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Tax avoidance aims at minimising tax liabilities, and it is allowed by all taxpayers provided that respect to the law is maintained at all times. Tax evasion on the other hand has no respect to the law; it is a scheme or plan designed mainly to reduce or avoid tax significantly. It can also be something simple such as making false claims in the taxpayer’s tax returns, which can be fake or exaggerated deductions or intentionally not reporting income earned. This article addresses those deliberate tax frauds io\n two parts, and below is the first.
This includes claiming a deduction for phone or computer use, such as claiming 90% business use and 10% personal use, when it is actually the reverse or using wrong percentage. It also includes claiming GST tax-input credits for purchases that are not partly or solely intended for use in the operation of your business. You can purchase items intended for both business and private use, but you can only claim a GST credit for that part of the purchase that relates to your intended business use. You must also have a tax invoice for all GST credit claims on purchases costing more than $82.50 including GST.
As stated previously, you must have a tax invoice for all purchases costing more than $82.50 including GST where a GST credit is being claimed. To constitute a valid tax invoice, the document must contain the following pieces of information. It must include the words ‘Tax Invoice’ printed at the top of the page, it must have the seller’s identity or business name, their ABN, the date the invoice was created, a description of the item(s) being sold including quantity and price and the GST amount (if any) that is payable. As is the case with other tax-related records, you must keep your tax invoices for a period of at least five years.
Bank reconciliation is where you or your bookkeeper compare the figures in your accounting records with those on your bank statements, allowing you to spot the discrepancies between items in each and reconcile them. These discrepancies might include things like differing recorded cheque amounts (known as over or under casting) or amounts that appear on one statement but not the other (a possible indication of fraud). Not only is reconciliation vital for maintaining an accurate financial picture of your business, but in taxation terms, failure to do so can impact on your legal reporting requirements. Ideally, you should perform bank reconciliation at least once a month.
Some businesses treat their workers as contractors when in fact they are employees. Reasons for doing this can include trying to avoid the obligations relating to employees such as superannuation, sick leave, holiday pay and payroll tax. A worker is generally an employee rather than a contractor if they perform work under your direction and control, and work standard or set hours, with an ongoing expectation of work and bear no financial risk for the tasks they perform. The ATO’s website has information about employee v contractor. Finding out retrospectively that you’ve been doing it wrong can involve steep financial penalties.
Whether a contractor quotes an ABN number or not is irrelevant when it comes to your superannuation obligations. According to the Superannuation Guarantee, a contractor is considered an employee (and therefore entitled to superannuation) if the contract between you and them is wholly or principally for their labour. In other words, if they perform the work on their own without delegation, are not being paid to achieve a result and are being paid mostly for their personal labour and skills (at least 50% of the invoice value), then they are considered employees and are entitled to a super contribution made by you on their behalf.
If you are operating a business you need to keep records which explain all transactions relating to your tax affairs. These records include sales and expense invoices and receipts, credit card statements, bank deposit books, cheque butts, bank account statements and cash register tapes. If you take money out of your cash register to pay refunds or for personal use or put money in without recording a sale, these amounts will not appear on your cash register tapes. So, in order to accurately reflect your sales, your takings must be reconciled at the end of each day, and all discrepancies accounted for.
In the case of business expenses, paying in cash can be a matter of convenience (i.e. buying the milk for the office lunch room), but in the case of wages, it is often an attempt by an employer to avoid attention from the ATO and Fair Work Australia. Some employers tell workers they are doing them a favour by paying them in cash, when in fact they are merely denying them their rights to penalty rates, superannuation, sick leave, holiday pay and general workplace rights. Therefore, the law requires that employers issue a pay slip within one working day of payday with the appropriate tax deduction recorded and remitted to the ATO and there are heavy penalties for not doing so.
A business is a separate entity from its owner and it must be treated that way, especially when it comes to finances. If you make a cash sale which you have not yet recorded and you use that money to buy your dinner or fill up your car with petrol, then you are creating loose ends for yourself that could come back to strangle you later on. If the cash sale involved an invoice (which it should), there will be a discrepancy at reconciliation time, and if it didn’t, there will be a stock discrepancy at stocktake time. And because you used the cash for personal use without obtaining a receipt, you will have no idea where the money has gone.
If your business employs staff, then you are usually required to make Super Guarantee contributions on their behalf. An employer must pay super contributions to all employee regardless of how much they earn. The only exception is that when the employee is less than 18 years old and working less than 30 hours a week. You must also pay super contributions for contractors being paid by you primarily for their labour. The amount you must pay is currently 10.5% of their regular income and payments must be made at least every quarter. If your employee doesn’t specify a preferred super fund, you must pay their super into a nominated default fund.
