In recent months, the Australian Taxation Office (ATO) has made significant strides in closing tax loopholes and holding businesses accountable. So far the focus has been primarily on larger businesses, however, the commissioner of taxation has indicated that SMEs will not be left out.
In theory, the ATO aims to stop rule-breaking small business owners who are illegitimately claiming business expenses, failing to declare income, failing to pay superannuation, or engaging in other kinds of tax avoidance. Unfortunately, it’s likely that businesses engaging in malicious activity won’t be the only ones affected. According to the ATO, the blame doesn’t just lie with careless or malicious taxpayers, but also tax agents and accountants who aren’t making a serious effort to vet claims or enforce existing rules.
For small business owners, even those who have been making a good-faith effort to pay appropriate taxes for years, this could spell trouble. As a precaution, SMEs all over the country need to prepare to deal with potential audits and to manage any resulting back payments.
Honest SMEs are facing unexpected costs
As a part of identifying offenders, the ATO will be focusing heavily on suspicious or poorly explained annual deductions. This is problematic for small businesses who may have made mistakes or been careless when claiming deductions, and for those working with an accountant or tax agent who was similarly careless.
Properly understanding work expenses
Work expenses need to be directly related to earning revenue for your business. This means that businesses that have claimed costs like food, laundry, or vehicle expenses without proper explanation of exactly how those are related to their business could run into significant problems.
In the event of an audit, a business that still has itemised records and valid receipts to corroborate their deductions is going to be in fairly good shape. Unfortunately, unlike their larger counterparts, small businesses often don’t keep excellent records. Entrepreneurs often can’t invest the necessary attention to managing their own records, and can’t afford to have anyone in their organisation dedicated to gathering receipts and tracking expenses. As a result, even valid expenses might not hold up under scrutiny, because they might not be sufficiently verifiable.
SMEs need to be prepared
Businesses owners need to prepare ahead of time, not only to avoid potential trouble with the ATO, but also to help manage any additional payments and penalties. Taking the time to understand the situation, what it means for your business, and what you can do about it can mean the difference between a simple inconvenience and a crippling cash flow interruption.
As a first step, business owners need to gather any and all available receipts and records. According to the ATO’s guidelines you should have the last 5 years’ records of…
● receipts and other evidence of all sales and purchases you made for your business
● tax invoices, wage and salary records
● all documents about GST
● records of the purchase, sale and other costs of any business assets, such as land, buildings or office equipment
● all records relating to tax returns, activity statements, fringe benefits tax (FBT) returns, and contributions to employee super.
By going back over your records, you can determine whether your past claimed deductions are verifiable, and whether you failed to pay any employee superannuation payments or other expenses that you may still owe. To get a good estimate of what you may owe in a worst case scenario, you can simply compare the expenses you’ve deducted against the records you have available. Any that aren’t clearly verifiable may not be considered valid upon review.
Absorbing the cost of back payments
Once you have an estimate of the potential costs, you can make decisions about managing any impacts on your business’ cash flow. To avoid any potential disruptions to your business’ operations, you’ll need to ensure that you can finance any costs without cutting into your working capital.
The ideal solutions for quickly coming up with the necessary funds are short term financing tools like invoice financing, or supply chain finance. Invoice financing allows businesses to access incoming revenues before client payments are due, and supply chain finance can help to defer outgoing supplier payments significantly. These are especially useful because they allow you to access funds incredibly quickly. An alternative finance institution can approve your application in a matter of one or two days, while traditional financing can take weeks or months.
It’s important that small and medium sized businesses begin to prepare and plan ahead today. This makes it possible to avoid any surprises in the future, and provides a clear path to the continued stable operation of your business, even if the ATO does take an interest in you.