Common tax mistakes that businesses make

Meeting tax obligations as a business owner can be stressful and potentially expensive if done wrong. Certain mistakes warrant severe action, so you can expect the ATO to take a closer look at them if you’ve failed to identify these errors before lodging tax returns for your business. Most mistakes made with regards to tax filing often revolve around poor administrative knowledge of tax laws. Ensure that you are aware of potential mistakes you could be making that might cost you your business.

Inconsistent declarations

The ATO gathers data from numerous businesses across a particular industry to create a benchmark showing a band of percentages within which businesses in that industry should typically fall under. Businesses that fall outside this band can expect delays and a closer look from the ATO inspecting reasons for inconsistencies within your business’ declarations. However, these can also be sources of mistakes from the ATO’s part as some inconsistencies can be very real – such as demographics or personal situations – that can cause variations in data. Ensure that you are declaring all your sales, and that any inconsistency can be justified to the ATO.

Poor bookkeeping

A majority of tax mistakes committed by small businesses revolve around poor bookkeeping. Businesses are required to maintain all financial transactions made – but forgetting to put the purchase through the register or taking money out of the register for personal use without replacement of the difference can show varying cash register tapes that can be problematic when filing your tax returns. You may be missing out on valuable tax credit claims by not keeping proper records of your financial transactions.

Employee payments

Businesses may assume that superannuation payments need not be made if they are employing subcontractors. This can be an expensive mistake, as if the worker has standard hours and is expected to work consistently for your business under your direction, they need to be treated as employees. Businesses may leave superannuation guarantee payments until the end when cash flow becomes restricted – but avoid late lodgements to prevent penalties from the ATO.

Amending fringe benefits tax return and updated exemptions

The Government has updated fringe benefits tax (FBT) exemptions to include travel in ride-sourcing vehicles under the existing taxi travel exemption. In the case that your business has been providing employees with such travel options and would like to amend your FBT returns to include the new exemption, the ATO has also updated 2020 FBT return amendment instructions.

New FBT exemption
Ride-sourcing vehicles are now included in the FBT taxi travel exemption. Business owners will be eligible for the exemption for travel provided to their employees in a single trip to or from the workplace:

• On or after 1 April 2020, and
• In a licenced taxi or other vehicle involving the transport of passengers for a fare, such as a ride-sourcing vehicle (excluding limousines).

Ride-sourcing FBT exemptions also apply to travel in relation to the sickness or injury of an employee.

Amending your FBT return
In the event that you have already lodged your FBT return but are eligible to be exempt from FBT due to the addition of ride-sourcing vehicles, there are a number of ways you can amend your FBT return.

An amendment to your FBT return can only be made if it is requested within three years from the date the FBT return was lodged. In the case that tax has been avoided, the amendment can be made within six years of lodgement. You can amend your FBT return by:

• lodging electronically using Standard Business Reporting enabled software,
• requesting an amendment assessment in writing through the ATO’s Business Portal or by post, or
• working with a tax accountant to submit your request.

Are you eligible for the small business income tax offset?

The small business income tax offset can be used to reduce the tax you pay by up to $1,000 a year. Also known as the unincorporated small business tax discount, the offset is worked out on the proportion of tax payable on your business income.

The rate of offset is 13% for the 2020-21 financial year and 16% for the 2021-22 financial year and onwards. The offset is only available to entities with an aggregated turnover of less than $5 million (from 2016-17 financial year onwards) and is capped at $1,000.

The ATO will work out your offset based on your income tax return and uses your:

• Net small business income you earned as a sole trader, or
• Share of net small business income from a partnership or trust.

Conditions for sole traders

The offset is calculated based on net small business income for sole traders (which is the sum of your assessable income from carrying on your business, minus any deductions). Sole traders are not entitled to the offset in the event that their net small business income is a loss.

Income and deductions that you need to include in your net small business income include:

• farm management deposits claimed as a deduction,
• repayments of farm management deposits included as income,
• net foreign business income related to your sole trading business, and
• other income or deductions such as interest or dividends derived in the course of conducting your business.

Conditions for partnership and trust distributions

You may be eligible for the tax offset if:

• you have a share of net small business income distributed from a partnership or trust that is a small business entity,
• you were a partner or beneficiary of that small business partnership or trust,
• the business income was derived by the small business partnership or trust from carrying on its own business activities, or
• your assessable income includes a distribution or share of net income from that partnership or trust.

Keep in mind that there are income and deductions that you cannot include when working out your net small business income for the small business income tax offset. Such income amounts include wages, government allowances and net capital gains you made from carrying on your business. Discuss with a financial advisor or accountant for more information on the offset conditions for your business.

COVID-19 factors to remember when filing your tax return

The end of the financial year has rolled around again, but this time, COVID-19 may affect the way you fill out your tax return. The ATO has released a range of methods to make tax time easier for businesses and individuals experiencing unprecedented circumstances.

How JobKeeper will affect tax returns

Sole traders receiving JobKeeper payments on behalf of their business are required to include these payments as assessable income for the business. Employees receiving JobKeeper will see that those payments have been automatically filled out in their tax return.

