register for GST. The ATO provides extensive information on registering for GST including how to register and the threshold requirements.
Claiming life insurance payments as personal accident cover
Personal Accident Insurance that protects your income if you are unable to work attracts a tax deduction from the ATO. However, some taxpayers have been trying to claim a deduction for accident insurance held under life insurance that does not protect their income and are surprised when their claim for a deduction is rejected.
The cost of your premiums can be claimed as a tax deduction only if your accident cover is in the form of income protection. It is also non-deductible if it is held inside superannuation or provides a lump sum benefit through life insurance or trauma insurance.
Claiming deductions against allowances that cannot be substantiated
Whether it’s work, car or travel-related, whatever type of deduction you are claiming, you must be able to substantiate your claims if called upon to do so by the ATO. If the total amount of deductions you are claiming is more than $300, you must have written evidence in the form of receipts or invoices, while if it is less than $300, you must at least be able to show how you worked out your claims. Certain types of deductions also require certain special types of evidence, such as car-related expenses, which call for the keeping of a log book.
Failing to show as income General Interest Charge that has been remitted by the ATO
This is a mistake taxpayers can make when they receive a GIC remittance by the ATO.
A General Interest Charge (GIC) is interest charged on unpaid tax debts and shortfall amounts. It can be remitted (reduced or cancelled) by the ATO if a taxpayer applies for a remittance and the ATO rules that the delay or shortfall was not of the taxpayer’s making or if it was, that they did everything in their power to rectify the situation in a timely manner.
Because it is in effect a refund of monies owed or paid, it must be shown as income on your tax return.
Trying to claim general clothes and footwear as protective or safety gear
Work-related deductions include clothing and footwear that protects you from the risk of illness or injury, or prevents damage to your ordinary clothes from your work environment.
These items include:
- fire-resistant clothing
- sun protection clothing
- hi viz safety vests
- non-slip shoes
- steel-capped boots
- gloves
- overalls
- aprons,
- heavy-duty shirts and trousers
Some taxpayers either knowingly or inadvertently try to claim ordinary clothes and footwear as protective wear, arguing that jeans and closed shoes are protecting them while they work. To be able to claim a deduction for protective clothing however, these items must possess protective qualities designed specifically for the risks of your particular workplace.
Trying to claim business set-up costs in the first year
Thanks to a change in taxation legislation, new business start-ups are now able to claim certain business set-up costs in their first year of operation. This includes a new immediate tax deduction for assets, which can now be immediately written off if their value is less than $20,000.
The mistake is made when new business owners try to claim set-up costs such as the purchase of office furniture and equipment as a deduction. This is in fact a capital expense and cannot be claimed as a deduction or in the first year, but needs to be depreciated over several years.
It is also important to note that a large portion of businesses fail in the first 12 months of being established. Read our top 10 reasons why new businesses don't survive (https://australiandebtsolvers.com.au/restructure-turnaround/guides/10-reasons-new-businesses-don-t-survive).
Wrongly claiming borrowing costs on financing investment property
The ATO is finding that property investors are making a variety of minor errors with regard to their rental properties which could be avoided with a little research.
These include:
- claiming interest on an investment loan when the rental property is being used for private purposes
- not apportioning deductible interest on loans used for both investment and private purposes
- not calculating deductible interest on a pro rata basis when the property is rented to family at a less than commercial rent
- claiming deductions for voluntary advance payments towards the principal
- claiming loan repayments as a deduction instead of just the interest part
Claiming GST credits on residential investment property you intend to keep
Another mistake some property investors make is claiming GST credits on investment property that they intend to keep.
You are only eligible for GST credits on new residential property that you plan to sell. Property is classed as new if it is built from scratch, has never been sold as a residential property before, has been substantially renovated or is replacing a demolished building on the same land.
You can claim GST credits for your construction costs and any purchases related to the sale, but you must clearly intend to sell the property and actively marketing it for sale is the best way of demonstrating this.
Not paying GST on development properties sold
If you carry on an enterprise (business) and your turnover is more than the GST registration threshold ($75,000), you are required to register for GST. What many property investors do not realise is that by participating in property transactions (even a one-off sale), their activities may constitute an enterprise and they may be required to register for GST.
