9 Ways Small Business Owners Keep the Taxman Happy

Benjamin Franklin famously once said: “the only things certain in life are death and taxes,” and the truth is, tax problems can consequentially lead to the death of your small business - unless you take steps to keep the taxman happy.

Small business owners have a lot to think about. From sales meetings and recruitment, to salaries, cashflow issues, marketing, suppliers, and a whole string of other things – the list can go on. There’s no need to add the tax department to the list.

Keeping the ATO happy should be the foundation that underpins your business, so that you can focus on the day-to-day operations of your business and the multitude of other issues that require your attention.

Many authorities are currently tightening the rules and clamping down on tax cheats and tax avoidance, so it’s important to be aware of the many “do’s” and “don’ts” of the tax system!

Nine of the most important general guidelines are detailed below: wherever you’re located, whatever your business size, and whatever industry you’re in. These will help you identify red flags in your tax setup:

1. Understand all the tax requirements - or find someone who does

Do you think your tax affairs are simple? They’re probably not. Many small business owners don’t fully understand tax legislation - so it’s important to seek specialist help.

While it’s tempting to try and look after everything yourself, it can take ages to get to grips with what you need to do, and it’s likely that you’ll miss something important. If that happens to be the case - the taxman won’t be happy.

2. File your returns on time

Make sure you file your tax returns before your deadline – your tax specialist or accountant will let you know this.

Good planning in your business will ensure that you’re ready for the process; you know when it’s coming, have scheduled time to do it each year, and don’t end up scrambling around at the last minute to avoid overdue penalties.

3. Keep consistent & accurate records

As a business owner, you should already understand the importance of accuracy and consistency. Apart from these being general good practice tools in ensuring a successful business, the tax authorities will love you for it too.

Being consistent and accurate will help you flag any changes that affect your tax liability and explain any anomalies that raise questions from the tax authorities.

If you have some bookkeeping experience, you may be able to manage this yourself with user-friendly cloud software like Xero and Quickbooks Online. Otherwise, it’s best to have a certified bookkeeper or accountant keep your accounting records up to date.

4. Keep the ‘evidence’ together

This one sounds pretty obvious, but keep all receipts and invoices for business expenses together! Most business owners know they should do this, but it’s surprising how many find themselves scrambling around looking for receipts when the time comes to do tax returns. Ever hunted for a receipt in your car glove box or wallet? You’re not alone! Furthermore, when receipts are finally located, sometimes the business owner doesn’t even remember what they relate to.

The simple takeaway here? Organisation! All the ATO wants to know is that there is sufficient documentation to justify business expenses, and at the end of the day, only you are responsible for losing receipts or causing confusion about their origin.

Additionally, one of the benefits of using an accounting software such as Xero is the ability to take a photo of a receipt with your smartphone to scan an expense in; or you can use specialist apps that integrate with Xero such as Receipt Bank or Expensify.

5. File business & personal expenditure separately

It’s easy to confuse business with personal expenditure. Unfortunately, it’s also one of the easiest ways to get offside with the tax authorities, and remember you want to keep the taxman happy at all costs.

By keeping your expenditure separate, you can see at a glance what you can deduct and what you can't: that means two separate (probably electronic) filing systems. Don’t be tempted to think “I’ll sort them out when the time comes for my tax return” – or it WILL be a nightmare.

6. If you’re a cash-based business, take extra steps

Some business owners like tradies often get paid in cash, so if this is you, it’s important to take extra steps to keep things transparent. You can guarantee you’ll be on the taxman’s radar at some point.

For income, keep additional records to back up bank deposits, such as cash register printouts or manual records of daily sales that can be matched to the bank records.

We may keep harping on about the benefits of keeping your accounting systems in a cloud-based software, but it’s true – you have the ability to do things faster and easier with paperless processes. For example, trades-based businesses can use apps like ServiceM8 to quote and invoice in the field and even take electronic payments on site, making it easier to not accept cash as payment.

If you’re thinking you prefer to be paid in cash so you don’t have to declare all your business’s income in order to reduce profits and therefore tax – sorry to break it to you but it’s not such a great idea. Not only are you dodging the taxman and putting yourself at risk of fines and serious punishment, your business will actually be more valuable when it comes time to sell it if you have always shown your sales revenue as ‘on the books’.

7. Create a clear policy for employee reimbursement

Tax auditors want to know that you’re following the regulations regarding employee reimbursement. This can be for things such as travel, mileage, personal expenses, etc. They also want to know that expenses are appropriately signed off within the business to indicate that the business accepts liability of those expenses.

The best thing to do here so everyone is on the same page, is document a clear policy that determines what employees can (and can’t!) claim for and how they go about claiming it. Make sure that this is clearly communicated to all employees.

8. Plan for your tax bill

There’s no place for surprise tax bills on the path to success. Tax is generally predictable and consistent, which means that you can - and should - plan for it in advance.

Sit down with your tax professional, understand what’s coming and when, and create a fund that can be used to pay the bill when it arrives. That way there are no nasty surprises ahead and you have the money already there when you need to pay it.

9. Always read the letters

Just because your tax authority writes to you asking questions or requesting records, it doesn’t necessarily mean the worst. Never avoid or delay answering these questions, as they don’t go away.

Answer in a timely fashion - there will normally be an expected response date detailed on the letter. Don’t go beyond this or you could be penalised.

Speak with your accountant or tax specialist and answer the questions to the best of your ability. Most tax issues can be solved relatively easily if they are dealt with before they spiral out of hand.

Don’t get caught out by non-compliance with tax or it can cost you and your business. Get the right tax advice from the start and follow the tips above to keep the taxman happy.

If you need any specialist tax advice for your business, contact us today to talk it over.

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