How SMEs can avoid receiving a call from the ATO

Small businesses need to be vigilant in managing their tax returns to avoid triggering audits by the Australian Taxation Office (ATO) this end of the financial year, says professional accounting body CPA Australia.

The 2024-2025 budget announcements saw the ATO recieve $187 million in new funding to help combat tax and superannuation fraud, which includes a new compliance task force to tackle false refunds.

Gavan Ord, a spokesperson from CPA Australia, told SmartCompany about the common mistakes that lead to unwanted financial penalties.

One prevalent mistake is the mixing of private and business expenses.

“This is a benefit the owner or their associate has received from their company, which tax law deems as an unfranked dividend,” Ord said. 

CPA Australia also warns against disproportionate claims that don’t align with typical expenses for similar businesses. 

The ATO uses data-driven profiles to identify anomalies, so it’s essential to maintain accurate records and provide evidence to support all claims.

“The ATO’s data capabilities are vast and growing, and so is their ability to join the dots when it comes to expense claims and cash transactions,” Ord explained.

Work-related expenses and home offices

For small businesses operating from home, claiming deductions for home office expenses can be financially beneficial.

These may include mortgage interest or rent, council rates, electricity, phone bills, and the decline in the value of office furniture. 

Ord emphasised it’s important to keep records for at least five years to substantiate these claims.

“To make such claims, you need to have an area of your home set aside as a ‘place of business’,” he said.

The fixed-rate method of 67 cents per hour can be used for home office expenses. 

Businesses should also keep a diary of work-related activities and corresponding receipts. 

Accurate record-keeping for motor vehicle use, including a logbook for business and private travel, is crucial to ensure claims are correct.

Commonly overlooked deductions

Many small businesses miss out on valuable deductions simply because they aren’t aware of them. 

Ord advised that professional expenses such as legal fees are also deductible during tax time. 

“Businesses should review outstanding debts to identify genuine bad debts that can be written off for tax purposes.”

Prepaying business expenses for the next 12 months before 30 June can bring forward tax deductions.

This includes software subscriptions, insurance, business travel, training events, and more. Additionally, reviewing and revaluing trading stock at year-end and writing off obsolete stock can help optimise tax positions.

Ensuring compliance with tax laws

Staying compliant with ever-changing tax laws is a continuous challenge for small businesses. 

Ord recommended seeking the guidance of a tax agent to identify legitimate claims and uncover potential deductions.

“Getting the basics right has never been more important,” he asserts. 

“Good record keeping, substantiation, correct account codes, properly accounting for private use and declaring all cash transactions are essential.”

The ATO is increasingly using sophisticated data analytics to detect discrepancies in returns. Business owners must ensure their income and expense claims are accurate and properly documented. 

“Your tax agent is required to take reasonable care when preparing your return which means they may ask you detailed questions,” Ord said.

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