Long-held tax myths continue to plague Australian small businesses, exposing many to substantial tax penalties, according to the latest small business research.
A nationwide survey by American Express of more than 1,000 small business owners has found that the understanding of tax reporting requirements varies enormously depending on the length of time in business and the type of business, with many subjecting themselves to substantial losses and the risk of being penalised by the Australian Taxation Office (ATO).
Adrian Raftery, taxation expert and author, said he was concerned that business owners, specifically younger entrepreneurs and those who work from home, risk inadvertently running afoul of the ATO due to a lack of understanding about their tax reporting requirements.
“If you don’t know your business obligations, then why are you in business?” said Raftery.
“Knowing your obligations and knowing what to claim and what not to claim is the key, however there exists some long-held misconceptions based on tax myths that continually trip business owners up,” he added.
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 per cent are in the dark when it comes to tax-breaks for asset purchases under $6,500.
Additionally, 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.
“GST and registration for GST is an area that always creates confusion in small business. The rule is that businesses with a turnover greater than $75,000 must register for GST with the ATO. Businesses that fail to do so, or incorrectly register, risk being penalised for their mistake,” Raftery said.
“When operating a home-based business it is important to keep clear and separate records of expenses that relate to the running of the business, and not to confuse them with the everyday expenses related to running a household,” he added.
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.
Furthermore, 44 per cent of business owners believe they are entitled to claim more than they are allowed to or else have no idea about the tax deductions they can legitimately claim for entertainment expenses.
“At some stage, most business owners have had a ‘friend’ who has told them a clever way of getting more out of their expense claims, but the reality is a mistake in expense claims could add up to a big expense in the long run,” Raftery said.
“Business owners should be getting their advice from credible sources, and if in doubt, they can always ask the ATO. Contrary to popular belief, asking the ATO for clarification does not put the owner on a ‘watch list’, it only serves to ensure they don’t make a mistake in the first instance,” he added.
Younger small business owners most prone to mistakes
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.
“For young business owners, it is as equally important for them to be an expert in their chosen field as it is for them to develop an understanding of their tax reporting obligations. A good tax reporting process, established early in the business’ life, is essential to long-term viability,” Raftery said.
“At the end of the day, business owners need to recognise the role of the ATO and work with the system to ensure they get the most benefit out of it. To do that, they need credible advice and to actively seek clarification in areas of uncertainty,” he added.
A few ways to avoid common tax pitfalls:
- 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; and
- Consider accounting software and other financial products that will help more efficiently and accurately record transactions - for example, the American Express Business charge card displays monthly expenses on a single statement with ATO-approved, GST-compliant itemisation for downloading into leading accounting software packages, eliminating the need for manual data entry and itemisation of receipts.
About the American Express research
Undertaken by Galaxy Research, the study was commissioned by American Express and comprised 1,003 small business owners across Australia with businesses generating an annual turnover of up to $2 million. The research was conducted in May 2013.