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Small Business tax help

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Small businesses need tax help – Article by Terry Hayes

So what else is new you say! That heading won’t shock any SME. The question is where to get that help. The SME’s adviser or accountant is one obvious source, but the ATO is another very valid so
Australia has almost three million small businesses, employing about one in five of the workforce. Small businesses therefore represent a large target sector for the ATO. Little wonder when you consider a survey by American Express earlier this year revealed a staggering 39% of small businesses keep their tax receipts in a shoebox!
Not surprisingly, the ATO does try to help, especially where a small business is just starting. Some of the guidance materials it can provide include:

  •  a checklist for people starting a new business;
  •  information about tax assistance visits by the ATO;
  •  tip and fact sheets about a range of business topics; and
  •  an easy-to-use small business tax calendar to plan and manage business tax obligations.

The ATO also contacts businesses that register for pay-as-you-go withholding when they take on staff for the first time or register for GST when their turnover exceeds the $75,000 threshold, to help them get it right from the start.Recently, the Tax Commissioner said that, in collaboration with local councils, industry associations and other government agencies, the ATO offered assistance to small business operators in western Sydney.

In one example in Penrith, the sister-in-law of a couple operating an earthmoving transport company attended an ATO seminar and got the couple to ask for an assistance visit. The couple in their first year in business earned $100,000 with the turnover increasing to around $2.6 million in the second year.During the visit, the ATO discussed the company’s need to move from cash to accrual accounting; how to better plan its cashflow; and how to manage its tax liabilities associated with much higher levels of income.

In another “good news” story, after reading an article in a Darwin newspaper about small business assistance visits on offer, a builder who registered for an Australian Business Number and for GST in July 2000 “because he thought he had to”, sought an ATO assistance visit as he had a significant amount of unopened mail from the ATO, causing him “sleepless nights”.

As he had operated his business for only a short period and was an employee for the rest of the time, the ATO helped him tidy up his un-lodged quarterly business activity statements. He also cancelled his GST registration, which he no longer needed.
The ATO also uses what are known as Taxpayer Alerts to provide early warning of arrangements it is concerned about. Recently, the Commissioner says the ATO has seen small business involved with deemed dividend schemes, labour hire arrangements (splitting income from personal services through the use of a discretionary trust ), research and development abuse, and foreign trust arrangements (foreign based discretionary trusts used to avoid taxation on Australian sourced income).

Employee vs contractor

There are, of course, regular problem areas. One of those is the issue of whether someone is an employee or a contractor. Disputes about this are becoming more common, especially in light of increased action by Fair Work Australia, and I have written on a number of occasions about this issue.In a very recent case, Fair Work Commissioner Jones ruled that a specialist Microsoft software consulting firm had 15 employees, finding two alleged contractors were, “as a practical matter”, employees. Therefore, the firm was not exempt from unfair dismissal claims nor could it avoid an obligation to make redundancy payments as per the Fair Work Act 2009. I’m sure this won’t be the last of the employee vs contractor cases that we will see.
In 2011-12, the Tax Commissioner said from its audits the ATO collected details of approximately 51,000 payments made to around 41,000 contractors, about 18,000 of which were individuals. The ATO found that 48% of businesses that engaged contractors were wrongly treating individuals as contractors. These workers were legally employees but were missing out on employee entitlements such as superannuation. To help SMEs, the ATO has an Employee or Contractor homepage on its website.

Information matching

The Tax Commissioner said the ATO’s information matching program is expected to match over 600 million transactions in the current year (up from 538 million in the 2011-12 income year). He said commensurate with the increase in information matching, the ATO also expects an increase in the number of discrepancies identified. According to the Commissioner, discrepancies detected by ATO information matching increased from 266,000 in 2007-08 to over 540,000 in 2011-12.Specifically in relation to small businesses, the Commissioner said the records of more than 10,800 taxpayers were matched in 2011-12, and identified businesses not reporting correctly through undeclared income or overdue returns. He said the identified discrepancies raised more than $40 million in liabilities.For example, by working with other agencies such as the Department of Climate Change and Energy Efficiency, the ATO was able to identify a government grant of $200,000 that was not declared by a taxpayer. Further information from the Department of Human Services highlighted the same taxpayer had also received a disability support pension, at the same time.

Small business benchmarks

Controversial as they may be, the Commissioner said ATO statistics indicated that approximately 90% of small businesses in benchmarked industries fell within a benchmark ratio. However, he said around 76,000 businesses reported income that was significantly below those benchmarks.To address this issue, Mr D’Ascenzo said the ATO wrote to around 30,000 small businesses regarding the benchmarks in 2010-11. He said around 17% (or over 5,000) of the businesses have since started reporting income commensurate with the benchmarks, thereby lowering their risk profile with the ATO.

Compliance and prosecution

The Commissioner said in the last financial year, the ATO’s compliance activities in the small business sector yielded around an additional $1.97 billion in taxes collected. He said that year also saw a decline in the number of returns and statements lodged on time for small businesses, as well as fewer income tax return liabilities paid on time. No doubt the general state of the economy was influential in that.

The Commissioner also said small business debt with the ATO increased in the last financial year to 61.4% of the total ATO collectable debt. The ATO believes this increase mostly reflects the cashflow impacts of the challenging economic environment. Despite the challenging economic conditions for small business, the Commissioner said the ATO will continue to support those businesses that are viable.
However, the Commissioner warned that the ATO undertook over 28,000 of what he called “firmer and legal recovery actions” in the small business sector in 2011-12. The ATO also conducted over 11,800 compliance reviews of self-managed super funds (mainly micro enterprises) raising tax liabilities of around $21.9 million.
Future ATO improvements for small businesses
Future technological improvements are planned to the interactions of small businesses with the ATO. By 2013, the ATO is aiming to allow small businesses to access and update their obligations online. By 2014, the ATO aims to allow small businesses to complete obligations using a mobile device and track their dealings online. Then by 2015, the ATO will aim to have integrated payment services, personalised options, and cross-channel authorisation solutions for small businesses.
With our complex and ever-changing tax laws, complying with them is not easy. That’s why around three-quarters of Australians use a tax agent. But there are ways SMEs can obtain the information they need to make tax compliance easier.
The Tax Commissioner says the ATO acknowledges that running a small business is not always easy and that behind every small business are people. He said, “We’re all human and we don’t always make the right choices, or circumstances sometimes make it extra difficult for us”. For people trying to do the right thing, he said the ATO will try to get them “over the line” where it can. A good adviser/accountant wouldn’t go astray either.

Terry Hayes is the Editor-in-Chief of tax news reporting at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.

Posted in Business
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