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Meeting tax obligations as a business owner can be stressful and potentially expensive if done wrong. Certain mistakes warrant severe action, so you can expect the ATO to take a closer look at them if you’ve failed to identify these errors before lodging tax returns for your business. Most mistakes made with regards to tax filing often revolve around poor administrative knowledge of tax laws. Ensure that you are aware of potential mistakes you could be making that might cost you your business.
The ATO gathers data from numerous businesses across a particular industry to create a benchmark showing a band of percentages within which businesses in that industry should typically fall under. Businesses that fall outside this band can expect delays and a closer look from the ATO inspecting reasons for inconsistencies within your business’ declarations. However, these can also be sources of mistakes from the ATO’s part as some inconsistencies can be very real – such as demographics or personal situations – that can cause variations in data. Ensure that you are declaring all your sales, and that any inconsistency can be justified to the ATO.
A majority of tax mistakes committed by small businesses revolve around poor bookkeeping. Businesses are required to maintain all financial transactions made – but forgetting to put the purchase through the register or taking money out of the register for personal use without replacement of the difference can show varying cash register tapes that can be problematic when filing your tax returns. You may be missing out on valuable tax credit claims by not keeping proper records of your financial transactions.
Businesses may assume that superannuation payments need not be made if they are employing subcontractors. This can be an expensive mistake, as if the worker has standard hours and is expected to work consistently for your business under your direction, they need to be treated as employees. Businesses may leave superannuation guarantee payments until the end when cash flow becomes restricted – but avoid late lodgements to prevent penalties from the ATO.
Due to COVID-19, organisations are coming to the realisation that web technology is essential to today’s business-running. Out of the more common types of web technologies, cloud computing has emerged as the most important addition due to its ability to keep businesses running solely online. Cloud computing is a safe and efficient way to store all business resources on the internet and comes with several benefits.
Your company data can be better protected using cloud computing cyber security, as such platforms make use of artificial intelligence technologies to keep your information safe. Using cloud computing services such as strong password protection, service network policies and firewalls will protect your business’ private information and resources more effectively than harddrive-installed protection software. Cloud computing cyber security services are also cost-effective, as rather than paying for spyware protection software for all of your business’ laptops, computers and other devices, one blanketing protection service for your online data is more than enough.
Keeping your business’ information and resources on the cloud will provide employees with the ability to work remotely and away from the traditional in-office style. Especially in the context of the current pandemic, improving your employees’ options to work flexibly and from home will keep employees productive and working despite social distancing restrictions. Providing employees with more work options can also improve employee morale and employee longevity, as working for your business will be convenient and safe for them.
Using digital online platforms such as cloud computing will allow businesses to grow easily and at their own pace. Improving your digital presence to reach a wider audience is easier than physically opening new business locations and expanding physically. Firms which use such technologies can take advantage of the flexibility of online servers and grow or downsize whenever they see fit. In addition, industries such as e-Commerce are becoming more popular so online marketing and operations are sure to be the future of business-running.
Turning an idea into a business requires money, and securing this stable funding is not easy. Businesses have a variety of innovative funding options today, but before you pick one, you may want to consider how well some of these methods fit your business model and if you can really benefit from them.
This is a form of financing that pairs you up with people online that are willing to lend money to your business, without going through a financial institution like a bank. It involves filling in an application on a peer-to-peer lending website, where your risk rating is determined based on your security, creditworthiness and revenue projections. Once approved, other members on this platform can see your request and may decide to lend you money.
If you are looking for a smaller loan, P2P might be ideal for you. Despite the cap on the maximum loan amount, its easy online application and competitive interest rates make P2P a great way to finance your transactions.
More business owners are turning to the internet to grow their business. Crowdfunding is a way to gain finances without going into debt. These platforms involve business owners pitching their business and asking for funds in exchange for some type of reward, like early access to your products or exclusive discounts for investors.
However, crowdfunding is not a long-term financing solution. Your business might benefit more from this if it is an innovative idea, and if you are looking for a one-off financing option that is cost effective. Crowdfunding offers the added bonus of gauging how people feel about your business – which is essentially free product-testing and customer feedback.
Purchase order financing
POF works by converting your incoming orders into collateral. When you engage with a POF company, they directly pay your supplier so the order can be met. The customer then pays the POF company directly, which then deducts its fee before returning the payment to you.
This can be a great option for small businesses that may not be able to financially take on larger orders. However, it is important to note that POF companies limit their services to product-based businesses, and their fees can be quite high.
COVID-19 has forced businesses to adapt their practices to cater for social distancing measures and sanitary precautions. As a result, many businesses have taken on contractors to assist with these changes.
Businesses who have made payments to contractors in the last year may need to lodge a Taxable payments annual report (TPAR) by 28 August. This applies to the following contractor services:
- building and construction,
- courier, delivery or road freight,
- information technology,
- security, surveillance or investigation.
