Are you an entrepreneur? Does this sound familiar? “Hey buddy, have you heard about this new clever tactic of squeezing more out of your expense claims? Here, let me show you…”
There is a bunch of long-held tax myths out there that continue to plague Australian small businesses, exposing many to substantial tax penalties.
How do we know this? American Express recently surveyed more than 1,000 Aussie SMEs and found that the understanding of tax reporting requirements is alarmingly low.
This is especially true for younger entrepreneurs and the home-based ones with many unwittingly paying the taxman more than they should. Others unknowingly dodge some taxes, risking penalties by the Australian Taxation Office (ATO). Sadly, they even have no clue about it!
How much do SMEs know about proper tax reporting?
According to the research, one-in-two small business owners has no idea about the write-offs that home-based businesses can claim for equipment purchases, and 40 percent are in the dark when it comes to tax-breaks for asset purchases under $6,500.
On top of that, the majority (65 per cent) of small business owners mistakenly believe that businesses with a turnover greater than $50,000 are required to register for GST, despite the threshold changing to $75,000 in 2007. Giving unto Caesar what belongs to him and, tipping him!
It doesn’t stop there. The research also identified that almost half (46 per cent) of small business operators incorrectly believe they can claim $300 worth of deductions without receipts.
And in related news, Adrian Raftery, taxation expert and author added that nearly three-quarters of small businesses (72 per cent) incorrectly believe they can claim back taxes paid last year based on losses made this year. But, this proposed legislation is yet to pass through parliament! Hold your horses people! Hold your horses…
And now for the cherry on top of this not-so-delicious sundae, 44 per cent of business owners believe they are entitled to claim more than they are allowed to. Or else, they simply have no idea about the tax deductions they can legitimately claim for entertainment expenses. Is ignorance really bliss?
What can businesses do to avoid ATO tax penalties?
- The ATO runs a free national seminar program for people who are new to business – an ideal way get up to speed with tax concessions and reporting obligations for small businesses
- Speak to an accountant about the latest regulatory and legislative changes as well as the tax regulations that apply to your individual business
- Don’t assume the same rules apply to a business as to an individual – take time to identify and fully understand the differences
- Always keep business and personal expenses separate by using a dedicated business card
- Consider accounting software and other financial products that will help more efficiently and accurately record transactions.
Which SME owners are most prone to tax reporting errors?
According to the research, small business owners aged 18-34 are most vulnerable to making losses and mistakes due to their lack of knowledge of their taxation rights and obligations.
Among this group, significant confusion prevails regarding write-offs, with almost half (47 per cent) not sure of the write-offs they’re entitled to on asset purchases and nearly a quarter (23 per cent) mistakenly thinking they can write-off asset purchases under $1,000 only.
The research also highlighted that half of young entrepreneurs (51 per cent) are not aware that errors in their tax return are their responsibility, not their accountant’s, and half of young entrepreneurs are unsure as to whether their business is susceptible to an audit by the ATO.