They are also required to pay GST on the sale of new development properties, which is normally one eleventh of the sale price. Those engaged in the practice of ‘flipping’ properties (renovating and reselling for profit) need to work out if what they are doing constitutes an enterprise and whether they need to register for GST.
Claiming CGT concessions on property sold as a developer
The ATO is currently looking at property developers who acquire development properties through newly established trusts.
The stated intention is to hold the developed property as a capital asset to generate rental income, but the activity which follows the purchase is conducive with an intention to sell before or immediately following completion of the development. When sold, the trustee treats the proceeds as being on capital account, and because the property was purchased more than a year before the sale, claims the general 50% Capital Gains Tax (CGT) discount.
The ATO has issues with this type of arrangement because the trustee may be carrying on an enterprise, which would make the property trading stock and the sale proceeds ordinary income.
Rolling over a capital gain for an active asset into super
Small businesses turning over less than AUD $2 million a year can qualify for four different capital gains tax exemptions. One of these is the CGT retirement exemption, which has a lifetime limit of $500,000 which can be claimed from the sale of your business.
If you are under 55 years old, the retirement exemption must be contributed to a super fund, and if you are over 55, you must be able to show that it is being set aside for your retirement.
A problem the ATO regularly encounters is business owners rolling over a capital gain for an active asset but not putting it into their super fund or if over 55, not being able to demonstrate that it was set aside for retirement.
Drawing money out of your SMSF because you were short of cash
Some trustees of SMSFs erroneously believe they can dip into their super funds to pay outstanding debts or fund their small businesses. But if they do so without satisfying a condition of release, they will be acting illegally and may find their SMSF being issued with a notice of noncompliance and themselves being personally disqualified from being a trustee.
The ATO may allow you to compensate for such a contravention of the Superannuation Act by calling the withdrawal a loan, but it must show all the characteristics of a loan transaction, including a loan contract, interest being charged and repayments made until the loan is paid back.
If you are considering withdrawing and using money from your super, it is essential to have knowledge of the rules surrounding this and the potential future financial impact of doing so.
Saying you were a resident of Australia for tax purposes when you were not, or saying you were a non-resident when you were
Another common mistake made by overseas visitors is making an erroneous declaration about their status for tax purposes.
Some claim to be Australian residents for tax purposes when they are not, and some claim not to be when they actually are. Often this is a genuine mistake, but in some cases it can be deliberate, because the tax rate for working residents and non-residents is markedly different.
Non-residents are taxed at 32%, while residents are only taxed at 15%, so the incentive to be a resident for tax purposes is obvious.
Receiving income from overseas and not disclosing it
This is a common mistake made by taxpayers who have investments or bank accounts overseas.
The common misconception is that because the money was not earned in Australia, there is no tax to pay and no reason to declare it in your tax return. While there may well be no tax to pay (not all overseas income is taxable), you still need to declare such amounts and failure to do so can attract stiff penalties.
There is growing cooperation between governments and financial institutions around the world, and more information sharing means those seeking to hide overseas income from the ATO will find it increasingly difficult in the future.
Inheriting assets and failing to apply the correct CGT treatment
Another common mistake is failing to pay CGT on assets you inherit as part of a deceased estate.
When the asset includes property, CGT will need to be paid either by the estate or by the beneficiary. If the estate sells the property rather than transferring it to a beneficiary, then CGT will need to be paid on the sale and the remainder distributed amongst the beneficiaries. If the estate transfers the property to the beneficiary as is, then CGT is payable by the beneficiary, but only if and when they sell the property.
The main residence of the deceased person does not attract CGT if sold within two years of their death.
Limiting the chance of mistakes in your tax return
Taxation can be something of a minefield for most of us, which is why we have a tax agent taking care of our annual returns. However, when you’re running a small business you sometimes can’t afford to outsource all your financial obligations, and the result can be a series of tax-related errors and omissions that go unnoticed until you are audited by the ATO.
These are just some of the most common mistakes they’ve encountered over the years, and hopefully by reading this resource, you’ve recognised one or two you’ve been making yourself and won’t be repeating in the future. These common mistakes also highlight the importance of finance management and the benefit of having a dedicated accountant.
If you have already run into issues with your tax obligations and require an administration expert to assist with getting your business back on track, contact our experts at Mackay Goodwin today.
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