Individuals who have had their wages increase due to JobKeeper should identify whether they have been bumped into a higher tax bracket as a result. If an individual is working multiple jobs and receiving JobKeeper at one of these positions pushes them into a new tax bracket, they may be faced with a higher tax bill on their return if their other employers had continued deducting tax at their original lower rate.

How JobSeeker will affect tax returns

JobSeeker payments are considered taxable income. The ATO will automatically upload JobSeeker details in the ‘Government Payments and Allowances’ section of recipients’ tax returns. However, recipients are advised that there may be a delay in these JobSeeker details being updated, potentially until the end of July. The ATO recommends delaying tax return lodgements until these details are finalised. Recipients that wish to complete their returns prior to this must ensure they include these details themselves, as leaving out assessable income can slow down the return process or result in a bill later.

COVID-19 protective equipment

Occupations that require public interactions may be able to claim personal protective equipment (PPE), including:

• Face masks

• Sanitiser
• Anti-bacterial spray
• Gloves.

This would typically apply to industries such as healthcare, retail and hospitality. Many workplaces now have this PPE available for employees, however, employees who must pay for their own COVID-19 PPE and are not reimbursed for it will be able to make a claim.

Working from home

The ATO has introduced a new ‘shortcut method,’ which applies from 1 March 2020 to 30 June 2020. Under this new method, employees working from home as a result of COVID-19 can claim expenses incurred at a rate of 80 cents for each hour worked from home. Employees must keep a record of the hours they worked from home as evidence to support their claim.

Deductible running expenses include:

• Utilities such as heating, cooling and lighting.
• Cleaning costs for your work area.
• Mobile or landline phone expenses for work calls.
• Internet connection.
• Computer consumables and stationery.
• Repair costs for home office equipment and furniture.
• Depreciation of home office equipment, computers, furniture and fittings.
• Small capital items such as a computer (purchased for the purpose of working from home) can be claimed if they cost under $300. If the cost exceeds $300, the decline in value can be deducted.

Cars and taxes for 2020-21 financial year

New car threshold amounts will be implemented from 1 July 2020. Understanding the new thresholds and how they may affect your small business operations and vehicle usage will be important in preparing you for the financial year ahead.

Income tax:

There is an upper limit on the cost you use to work out the depreciation for the business use of your car or station wagon (including four-wheel drives). The maximum value you can use for calculating your depreciation claim is the car limit (irrespective of any amount you were paid for a trade-in) in the year in which you first used or leased the car.

For the 2020-21 financial year, the upper cost limit is $59,136 including GST.

Goods and services tax (GST):

Businesses registered for GST with motor vehicles used solely for business purposes are entitled to claim a credit for the GST included in the price of the vehicle, provided they have a tax invoice.

In the event that you purchase a car and the price is more than the car threshold, the maximum amount of GST credit you can claim is one-eleventh of your car limit amount. Keep in mind that you cannot claim a GST credit for any luxury car tax you pay when you purchase a luxury car, regardless of how much you use the car in carrying on your business.

Luxury car tax (LCT):

You are required to pay LCT if you’re registered or required to be registered for GST and you sell or import a luxury car.

LCT applies to motor vehicles designed to carry a load of less than two tonnes and fewer than nine passengers. LCT also applies to a car purchased by a person with a disability even if the car is GST-free. However, disability-related modifications are not subject to LCT. The LCT value of a car includes the value of any parts, accessories or attachments supplied or imported at the same time as the car.

Cars with LCT over the LCT threshold attract an LCT rate of 33%. From 1 July 2020, the LCT threshold will increase to $68,740. Additionally, the LCT threshold for fuel efficient cars will increase to $77,565 for the 2020-21 financial year.

Landlord tax obligations under COVID-19 circumstances

Property investors may have a number of tenants that have temporarily paused their rent payments or are not paying the full amount of rent owed due to being impacted by COVID-19. Regardless of rental income changes, landlords are still entitled to claim deductions on rental property expenses if they are still incurring regular rental property expenses.

Landlords who receive a back-payment of rent, or an amount of insurance as a result of a decrease in rental income, will still need to include these amounts in their assessable income for the tax year that they receive the payment.

Additionally, landlords may be faced with deferred loan repayments as a result of COVID-19. In this case, if your loan accumulates interest it will be considered as an incurred expense, meaning that you will still be able to continue claiming a deduction on your loan interest.

It is likely that landlords of short-term rental properties have had their situation compromised by COVID-19 due to cancelled bookings and low demand. If your property is used both privately and for renting out short-term accommodation, you will be able to continue deducting property expenses in the same proportion as you were entitled to prior to COVID-19. If you had begun using the property differently in the period after your latest tax return and before COVID-19, the proportion of expenses you can claim may vary. This can include situations where:

• You have increased the amount of private use of the property by you, your family, or your friends.
• You have made the decision to permanently stop renting out your property once COVID-19 restrictions end.

Claiming self-education expense deductions

Individuals upskilling and educating themselves during these down times may be eligible to claim a deduction for their self-education expenses. The deductions apply to self-education activities that are directly related to an individual’s work as an employee.