Director’s fees are considered to be salary and wages for the purposes of PAYG withholding. PAYG must be withheld from the gross director’s fees, reported on the IAS or BAS used to report the salary and wages, and remitted to the ATO within the appropriate time frame. Because directors’ fees fall within the definition of Ordinary Times Earnings, superannuation contributions must also be paid at the relevant rate. While there may be a difference between when the directors fees are paid (i.e. quarterly rather than monthly), the related PAYG reporting and payment must still be made by the standard deadlines which apply for all other employees.
In normal circumstances, you can claim a tax deduction for super guarantee payments you make for your employees in the financial year you make them. But if you are late making your SG payments, you cannot claim a deduction for those late payments. Furthermore, you will have to provide the ATO with an SG Statement the following month and pay a non-tax deductible SG penalty, which can be a maximum of 200 per cent of the SGC.
Failing to maintain adequate vehicle log books is another common mistake by business owners. The car log book is an important tax substantiation record if you use your vehicle in the course of performing your duties. It allows you to claim the business-use percentage of each expense, based on the records of your vehicle’s usage. Information a logbook must contain to be valid includes the start and end date of the logbook period, the odometer readings at those dates, the total kilometres travelled and the business-use percentage for the logbook period. It must also contain the odometer readings and kilometres travelled for each journey, the start and finishing times and the reason for each journey.
Self-education expenses are deductible when they have a relevant connection to your current income earning activities. In other words, if the subjects you undertake can maintain or improve the skills or knowledge you require in your current work activities, then the self-education expenses are deductible. You will be able to claim your course tuition fees, textbooks, stationery, student union fees and travel expenses to and from your place of education. A common mistake employees make is claiming self-education expenses without this link to earning their current income. You cannot claim a deduction for self-education that is undertaken for the purpose of gaining new employment.
A common mistake made when claiming home office expenses is failing to have a clearly designated business area in your home, meaning it is a residential property and does not qualify as a place of business. For your home to qualify as your principal place of business, it must have a room or separate area set aside exclusively for business activities. You can then legitimately claim home office expenses include a portion of your utilities, such as your business phone costs (rental and calls, but not installation), depreciation on your office equipment, computers and printers and possibly a portion of your occupancy expenses such as your rent or mortgage.
A common mistake is claiming renovations or improvements as repairs to your rental property. A repair is classified as an ongoing expense, which generally has short rather than long-term value, is relatively inexpensive and is often a case of replacing like for like. Ongoing repairs can be claimed as tax deductions, but if rather than repairing something, you upgrade or install a new item, this is considered a capital expense, which cannot be claimed as an outright deduction (unless it costs less than $300). However, such improvements can be claimed under depreciation over a period of years, once you have obtained a depreciation schedule from a licensed quantity surveyor.
Work-related expense claims are one of the least understood and most error prone areas of personal taxation. Most people are eligible to claim for some work-related expenses, which are expenses incurred while performing your job as an employee. These can include car-related expenses such as fuel and maintenance, travel costs, clothing expenses, education expenses, union fees, home computer and phone expenses, tools and equipment expenses and journals and trade magazines. However, you must be able to substantiate your claims for deductions with written evidence such as receipts and invoices if the total amount of deductions you are claiming is greater than $300.
Many employers are unaware that if they make a company vehicle available for private use by an employee, they are liable to pay Fringe Benefit Tax (FBT). A vehicle is considered available for the private use of an employee if they use it for private purposes (which includes travel to and from work) or if the vehicle is garaged at or near your employee’s home, even if only for security reasons and regardless of whether or not they have permission to use the vehicle privately. If, on the other hand, the employee reimburses you for the private use of the vehicle, then no Fringe Benefit Tax is payable.
Interest on loan repayments for rental properties can be claimed as a tax deduction, but many property owners are also, unwittingly or otherwise, attempting to claim for their loan repayments as well. There is a lot of confusion amongst property investors over this matter, but the bottom line is, you can only claim the interest portion of your loan repayments and not the principle repayments, which would be equivalent to claiming the purchase price of the house as a tax deduction. You can claim a deduction for expenses such as management and maintenance costs (including interest on loans), but borrowing expenses, depreciation and capital works spending must all be depreciated over a number of years.
A common mistake made by business owners is claiming the GST paid when they purchase a motor vehicle, when that vehicle will only be partially used for business purposes. The only time you’re entitled to claim a 100% credit for the GST included in the price of the vehicle is when it will be used solely for the operation of your business. Part of the confusion surrounding this issue may lie in the fact that you are often entitled to a reduced GST payment (decreasing adjustment) for the business use portion when you dispose of a motor vehicle, if the vehicle was used for both business and private purposes.
GST is required to be paid when you sell a company vehicle or item of plant, but some businesses are either not aware of this or simply ignore this requirement. The only time you don’t have to account for GST on disposal of a capital asset such as a company vehicle is if it was not used for business purposes (i.e. your family car) or if it was sold as part of a GST-free going concern. However, while you are normally liable for GST when you sell a company vehicle, as mentioned in the previous section, you may be entitled to a reduced GST payment if you used the vehicle partly for business purposes.
