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5 Major Mistakes that can land your Small Business in the ATO’s Bad Books

Introduction

What is the most common issue for small business owners? In my experience, it is time management. Timing is even more important than the cash flow, because it can block the way that cash comes in. Small business owners are always busy so they often ignore issues that don’t affect their business immediately, putting them on the backburner until they become a problem. So what is the number one thing they are guilty of ignoring? Tax obligations.

You can’t escape the ATO

As the principal accountant and tax agent at Bright Accounting and Taxation Services, I have had quite a good number of my clients picked by the Australian Taxation Office (ATO) for audit. These clients were not large corporations – quite the opposite. They were really small businesses, in a range of industries. No business, no matter how small, or in what industry, is immune to potential audit by the ATO – so it is important to always stay on top your tax obligations! So, what happened to these small business clients of mine? The following are five of the most common mistakes I have dealt with in the last 12 months:

1. Ignoring Taxation

The first big mistake is to ignore taxation altogether. Don’t. It comes back and bites hard. I have seen clients who had to shut down their businesses because of overdue taxes, penalties and interest.

2. Relying too much on Accountants

In my dealings with clients, they are often quite unwilling to use their time to think about taxation. They don’t even want to meet with their accountant because they are ‘too busy’. Many of my clients simply rely on their accountants 500% without considering the possibility of having overdue lodgements. I encourage all small business owners to be more involved with their tax obligations and take a proactive approach, working together with their accountant.

3. Being Unaware of Technical Issues

The third common mistake of small business owners is not being aware of the technical issues they face. An example is keeping a log book for the car they use for business. Your business cannot survive without a log book because it may also be used in Fringe Benefits Tax calculation. One of my clients had never heard of it. He then had to pay the ATO 6 years’ worth of Fringe Benefits Tax. If you are scratching your head now, contact me immediately.

4. Taking Advice from Friends

The fourth issue is taking advice from friends. Unfortunately, small business owners often respect their friends’ advice more that they do their accountants’. If your friends talk about taxes and start their sentence by saying “Don’t worry” then you start running, because their advice usually ends up in a great mess. It pays to talk to a professional about taxation– it is a serious matter and can lead to big issues for your small business.

5. Taking Inappropriate Steps for Short-term gains

Finally, small business owners often take action to save money in the short term without first seeking advice from their accountants. A good example of this is transferring money from the company account to the home loan offset account regularly in order to save some interest. Though business owners don’t like to hear it, the truth is that company money should be untouchable, except for business related payments and wages. When the ATO catches you for that, they will calculate the total figure and make it your income. That doesn’t sound too good does it? So why is it such a common trap for small business owners? The answer is because they don’t choose to verify their genius ideas with their accountants first. Make sure you don’t make that same mistake.

Conclusion

These are just a few examples of the many mistakes made by everyday small business owners. These people are often successful in their own field of work, however this doesn’t really matter unless they are experienced in the accounting industry. So if you have any questions or concerns about your business that you might want to discuss with an accountant, contact me now on 02 8858 3242, or send me an email at info@brighttax.com.au.