Bookkeeping compliance and fine prevention – those terms alone can strike a fear as cold as ice into the hearts of most SME owners and managers. Most of us think if we keep our heads down and our nose clean we will not evoke the wrath of the Australian Tax Office.
It will surprise you that the vast majority of issues most businesses will face will be due to small errors in bookkeeping and compliance that grew like a festering wound.
The five most common compliance issues we see occurring for SMEs include:
Late lodgement of BAS’s/IAS’s.
Late lodgement of Tax Returns.
Claiming GST when not entitled.
Falling behind in lodgements as obligations can snowball.
Agreeing to ATO payment arrangement then defaulting.
The main mistakes SMEs are making when it comes to compliance are:
- Treating GST Collected as income or money to be spent.
- Preparing their own work poorly and being unable to use the information.
- Preparing accounts for 30th June 2016 in May 2017 (i.e. not timely reporting).
- Seeing professional services as a cost burden rather than being unable to manage the business.
Top Business Tips for SMEs
The key point to remember in the daily running of your business to avoid the attention of the ATO is keep up-to-date with compliance issues relating to your industry and the specific requirements of your business.
It is important to:
- Be organised and correctly set up from the start.
- Regularly attend to tasks so they don’t become overwhelming.
- Deal with any problems as and when they arise. Ignoring it won't make it go away!
- Understand what a Balance Sheet and Profit and Loss are and what they show.
The most important thing is sound bookkeeping and maintaining appropriate business records. Even if you do find yourself under the microscope you will be able to provide proof that you acted with due diligence.
What is ‘Good Bookkeeping’?
We talk about ‘good bookkeeping’ all the time, but what constitutes appropriate bookkeeping standards within your business?
From the perspective of running your business, ‘good bookkeeping’ allows you to:
- Measure how your business is performing.
- Keep track of your income and expenses.
- Show banks or lenders how your business is going.
- Make the best use of your registered tax or BAS agent.
From the ATO’s perspective your bookkeeping is essential record keeping for compliance and involves:
- Providing receipts and other evidence of all sales and purchases you made for your business.
- Keeping tax invoices, wage and salary records.
- Retaining all documents relating to GST.
- Maintaining records of the purchase, sale and other costs of any business assets, such as land, buildings or office equipment.
- Providing all records relating to tax returns, activity statements, fringe benefits tax (FBT) returns, and contributions to employee super.
It is important to note - you must keep your business records for at least five years.
2017 ATO Hitlist – What you Should be Aware of?
They say forewarned is forearmed! It is always a good idea to take note of where the ATO’s microscope will be aimed for the year. Uber drivers, airbnb income earners and taxpayers claiming “dodgy” deductions are currently in their sites.
People earning extra income through the ‘sharing economy’ like Uber and Airbnb can expect extra scrutiny this year as can those with inflated work-related personal tax deductions.
Also under the ATO microscope will be deductions relating to investment properties, working holiday-makers claiming to be residents and rental properties located in popular holiday destinations.
It is important to remember the ATO is benefiting from constantly evolving technological advances. Taxpayers’ financial information can be gained from third parties and be matched with tax returns to identify people who aren’t complying.
Unsubstantiated or “dodgy” work-related expenses are in focus. The ATO has clear benchmarks about what people in different professions should be claiming. If your claims are significantly outside of the benchmark, you may be answering a few more questions.
The ATO uses real-time data to compare taxpayers with others in similar occupations and income brackets, to identify higher-than-expected claims related to expenses including vehicle, travel, internet and mobile phone, and self-education.
Penalties can work out steep at anywhere from 25% to 95% of the unpaid tax (plus interest).
One of the biggest misconceptions is that you can make a standard claim of $300 without having spent the money. You don’t need receipts for claims up to $300 but you must have spent the money, and be able to show the ATO how you worked out your deduction if asked.
The general rules for claiming deductions are:
- You must have spent the money yourself and not have been reimbursed.
- The claim must be directly related to earning your income.
- You need a receipt/record to prove it.
What are “Dodgy Deductions”?
According to the ATO, these are the things you probably can’t claim:
- Trips between home and work. Generally, you can’t claim a deduction for these because they’re considered private travel.
- Car expenses for transporting bulky tools or equipment, unless you need to use your bulky tools to do your job; your employer requires you to transport this equipment; or there is no secure area to store the equipment at work.
- Car expenses that have been salary sacrificed.
- Meal expenses for travel, unless you were required to work away from home overnight.
- Private travel, so if you take a work trip that includes personal travel you can only claim the work-related portion.
- Everyday clothes you bought to wear to work (e.g., a suit or black pants), even if your employer requires you to wear them.
- A flat rate for cleaning eligible work clothes without being able to show how you calculated the cost.
- Higher education contributions charged through the HELP scheme.
- Self-education expenses when the study doesn’t have a direct connection to your current employment — your future or dream jobs don’t count.
- Private use of phone or internet expenses — only the work-related portion counts.
- Upfront deductions for tools and equipment that cost more than $300. These can be claimed over a number of years by depreciation.
Remember Prevention is Always Better Than a Cure
By the time most people seek professional help in relation to bookkeeping compliance, the symptoms of their festering wound are often all too obvious.
As professionals, we can assist in the management of the situation and help to put in place safeguards for repeat infections.
For larger businesses, employing specialists in key areas such as planning, governance, risk management or systems will keep their compliance up to scratch, but small businesses are often less equipped.
Outsourcing by using an advisor whose specialist training can complement the skills of the business is not a new concept. We all know it is better to engage a professional health expert to get our risk factors in check before there is a health scare.
Likewise - getting personal specific advice and a comprehensive health check for your businesses compliance risk factors is always better than working through the result of an ATO intervention.