Top 5 tax mistakes small businesses make and how to avoid them

Running a small business is a rewarding endeavour but tax compliance can bring unique challenges. There are a number of common mistakes that small business owners often make that can have significant financial implications.

To help you avoid these, here are the top five tax mistakes Australian small business owners make with strategies for how to avoid them:

1. Poor record-keeping

One of the most common mistakes small businesses make is not keeping sufficient or neat records. The Australian Taxation Office (ATO) requires you to keep accurate records of your income, expenses and assets for at least five years. Without proper documentation, verifying your tax deductions becomes difficult and can potentially lead to missed tax benefits or penalties for underpayment.

The solution
Develop a system for collecting and storing receipts, invoices and bank statements. You could consider using accounting software or cloud-based solutions to help streamline and digitise your records.

It may help to block out time in your schedule once a month to categorise and record your finances.

2. Mixing personal and business expenses

Blurring the lines between personal and business finances is a common mistake for small business owners, particularly sole traders and independent contractors. Using business funds for personal expenses or vice versa not only complicates your taxes but might also raise red flags with the ATO.

The solution
Keep separate bank accounts and credit cards for business and personal use. This will help prevent you using business funds for personal purchases.

Where personal accounts are used for business expenses, develop a clear policy for reimbursing your personal accounts. That way, you will have records of all transactions.

3. Not claiming all deductions

The ATO has a large range of tax deductions available to small businesses to help reduce your tax bill. These include rent, travel expenses, marketing, phone bills, training and more. While it is difficult for you to know all of these, it will help to keep up to date on tax regulations to know where you can maximise your deductions.

The solution
Using a tax professional will help you in the long run as they are up-to-date with the latest ATO tax rules. An accountant will help you identify areas where you might be missing out.

It also helps to keep an eye on tax news yourself.

4. Missing tax deadlines

Tax deadlines are very important. Late lodgements or payments can result in penalties and fines from the ATO.

The solution
Mark important tax deadlines on your calendar and set reminders well in advance. Some important filings to remember include:

  • Income tax returns
  • Business activity statements
  • PAYG withholding payments
  • Superannuation guarantee lodgement and payments
  • Fringe benefits tax returns
  • Capital gains tax instalments

You could also ask your accountant to remind you in advance of due dates so that you can work together to gather the correct documentation.

5. Not classifying staff correctly

How your staff are employed affects your tax and superannuation obligations, and theirs too. Misclassifying can mean mistakes in your business’s taxes and lead to penalties for non-compliance.

The solution
Pay attention to how you classify employees and contractors in their employment agreements. If you are unsure, check with a tax professional or employment lawyer.

Get expert advice

Small businesses can avoid common mistakes by implementing clear record-keeping and getting professional help when needed. By being proactive and vigilant, you can ensure accurate tax filings, maximise deductions and avoid penalties.

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