How will you feel when the tax man knocks on your door?
Australia adopted self-assessment taxation regime in 1987, placing the responsibility for the quality of records and accuracy of tax returns on the taxpayer.
To ensure that businesses comply, the ATO can visit a business to check their record keeping and run an audit.
It’s no longer a case of “if” but “when” this may occur.
The prospect of an audit can be fairly chilling! Depending on the offence and culpability of the taxpayer, there are considerable penalties for non-compliance or tax avoidance, ranging from 25 percent to 200 percent of the taxation liability. What’s more, you pay interest at penalty rates on the amount of tax avoided.
When the ATO introduced “The new Tax System” in July, 2000, confusion hit many small businesses. The result was that small businesses need to have a better handle on their finances and reporting to the tax office. Oddly enough, it’s actually good news for businesspeople.
By paying greater attention to your bookkeeping, you have a better understanding of the financial position of your business.
This means you will be forced to be more informed about business actuals and therefore able to accurately compare your business forecasts and plans with reality.
Businesses need to have an understanding of the tax system, and cultivate a good relationship with your accountant or registered tax agent. Poor tax planning can have a disastrous effect on your own personal wellbeing and on the impact on your business.
As a businessowner, your taxable income is the total of your assessable income less allowable deductions. So you pay tax on your business income, less any legitimate business expenses.
From the beginning, every business needs to establish an appropriate level and quality of accounting records and receipts. Without any record or proof of purchase you can’t expect to get a deduction
Just because you do have proof of purchase, when the ATO does an audit on your business, they require evidence that any business expenditure is legitimate for that business.
Legitimate business deductions
Legitimate business deductions are ongoing business costs incurred in operating the business, such as:
- insurance
- stationery and printing
- advertising
- travel
- staff training expenses
- subcontracting costs
- delivery expenses
- computer supplies
- telephone and other communications costs
- subscriptions to business associations and publications
There’s also certain one-off costs which affect the business, and capital expenses which depreciate over time. Other legitimate expenses include deductions for depreciation of capital assets, like plant, equipment and fittings, over the useful life of the asset.
Tax planning for the end-of-financial-year
Many businesses fail to plan their tax position for the end-of-financial-year, so they may miss out on optimising their tax position.
By keeping accurate and up-to-date accounting records, you know the financial position of your business. Thus you can take advantage of the various actions and choices to put you in the best possible position regarding tax payments or tax liability.
This is why choosing the right accountant and bookkeeping system is so important, and the old ‘shoebox’ system is no longer viable.
The Taxman Cometh!
As the ATO widens the scope of its audit activity, the chances of a taxation audit get stronger every year, and are highest among those whose tax returns reveal that:
- declared income is below the average for their industry or occupation,
- there’s unusual or apparently large claims, particularly relating to work or rental property expenditure
- deductions that are above their industry or occupation average
It’s worth checking your claims and level of income, to see if they could make you more susceptible to an audit. If you are selected for an audit, you will receive written notification and sometimes verbal notification as well.
Most people expect audits to be conducted by face-to-face meetings with the audit officers, where you present and identify all relevant documentation. Some audits are undertaken entirely by mail and phone.
They may need access to your business premises and residence, and expect you to provide reasonable facilities, such as a workstation for the audit officers to carry out their work. They’ll be seeking explanations for your claims, omitted income or excessive deductions.
The ATO instructs its audit officers to:
- give taxpayers reasonable time to collect records, documents and papers required for an audit
- arrange interviews with taxpayers at mutually convenient times usually during normal business hours
- produce identification at the first meeting with a taxpayer
- act in a courteous and professional manner
- explain the purpose of any interview or visit
- show fairness and impartiality in the conduct of the audit
- to gather information on any other matter that might arise during an audit
You should speak to your accountant or registered tax agent, to keep up to date, but here’s a brief checklist outlining what you need to get in shape for an audit.
1) Make sure that you can substantiate all:
- motor vehicle expenses
- travel expenses
2) verify the cost of all assets so that depreciation rates may be confirmed
3) check all records details and accuracy of
- capital expenditure to ensure that none has been used for non-business purposes)
- fringe benefits tax declarations
- payment to subcontractors, including names and addresses and amount paid
- all sales have been recorded properly
4) check that any declarations of interest or dividends match the amounts credited in bank or dividend statements.
Disclaimer: This article is provided as a general information service only and should not be relied upon as a substitute for the advice of a properly qualified professional. Yo2go does not assume or accept any responsibility for, and neither shall be liable for, the accuracy or appropriate application of any information on the site.
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