The Australian tax office has moved to a softly-softly, carrot rather than a stick approach when it comes to running small business audits, along with talk about making large multinationals pay more tax. However, SMEs should be under no illusions – they are still in the firing line. There has been a notable cultural shift in by the Australian Taxation Office over the past year – one that should be welcome news for the majority of small business owners.
Gone is the big stick – which in recent years saw the tax office raising over $3 billion in extra taxes and penalties for a cash-strapped Commonwealth Treasury.
In its place is a new-look warm and fuzzy taxman. “This tax time, the ATO is making things easier for small business. Whether you use a registered tax agent or manage your own tax affairs, we have a range of tips and have improved online tools to help you get it right,” the Tax Office said via media release on 18 July this year.
And for that to work, the ATO expects small businesses to put in a bit more effort in understanding what they need to do.
Program Blueprint, a new game plan
“We are changing the way we work to deliver the best possible experience with the tax and super systems for our clients, our staff and our partners,” the ATO says.
In place of its annual Compliance Program – where the business sectors most likely to be audited were put on notice – the Tax Office launched a webpage titled “Building Confidence” in March 2015.
However, SMEs should be under no illusions that they are out of the firing line. On the Building Confidence website, the ATO outlines a series of escalating contact points, ranging from a “we’re here to help you in the way that best suits you” type approach to “those choosing not to comply and … who abuse the tax and super system”.
This latter group, not unexpectedly, can expect to feel the full force of the law.
The game plan for the ATO’s compliance teams can be summed up as:
- identifying and dealing with dishonest businesses who intentionally seek an unfair advantage by hiding income (cash and electronic payments) or deliberately avoiding their obligations by failing to register, keep records and/or lodge accurately
- businesses that report outside of the small business benchmarks for their industry
- employers not deducting and/or not sending us the PAYG withholding from employee wages
- employers not paying the super guarantee
- businesses registered for GST but not actively carrying on a business
- failure to lodge activity statements
- incorrect and under-reporting of sales.
In between sit, in the ATO’s words, “clients who need advice, services or information to help them navigate more complex tax and super issues.” What follows primarily relates to this group.
Take control before it’s too late
Peter Bembrick, taxation partner at accounting firm HLB Mann Judd, advises that managing the tax effects of the big ticket items is one area where business owners need to be more active, long before tax time rolls around.
“Particularly on something large or contentious it could be worthwhile to get a second opinion, but it would have to be a major item,” he says.
“You could also get a tax barrister to give an opinion but the best thing is to document your position as you will have the benefit of the ‘reasonably arguable position’ provisions in the Tax Act.”
This is an important distinction to make. It means that if you are audited and your tax bill is increased – ie, you over-claimed deductions or rebates, or under-reported income – any penalties would be limited because you tried to do the right thing. That is, it’s just a difference in interpretation of law rather than any attempt at avoiding tax.
Further along the same tangent, if you do – in hindsight – realise you have made a mistake, you might want to consider making a “voluntary disclosure”.
There are a number of factors that might cause you to choose this course of action. The rumour mill often kicks in here. “Hearing about other people in the same industry as you might be a hint to check your own records”, says Bembrick.
“If you know you’re wrong – take a pragmatic view,” Bembrick says. “The ATO is getting more access to more sources of data, and getting better at matching it.”
Tips and traps
The areas where small business owners can get tripped up is ever-expanding, despite the ATO’s new smiley face. Here are some of the more common mistakes:
- Shareholder loan accounts from private companies
“In the event of a review, it is critical to be able to show that the loan has either been repaid in full by the company’s ITR lodgement date, or placed on a qualifying written loan agreement,” says Bembrick. “Be aware that the interest on these loans cannot be claimed as a tax deduction unless the funds borrowed were used for an income-producing purpose.”
- Employees being incorrectly classed as “contractors”
This is a consistent focus of ATO reviews. At risk are liabilities for PAYG Withholding and Super Guarantee, and possibly state taxes such as payroll tax, along with workers comp liabilities.
- Entertainment expenses
These are generally either non-deductible or subject to fringe benefits tax (FBT). “Businesses often get the classification and calculation wrong – usually they under-pay FBT but can also be at risk of over-paying,” says Bembrick.
- Mobile phones and home internet
Many businesses ignore the private component on and fail to include anything in their FBT return, which is an area the ATO is looking at. “Business use percentage and employee contributions should also be appropriately documented and employees asked to sign the relevant declarations at the time of preparing the FBT return,” says Bembrick.
- Small business capital gains tax concessions
These can cause complications in the event of a sale of the business or a restructure. “One of the biggest risks is usually the business or company valuation, especially with a restructure rather than an external sale.
- Participation in the “sharing economy”
Earning income from Uber and Airbnb and similar activities “on the side” can have tax implications. People may not realise the ATO is more likely to consider these activities as businesses, and all Uber driver must be GST-registered, regardless of income earned.
Reckon gives no professional advice. This article is for general purposes only and you should seek professional advice suitable to your own specific circumstances before acting on anything in this article.