There are several steps involved when preparing and lodging a BAS and the most important of these is reconciling your financial records. Unfortunately, failing to do so is a common problem which could be easily overcome if business owners followed these four basic steps:
Minimum repayments must be made by the 30th of June each year on director debit loans or else Division 7A of Part III of the Income Tax Assessment Act 1936 applies. When minimum loan repayments are not made, a deemed dividend is taken to be paid in the year the shortfall occurs. Some companies are failing to make the minimum payments and incurring a Division 7A penalty as a result. Division 7A is a measure designed to prevent companies from making distributions to shareholders or their associates at the corporate tax rate of 30% instead of the shareholder rate of 48.5%.
This is another common mistake made by both individuals and businesses. Individuals claiming donations of more than $2 should have a receipt for each donation, although bucket donations can be up to $10 without receipts. You also can’t claim for donations where there is a personal benefit involved (i.e. a raffle or art union tickets). And for a business to claim a deduction for donations made to an organisation, the organisation must be a deductible gift recipient (DGR), endorsed by the ATO. While claims for donations must generally be in the same year the donation was made, you can choose to spread a deduction over several years where the gift to the DGR is money or property valued at over $5,000.
Failing to disclose any interest you earned or dividends you received can easily come back to haunt you, as every company is required to lodge a Dividend and Interest schedule. This shows the names, addresses, dates of birth, gender and tax file numbers (TFNs) or Australian Business Numbers (ABNs) of all shareholders to whom dividends were paid during the year. They must also lodge the names, addresses, dates of birth, gender and TFNs or ABNs of all investors to whom interest of $1 or more was paid or credited during the year and the amount of interest that was paid or credited to each investor.
A mistake that employees often make is claiming for travel expenses that are not considered by the ATO to be directly work-related. This can include everything from claiming because you have to stop to pick up the company’s mail on the way to work, to claiming for personal sightseeing excursions made during interstate or overseas business trips. Travel expenses you can legitimately claim for include meals, accommodation and incidentals while away on company business (i.e. an interstate conference), your fuel costs when using a borrowed vehicle for work purposes and your airfares, taxi fares and car hire fees when travelling for work purposes.
Many businesses seem unaware that GST credits cannot be claimed on entertainment expenses. An activity is classed as ‘entertainment’ if its main purpose is for people to enjoy themselves or it takes place in a social setting, so the cost of an activity such as wining and dining a business client is normally considered an entertainment expense. The key is in what defines entertainment. If a meal with a client does not include alcohol and is not overly expensive or elaborate, it can be classified as refreshment rather than entertainment. So, too, if it is consumed on company premises during business hours.
Following on from the previous mistake, some businesses also try to claim their entertainment expenses (for which no GST credits can be claimed and for which Fringe Benefit Tax may be due) as staff amenities expenses (for which GST can be claimed). The two categories are quite different however, as staff amenities expenses are clearly defined as the cost of tea, coffee and biscuits etc made available in the staff tea room for the benefit of employees, while entertainment expenses are costs associated with client dinners and the like, especially those where alcohol is involved. So, trying to claim the office Christmas party as a staff amenity expense is not going to have much credibility with the ATO.
This is another error that some small businesses make, attempting to claim 100% of their home phone and electricity bills as business-related expenses. If you run your business from home, it is obviously where you live as well as where you work, so you are obviously going to consume a percentage of electricity while you are not working and in those areas of your home not dedicated to your business. Similarly, all your phone calls are not going to be business related, so you need to work out the percentage that are work-related and those that are personal, rather than trying to claim everything as a business deduction.
This is a problem that occurs frequently in a number of food-related businesses such as butchers, bakers, delis, grocers, restaurants and cafes. Stock is consumed or taken by staff and/or management for personal use without being paid for or recorded in any way. The ATO is familiar with this recurring problem, which has the effect of turning business stock into taxable income, so in order to simplify the reporting problems surrounding this issue, they now publish and regularly update a schedule of standard values, so that business owners can estimate for tax purposes the value of the stock being taken.
Some businesses make the mistake of claimimg for donations that are ineligible for a tax deduction. As mentioned earlier, in order for a donation to be an eleigible deduction it must be a purely charitable gift, with no reward or benefit being accrued by the donor. It must also be made to a Deductible Gift Recipient (DGR) approved by the ATO. An example of a donation that would not qualify for a tax deduction would be a donation by a business to a political party. In the first instance, the political party is not a DGR and secondly, a reward or benefit is implicit in such a donation. However, such donation can be deductible if made in a personal capacity and the political party is registered by the Commonwealth, state or territory legislation.