In response to COVID-19 restrictions, providing additional cleaning and courier services to customers have become particularly popular for businesses. For example, businesses with limited access to physical stores due to social distancing restrictions may have paid contractors providing courier services to deliver goods to customers on behalf of the business. If the payments received by the business for courier or cleaning services provided by contractors amounts to 10% or more of their total GST turnover, they will be required to complete a TPAR. Businesses can still lodge a TPAR even if they don’t think they need to or if they are unsure if they meet the 10% GST turnover threshold.
Businesses providing courier or cleaning services using their existing employees and not contractors will not need to lodge a TPAR.
TPAR lodgements can be made using SBR-enabled business software, the ATO Business Portal, through a tax or BAS agent, or by ordering a Taxable payments annual report (NAT74109) paper form.
Individuals may be able to claim tax deductions for personal superannuation contributions they make. Personal super contributions are made after-tax, not to be confused with the pre-tax contributions made by employers. This includes contributions made using inheritance money, savings, proceeds from the sale of assets, or from a bank account directly into a super fund. To be eligible, individuals must receive their income from:
- salary and wages,
- personal businesses,
- government pensions or allowances,
- partnership or trust distributions,
- a foreign source.
A valid notice of intent to claim or vary a deduction must be provided to and acknowledged by your super fund before being able to claim a deduction for personal super contributions.
A valid notice may be:
- A Notice of intent to claim or vary a deduction for personal contributions form (NAT71121).
- A form that your super fund provides.
- A written statement to your fund explaining your wish to claim a deduction for your personal super contributions.
Deductions claimed for a super contribution will result in the contribution being subject to 15% tax in the fund. As well as this, after-tax contributions that have been successfully claimed will not be eligible for a super co-contribution from the government.
Individuals who are eligible to contribute to super will be able to claim a deduction, however, some age restrictions may apply. Those aged 65 or over must meet a work test before voluntary super contributions can be made, while those under 18 years of age may only be able to claim a deduction if they have earned income as an employee or business operator during the year.
Individuals claiming deductions for their personal contributions should also keep in mind that their contributions will count towards their concessional contributions cap of $25,000 a year. Penalties may apply if this amount is exceeded.
The Government has updated fringe benefits tax (FBT) exemptions to include travel in ride-sourcing vehicles under the existing taxi travel exemption. In the case that your business has been providing employees with such travel options and would like to amend your FBT returns to include the new exemption, the ATO has also updated 2020 FBT return amendment instructions.
New FBT exemption
Ride-sourcing vehicles are now included in the FBT taxi travel exemption. Business owners will be eligible for the exemption for travel provided to their employees in a single trip to or from the workplace:
- On or after 1 April 2020, and
- In a licenced taxi or other vehicle involving the transport of passengers for a fare, such as a ride-sourcing vehicle (excluding limousines).
Ride-sourcing FBT exemptions also apply to travel in relation to the sickness or injury of an employee.
Amending your FBT return
In the event that you have already lodged your FBT return but are eligible to be exempt from FBT due to the addition of ride-sourcing vehicles, there are a number of ways you can amend your FBT return.
An amendment to your FBT return can only be made if it is requested within three years from the date the FBT return was lodged. In the case that tax has been avoided, the amendment can be made within six years of lodgement. You can amend your FBT return by:
- lodging electronically using Standard Business Reporting enabled software,
- requesting an amendment assessment in writing through the ATO’s Business Portal or by post, or
- working with a tax accountant to submit your request.
Increasing life expectancy and late retirements mean that businesses need to be ready to welcome more mature-aged workers into their organisation. Workers aged 50 and over are often overlooked by hiring managers, but diversifying your workforce to include this age group could be greatly beneficial to your business.
Businesses are likely to see lower rates of sick leaves and higher loyalty rates amongst mature-aged workers. These low turnover rates can save your business costs relating to recruitment and training, and increase productivity within your workforce.
If your target audience includes an older age demographic, it may be more beneficial to have older employees working for you. By including mature-aged employees, you gain their perspectives of your product, and key insights into how to make your business more attractive to an older customer base.
Upskilling the team
Teams with diverse age groups perform better in the workplace. Older workers are equipped with a wealth of knowledge and skills that younger workers may not have. Less experienced members on your team are likely to learn new skills faster with older mentors on board. This can also help prevent the loss of key skills when older employees transition out of the workforce.
As a result of their experience, older employees are also more adaptable to change and high stress situations, and fill skill gaps in the workplace which leads to more well-rounded teams.
Older employees have a more stable work-life balance. Years of working has provided them with a strong work ethic, and an awareness of their strengths and weaknesses. Their work experience helps them perform better in diverse environments, and they have high conflict resolution skills. If your business involves meeting clients, older employees might be more successful by being confident and reassuring from a customer perspective.
Gathering funding is a challenge that almost all business owners face at some point. Financing can come in two forms – debt financing and equity financing.
