Up close and personal with the ATO

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Did you know that a small business can get a visit from the Australian Taxation Office with the surprising message, ‘We’re from the ATO and we want to help’?

At the centre of the ATO‘s help program is a business register which has been created following a business, for example, filing its first group tax return.

An officer from the tax office will then set up a meeting with the business owners, who can have a tax agent present if they want, to check that the correct record-keeping procedures are in place. There are tax advisers specifically assigned to this task force.

“Our work with small business shows time and pressure with record-keeping leads to downstream problems,” says the ATO‘s deputy commissioner, small business.

Apart from the one-off visits for new businesses, those on the register are monitored for two years to ensure that no tax problems develop.

If not checked early, tax mistakes may result in fines and back-tax payments but also could undermine cash flow, which is one of the biggest reasons for small businesses going bankrupt.

Don’t get caught
According to the ATO, businesses were surprised, but also very appreciative of the ATO‘s involvement.

There are four areas where small business often performs poorly:
o Record-keeping is often inadequate
o Budgeting for tax obligations is unrealistic
o Fringe benefits tax issues, where the business owner is unaware that there is an FBT liability
o Business structure problems, which give rise to different compliance issues.

On the issue of FBT, the ATO suggests that a business owner should simply ask whether the business delivers a benefit which is not in cash, particularly if the owner is also on the books as an employee.

The part-time use of a car owned by the business is a classic FBT issue. Aside from being keen to educate small businesses on FBT issues, the ATO is also concerned about businesses which are not really businesses.

Hobby farmers, direct marketers and people in the arts and craft area are sometimes targeted and tested to see whether they are a real business.

“There is a large number of people who are claiming tax deductions who are not really in business,” the ATO says.
However, the ATO doesn’t necessarily presume that home-based consultants are non-businesses.

Where do you fit in?
While some workers simply leave a job and become self employed to reduce the tax obligations of both the employer and the employee, the ATO conceded that in this age of downsizing some genuinely unemployed people were going into business for themselves.

The ATO suggested the following tests as key determinants of the existence of a business:
o Is there more than one customer?
o Is the consultant available to work for anyone?
o Does the consultant advertise?

All these characteristics of a real business would be important when the ATO investigates the credentials of a business.

In addition to the visiting program, the ATO holds free seminars and issues several helpful publications such as A Tax Guide For New Small Businesses, and A Guide To Keeping Your Business Records.

Getting close and personal with the ATO might be a way to keep on the right side of this often misunderstood organisation.

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Save time, save money

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When it comes to matters of tax, most people don’t know what they don’t know! That’s why seeking out expert help is important.

The key to running a good business is finding experts, such as an accountant, business coach, bank manager or lawyer, who can add value.

When the end of the financial year approaches, the focus for most businesses is on how they can minimise their tax. But you should work with your accountant several times during the year not just at the end of the financial year. Quite often cashflow issues at this time can reduce your options for reducing your tax.

A trustworthy accountant who can work with you on developing strategies to take your business forward, is not easy to find. Many accountants are either busy tending to compliance or don’t have the skills to be a business adviser. Still, you shouldn’t give up the search.

The key thing to remember is to see your accountant well before 30 June – after that date there’s nothing that can be done to improve your tax situation for the previous year.

How to find an accountant
The best way to choose a trustworthy accountant is to ensure they are a member of professional association and/or come with a personal recommendation.
o Ask your friends, family and other contacts (but remember, what works for someone else isn’t necessarily going to be right for you)
o Tap into the referral networks of your lawyer, financial planner or bank manager
o Call or visit the websites of professional associations, such as CPA Australia or the National Institute of Accountants (NIA). The CPA Australia website has a ‘Find a CPA’ quick link (www.cpaaustralia.com.au)

Here are some general answers to accounting questions frequently asked by small business owners:

What payroll methods can I use to reduce my employees’ tax bill?
A salary sacrifice arrangement is also commonly referred to as salary packaging or total remuneration packaging. It’s an arrangement between an employer and an employee, where the employee agrees to give up part of their future entitlement to salary or wages in return for the employer providing them with benefits of a similar total value.

