What the ATO is seeing in the small business market

For Business | Tax
November 21, 2018

One of the things we like about working in the accounting world is we get to stay on top of what the ATO is reporting on. Earlier this month Deputy Commissioner for Small Business at the ATO, Deborah Jenkins, gave a speech to the Institute of Public Accountants 2018 National Congress on what the ATO is seeing in the small business market A rather interesting read…

Ms Jenkins outlined some of the key things that the ATO is focused on when it comes to small business.

Here’s Nexis’ key take outs:

  • The ATO defines small business as those businesses with an annual turnover less than $10 million.
  • There are around 4 million small businesses in Australia, accounting for 99% of all Australian businesses.
  • 44% of small businesses are sole traders, followed by companies, then trusts and partnerships.
  • They contribute $380 billion to the economy and employ approximately 5.6 million Australians.
  • Around 70% of small businesses pay their tax on time.
  • The ATO’s insights into small businesses show that they are almost always time poor, generally not tax literate and often have limited business acumen. They are challenged by cash flow, tax and super seems complex and overwhelming, they most commonly use tax agents or book keepers, they are often slow to adopt new technology for their business.
  • The ATO is paying particular attention to these areas of small businesses:
    • Claiming private expenses in the business.
    • The attribution of personal and business use.
    • A lack of understanding of how tax applies for different and often complex business structures, and
    • Omitted income.
  • Some basic and unintentional mistakes the ATO sees are:
    • Forgetting to check all bank accounts for interest.
    • Forgetting to correctly report dividends and franking credits.
    • Unable to substantiate small business expense claims.
    • Not completing annual reconciliation of income tax return information and business activity statements.
    • Little calculation errors.
    • Claiming business expenses at the GST inclusive rate rather than ex GST.
    • Over claiming agent fees.
    • Not including income from coupon sales.
  • Behaviours that indicate small businesses are intentionally misleading the ATO, or operating in the ‘black economy’ as they like to call it:
    • Deliberately omitting income that has been diverted to personal bank accounts and mortgages.
    • Deliberately omitting cash income.
    • Non-invoicing of sales.
    • Not reporting income from weekend sales.
    • Paying staff in cash from non-reported cash takings.
  • The most common incorrect claiming for private small businesses is claims around:
    • Motor vehicle.
    • Home office expenses.
    • Overseas travel.
  • The ATO’s main message to small business is always to substantiate small business deduction claims. They say their 3 rules to help small businesses in this area are:       
    • The money must have been spent for your business – not a private expense, for example you can’t claim child care fees or clothes for your family.
    • If it’s a mix of business and private use, only claim the portion related to your business.
    • You must have a record to prove your expense like bank statements or receipts, so you can demonstrate how you calculated your claim – including working out the business portion of the expense – substantiation.

When it comes to getting your small business tax affairs in order, Nexis is here to assist you. We remind you to always include ALL income and substantiate, substantiate, substantiate all your claims. Talk to us today about all your small business tax needs, and make sure you’re not on the ATO’s ‘blacklist’.

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