In the case that individuals are looking to claim self-education expenses based on a course’s relation to their work, the relation must mean:

• maintaining or improving the specific skills or knowledge the individual requires in their current work activities;
• resulting in, or likely to result in, an increase in the individual’s income from their current work activities.

There are many types of expenses you can claim as part of your self-education deduction, including:

• General course expenses (e.g. tuition fees, stationary, textbook, student union fees)
• Depreciating assets (e.g. computer, desk)
• Repair costs to assets used for self-education purposes
• Car assets (claimed using the cents per kilometre method)

Work-related self-education expenses cannot be claimed as part of a deduction. These expenses include travel expenses, child care costs related to attendance of courses and capital costs of items (e.g. computers, desk) acquired for self-education purposes.

Keep in mind that self-education courses which enable individuals to get new employment are not eligible for deduction claims. Some expenses also need to be apportioned between private purposes and use for self-education such as travel costs and depreciating assets. You will need to estimate your apportions and provide information on such expenses to be eligible to claim.

For more information on what you claim as self-education expenses, visit the ATO website or consult with a financial advisor.

Closely held payees exemption to be extended

Employers with 19 or fewer employees are temporarily exempt from reporting ‘closely held (related) payees’ through Single Touch Payroll enabled software. The exemption deadline has been extended from 1 July 2020 to 1 July 2021 as part of the ATO’s response to the COVID-19 situation.

A closely held payee is an individual directly related to the business, company or trust that pays them. Commonly, these are:

• Family relatives of a family business.
• Directors or shareholders if a company.
• Beneficiaries of a trust.

The closely held payees exemption is automatically applied, and employers do not need to report them to the ATO.

Employers still have the option to report their closely held payees’ payroll information through Single Touch Payroll if they wish to. This can be done each time a payment is made, following the same process that applies for regular employees.

Employers will need to provide payment summaries to their closely held employees and a payment summary annual report to the ATO at the end of the financial year unless they:

• report through Single Touch Payroll for their closely held employees, and
• lodge their finalisation declaration by the due date.

What you need to know about fringe benefits tax

A fringe benefits tax (FBT) is a tax paid on benefits provided to employees (usually non-cash). FBT is calculated based on the gross taxable value of benefits employers provide to their employees. Employees must lodge their return and pay the total FBT amount they owe for the previous FBT year. Due to COVID-19, the FBT lodgement deadline has been extended from 31 March 2020 to 25 June 2020.

The following are the types of fringe benefits you must lodge before the extended due date:

• Car fringe benefits: when a car your business owns or leases is available for employee private usage.
• Debt waiver fringe benefits: when you waive or forgive an employee’s debt (including those you write-off as a genuine bad debt).
• Loan fringe benefits: when you provide a loan to an employee and charge a low rate of interest or no interest during the GBT year.
• Expense payment fringe benefits: when you reimburse an employee for expenses they incur or pay a third party for expenses incurred by an employee.
• Housing fringe benefits: when you provide an employee with accommodation as a usual place of residence for the employee.
• Living-away-from-home allowance fringe benefits: any payments you make to compensate an employee for any disadvantages suffered because they have to live away from home to be employed at your business.
• Airline transport fringe benefits: any payments made in relation to airline transport.
• Board fringe benefits: meals provided to employees.
• Entertainment fringe benefits: payments for entertainment by the way of food, drink or recreation.
• Tax-exempt body entertainment fringe benefits: when you incur entertainment expenses and you are wholly or partially exempt from income tax or don’t derive assessable income from the activities related to the entertainment.
• Car parking fringe benefits: when you provide car parking for your employee.
• Property fringe benefits: when you provide free or discounted property (including goods such as electricity and gas, real property and rights to property) to an employee.
• Residual fringe benefits: broadly speaking, any rights, privileges, services or facilities provided in respect of employment.

Businesses who have paid less than $3000 in FBT in the previous year only need to make one payment when lodging their FBT this financial year. For businesses with more than $3000 in FBT, they must lodge their FBT quarterly. Clarify with your tax agent or accountant for your FBT details before lodging.

Tax implications for workers with COVID-19 mobility restrictions

Employees who are not living or working in their regular location due to COVID-19 mobility restrictions need to be aware of the tax implications that apply to their situation.

Individuals who ordinarily work and live in Australia but are temporarily overseas due to COVID-19 restrictions will not experience any changes to their Australian tax obligations. If the employee is paying foreign income tax overseas, they will receive a foreign income tax offset to reduce their Australian tax payable.

Foreign residents working from Australia who are not able to leave as a result of COVID-19 restrictions will not experience Australian tax impacts if their stay in the country is under three months. However, non-residents working in Australia for longer than three months may need to lodge an Australian tax return if they earn any assessable income from an Australian source. Other than this, their Australian tax obligations will remain unchanged.

Employment income will not be taxable in Australia if the employee:

• Is not an Australian resident;
• Are intending to leave as soon as they are able to;
• Has no employment connections to Australia other than the fact that they are performing remote work in the country.

Employees who typically reside in a country that Australia has a double tax agreement with may already qualify for an exemption in Australia.