Having your business audited by the Australian Taxation Office (ATO) can be a nerve racking experience. Pulling together your tax and business records, statements and required documentation, and making sure you cross all of your t’s and dot all of your i’s can be a tiresome exercise, even for those who are reasonably organised. If you are a business owner, here are some common mistakes you can try to avoid when your next audit rolls around.
1. Vehicle log books
When using a vehicle for combined purposes (business and personal), maintaining an accurate record through a vehicle log book is crucial. Initially, you must keep a log book during the income tax year for at least twelve continuous weeks and this should be a representation of your travel throughout the year. For the log book to be valid, it must specify the following for each trip: start and end dates, the car’s odometer readings, how many kilometres the car travelled for work purposes and the percentage of kilometres travelled for business. All entries in your log book must be written in English. Although your log book is valid for five years, should your business usage change significantly then it is recommended that you complete a new one.
2. GST registration requirements
Although all businesses are eligible to register for GST, it is not compulsory if your annual turnover is less than $75,000. If your business is not registered, you must ensure that should your business income reach the $75,000 threshold, you register for GST immediately. Registering for GST when you have an annual turnover of more than $75,000 is compulsory and fees apply if your business does not comply.
3. Keeping accurate stock records
Depending on the nature of your business, you may or may not use business stock for personal use. Whether it’s your staff or yourself, taking stock for personal use must be recorded if it is not being paid for. Typically this applies to food related businesses where stock is consumed. However, if this is relevant to your business, the ATO has a schedule of standard values to assist with estimating the value of stock being used. It is important to record all usage and at the end of the financial year, allocate a value based on these standards
4. Claiming clothing and footwear
If you purchase clothing and footwear for your business, it is only tax deductable if:
- It is printed with your business logo; or
- It is classified as protective clothing. In order to meet the requirements of protective clothing, it must prevent damage to ordinary clothes in a work environment or protect from risk of illness or injury. Typically these items include, Hi Viz safety and heavy duty clothing, steel-capped boots, overalls, gloves, fire-resistant and sun protection clothing and non-slip shoes.
Ordinary clothing and footwear cannot be claimed. In the event you claim protective clothing, it must be relevant to the risks
associated with your specific workplace.
5. Bank reconciliations
Do you complete bank reconciliations? In order to spot discrepancies and detect fraudulent transactions in your accounts, completing these every month is important. Not only do you have reporting requirements you are obligated to meet but this exercise also provides a good indication of your business’s ongoing financial health.
6. Missing receipts
If you are claiming business expenses that have a value of $50 or more, then a receipt is required by the ATO. This is especially important if you have paid using cash. For other payment types, you can use a combination of written evidence such as credit card or bank statements and email receipts or remittances.
7. Home office expenses
Understanding the requirements when claiming home office expenses is a common area people make mistakes. Firstly, you must have a designated area in your home where you conduct business – whether it’s a room, separate dwelling or other dedicated space. Providing you have an exclusive space for your business activities, then you can claim a portion of expenses such as phone, internet, equipment, utilities and more. It is important to understand that you can only claim the portion used for business and not any personal use.
8. Entertainment activities
Do you sometimes take business clients out to lunch? If you do, then don’t fall into the trap of claiming GST if it is an entertainment expense. It is important when claiming expenses that you consider their intended purpose. For activities hosted in a social setting or those intended to provide enjoyment, then this usually indicates it is an entertainment expense. However, for client activities that occur during business hours, at your place of business, do not include alcohol or are low key, then it may be more appropriate to class these expenses as refreshments.
9. Sales records
As a business owner, you have a requirement to keep accurate and transparent records for your business activities. This includes sales transactions. If you or your staff members have a habit of using business funds to pay for personal items without recording it, then this will not only cause issues in an audit but will also provide an inaccurate view of your sales. To ensure your sales transactions are correct, you should conduct regular reconciliations appropriate to your business activities and account for discrepancies.
Do you reconcile your business records when you prepare and lodge a BAS? Ensuring your figures match up is important. If you prepare your BAS yourself, make sure you do a comparison, identify discrepancies such as missing transactions you have invoices for, calculate your payable GST and PAYG, and enter up-to-date data before lodging.
When it comes to your business taxation needs or business advice, our team can help. We also offer an audit insurance product to help you when audit time rolls around. Called, Audit Shield, it covers the professional fees associated with assisting you to respond to an official audit, enquiry, investigation or review of returns lodged. For more information about tax audits, insurance options and your obligations as a business owner, please contact your accountant. Not a client? Contact us today to arrange a consultation.
GENERAL ADVICE WARNING | The information provided in this article is for general information purposes only. It is not intended to be, nor should it be read as specific taxation advice. Before acting on any of the information contained in this article you should obtain advice from a specialist advisor, which is appropriate to your specific business needs, objectives and financial situation.