Many of my staff require vehicle for their work. What is a novated lease?
A novated lease is a three-way arrangement between the employee, the financier and the employer, where a vehicle is leased under a finance lease in the employee’s name and assigned to the employer by way of a novation agreement. The employer recovers this amount from the employee’s salary package. The lease, the FBT and the operating costs associated with running the vehicle are deducted from the employee’s gross salary, therefore reducing their income tax.

Can I reward my staff without increasing their tax bill through cash bonuses?
Yes, use other methods such as hampers or tickets to sporting or cultural events. If the benefits are less than $300 and are irregular, then generally they’re not subject to fringe benefits tax (FBT).

What tax deductions can be made for the home and serviced office? Can I claim part of my mortgage repayment?
It’s not recommended to claim part of your mortgage repayment, as it could become partially liable for capital gains tax (CGT) if you sell your home (your residential property is usually exempt from CGT). This may also apply to council rates and water bills.

You can claim utility bills by estimating the percentage of business use (based on the number of rooms utilised). You should make a reasonable estimate of the area used for the business, for example, one third of the property equals 33.33% of the bill.

All of your office furniture and serviced office fees will be tax deductible. For simplified tax system (STS) payers, all assets less than a certain value means a straight deduction. On other hand, for non-STS payers, all items need to be depreciated at a percentage, as per the Australian Tax Office (ATO) guidelines (visit www.ato.gov.au for more exact details).

Therefore, it’s important that you engage a qualified accountant to ensure you receive the maximum tax deductions.

What records should I keep?
Keep all invoices to support a claim (for five years). If you lose receipts/tax invoices, make sure you have secondary evidence such as credit card statements, bank statements, a petty cash book or diary evidence. In the case of flood or fire, make a statutory declaration and keep the insurance claims documentation.

Can I claim entertainment expenses if I have a meeting at a café or restaurant?
If the meeting is arranged to discuss a business proposal and you simply have a cup of coffee and a biscuit, this cost would generally not be seen an entertainment cost, but a legitimate business cost.
It is recommended as a good business practice/policy to keep a diary with some notes from the meeting – for instance minutes of the meeting, who attended, reason for the meeting and so on.

If we travelled overseas for a business conference, can we claim the expenses? What if we included a side trip for personal reasons?
All travel expenses for business purposes are tax deductible. A side trip to Disneyland would be excluded from the calculation, as it’s non-deductible. Again, keep a diary to show what’s business and what’s personal and have a chat with your accountant if you’re not clear on this.

Are any courses we attend tax deductible or just ones related to the business?
Courses, seminars and any professional development (including business coaching) that is designed to bring in more revenue for the business is tax deductible.

Can I claim my dry cleaning?
This is very hard to claim, as the ATO’s view on this strictly classifies what is a uniform (it must have a logo or be registered with the ATO). A uniform is not a suit or shoes that you wear everyday, with the exception of protective shoes. The argument that you need to look presentable is not a valid one. If your income depends on your image eg a TV presenter it would be worth discussing this with your accountant.

What happens if I get audited?
You will be asked to provide all the documents to support your claims in the tax return. Your accountant is not responsible for the expenses that you claim, as the Australian tax system works as a self-assessment and whenever you sign the tax return, you’re signing a declaration that all expenses claimed in your tax return are correct as per your advice.

How can I legally reduce my tax bill?
o Use a qualified accountant who will claim the maximum deduction for you
o Talk to your accountant several times a year
o Keep a good record of all of your expenses (even the ones that you’re not sure about it), such as communication bills and consumables, postage, advertising/promotion, travel, motor vehicle (keep a log book for a minimum period of three months and renew every five years), bank fees, merchant fees, interest on business credit cards and loans and gifts for clients.

This information is provided as a general guide. You should seek your own detailed accounting advice to suit your individual business circumstances. Remember – that advice is tax deductible!

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