Debt financing is money that you borrow and plan to pay back within an agreed time frame and interest rate. Common forms of debt financing include bank loans, mortgages and credit cards. This may appeal to business owners that wish to maintain complete control and ownership over their business, without having to manage the expectations of investors. Debt financing also means that business owners do not have to share any profits made by the business, as their only obligation to their lender is making payments on time. As well as this, debt financing methods are usually tax-deductible, unlike private loans.
However, debt financing also has its downsides as the cost of capital is higher. Loans from official lenders such as banks typically come with interest rates that also need to be paid in addition to regular repayments. This means that your business must generate enough income to meet the requirements of the debt, which can affect cash flow and could even result in bankruptcy if the business fails and is not able to repay the debt. As well as this, new businesses may struggle to secure a bank loan, as banks often have a strict protocol regarding who can receive a loan.
Equity financing, on the other hand, is when you invest your own money or someone else’s money (usually family and friends, venture capitalists, business angels, or public floats) in your business. As a result of this, the investor of your business partially owns your business and shares the profits you make. This method of financing may be more suitable for business owners who can accept sharing their profits and not having complete ownership and control over their business.
One advantage of equity financing is having freedom of debt as repayments do not have to be made on investments. As well as this, equity financing methods can potentially expose business owners to additional funding opportunities if investors decide to provide more support for the business as it develops. However, business owners considering equity funding should also keep in mind that these methods can often put a strain on personal relationships if the financing was sourced from family and friends, depending on if the business succeeds or fails.
A super death benefit is the super paid after a person’s death, usually to a nominated beneficiary. These benefits are subject to different tax treatments, depending on whether the beneficiaries are dependant or non-dependant.
Superannuation death benefits will generally be received tax-free by tax dependants, who are considered to be:
- A child of the deceased who is under 18 years of age,
- A spouse or former spouse of the deceased,
- A person who has an interdependency relationship with the deceased (e.g. if they live together or have a close personal relationship),
- A financial dependant of the deceased.
Dependants will not have to pay tax on the tax-free component of their super in the event that they:
- Withdraw it as a lump sum, or
- Receive an account based income stream.
However, they will be taxed at their marginal rate if they receive a capped benefit income stream and:
- The deceased was at least 60 years of age at the time of death
- The dependent is over 60 years of age and the total of their tax-free component and taxed element exceeds their defined benefit income cap.
Not all super death benefits are subject to tax; for non-dependants, there is a taxable portion. This component is largely made up of after-tax super contributions that the deceased member has made.
Super death benefit payments are subject to tax when:
- The payment is made as a result of the SMSF member passing away,
- The payment is provided to a non-dependent for tax purposes,
- The payment has a taxable component.
Non-dependants must calculate how much money in the super account is a:
- Tax-free component,
- Taxable component the super provider has paid tax on (taxed element),
- Taxable component the super provider has not paid tax on (untaxed element).
The amount of tax non-dependants pay will be based on their marginal tax rate, however, this amount may be reduced by tax offsets. For the taxed element of the taxable component, the effective tax rate is your marginal tax rate of 17% (whichever is lower). For the untaxed element of the taxable component, the effective tax rate is 32% or your marginal tax rate (whichever is lower).
The small business income tax offset can be used to reduce the tax you pay by up to $1,000 a year. Also known as the unincorporated small business tax discount, the offset is worked out on the proportion of tax payable on your business income.
The rate of offset is 13% for the 2020-21 financial year and 16% for the 2021-22 financial year and onwards. The offset is only available to entities with an aggregated turnover of less than $5 million (from 2016-17 financial year onwards) and is capped at $1,000.
The ATO will work out your offset based on your income tax return and uses your:
- Net small business income you earned as a sole trader, or
- Share of net small business income from a partnership or trust.
Conditions for sole traders
The offset is calculated based on net small business income for sole traders (which is the sum of your assessable income from carrying on your business, minus any deductions). Sole traders are not entitled to the offset in the event that their net small business income is a loss.
Income and deductions that you need to include in your net small business income include:
- farm management deposits claimed as a deduction,
- repayments of farm management deposits included as income,
- net foreign business income related to your sole trading business, and
- other income or deductions such as interest or dividends derived in the course of conducting your business.
Conditions for partnership and trust distributions
You may be eligible for the tax offset if:
- you have a share of net small business income distributed from a partnership or trust that is a small business entity,
- you were a partner or beneficiary of that small business partnership or trust,
- the business income was derived by the small business partnership or trust from carrying on its own business activities, or
- your assessable income includes a distribution or share of net income from that partnership or trust.
Keep in mind that there are income and deductions that you cannot include when working out your net small business income for the small business income tax offset. Such income amounts include wages, government allowances and net capital gains you made from carrying on your business. Discuss with a financial advisor or accountant for more information on the offset conditions for your business.