Understanding the complexities of taxation is essential for businesses of all sizes. As a business owner, you have a range of obligations and responsibilities tax-wise that you need to fulfil. This can be easily accomplished if you’re working closely with accountants who know the ins and outs of taxation.
When it comes to taxes, the Australian Taxation Office (ATO) performs stringent measures during tax audits to ensure that businesses fulfil their obligations and follow the ATO’s guidelines to the letter. This makes navigating through a tax audit by the ATO a little tricky. If you want to avoid getting fined for some tax blunders, you better avoid these mistakes at all costs.
Claiming Deductions for Non-Business Related Items
Some companies engage in shady tax manipulations by claiming deductions for items that are in no way connected to their business. This includes claiming phone or computer use that are way above their actual use for business purposes.
Another example is claiming GST tax-input credits for purchases that are not partly or solely intended for use in the operation of the business. It’s completely normal to purchase items intended for both business and private use as long as you only claim a GST credit for those purchases related to your business. Claiming otherwise will put you under the radar of ATO’s auditors.
Incomplete and Missing Tax Invoices
For any purchases costing more than $82.50, you need to keep a tax invoice, especially when you’re claiming a GST credit for it. What constitutes a valid tax invoice, you may ask? To be considered a valid invoice, the document needs to contain the following pieces of information:
- The words “Tax Invoice” printed at the top of the page
- The seller’s identity or business name
- The seller’s Australian Business Number (ABN)
- The date the invoice was created
- A description of the items being sold, including quantity and price
- The GST amount (if any) that is payable
If you hired accountancy services for your business, you need to inform them of these purchases and keep the tax invoice. As with other tax-related records, you must keep your tax invoices for a period of at least five years.
Treating Employees as Subcontractors
Some businesses treat their workers as contractors when in fact, they are employees. Companies do this to avoid obligations relating to employees, such as superannuation, sick leave, holiday pay, and payroll taxes.
According to the ATO’s business guidelines, a worker is considered an employee if they perform work under your direction and control. That includes work standards and set hours of work. Treating your employees as subcontractors is actually illegal and is subject to penalties and charges. It’s best to follow the ATO’s definitions of an employee vs. a contractor and give them the appropriate compensation while fulfilling your obligations relating to their employment.
Committing any of these mistakes can be quite costly. So it’s best to avoid them as much as you can. The best way to pass the ATO’s audit with flying colours is to have a deep understanding of everything there is to know about taxation for businesses. That may sound like a daunting task. But with the help of a capable accountant, taxation is nothing to worry about.
Every business needs to rely on a team of competent accounting professionals to maintain the growth of their business. This is where SMB Accounting works best. We offer a range of accountancy services for businesses, including taxation, auditing, and cloud accounting services. Get in touch with us today to get started.