Counting Together: The Benefit of Visiting an Accountant

How Small Business Owners Get Into Trouble With Their End-of-Year Return

Did you know that the Australian Tax Office has many ways of cross-referencing official documents to ensure that your end-of-year tax return is correct? Officials have developed smart algorithms to instantly see if something is wrong and raise a digital red flag against your account. What are some of the most common mistakes that small business owners make when they submit their returns, and how can you avoid a red flag of your own?

Lifestyle Separation

One of the biggest grey areas for small business owners is the line between business and personal. Many people operate what is euphemistically known as a "lifestyle" business, where they take advantage of certain skills or other assets to operate their company. In this case, they may even run the business from their home, especially if it is purely digital. However, they may not fully understand the difference between business and personal expenditure and often get into trouble.

Business Use Apportionment

For example, while it is undoubtedly possible to offset some of your household bills against your tax return should you operate a home office, this needs to be done carefully.

To begin the process, you have to apportion the size of your home office against the footprint of your house or apartment. In this case, the home office will represent a percentage of the total size. So long as you use this particular area for business and nothing else, you can then apply that percentage to your rent, mortgage and utility bills. Just make sure that you are accurate and that you do not claim too much. After all, if you claim that your home office represents 50% of your electricity bill, the tax authority may want to look more closely.

Taxable Payment Annual Reports

Other companies may get into trouble if they fail to claim work that they performed for another organisation. In this case, they may have completed the work as an independent contractor but not realise that ATO is now able to cross-reference against other data such as the "taxable payment annual report." This report requires companies to detail any payments that they may have made to contractors for services. If you do not report this work on your own end-of-year return, it will immediately trigger one of those red flags, and you can expect a call from the taxman.

A Better Approach

As the ATO is as knowledgeable as ever, you need to pay particular attention to your tax affairs. For help with your business tax returns, engage an accountant so that you do not fall into any of the usual traps.