Focus Area 1: Business Income Is Not Personal Income
The ATO is paying close attention to business owners who use company money or assets for personal purposes. A common mistake arises from failing to recognise the legal separation between a business and its shareholders, leading to:
- Using company assets for personal benefit.
- Mixing personal and business finances, such as sharing a single bank account or credit card.
- Poor or incomplete business records.
- Failing to comply with Division 7A requirements when providing, repaying, or managing loans to shareholders or their associates.
What is Division 7A?
Division 7A is a tax rule designed to prevent private companies from providing money, assets, or other benefits to shareholders or their associates without declaring them as taxable income.
Common Division 7A Errors
- Not entering into a compliant loan agreement by the company’s lodgement day.
- Creating loan agreements between the wrong entities.
- Charging an interest rate below the benchmark rate.
- Failing to declare interest earned on Division 7A loans in assessable income.
- Recording repayments through journal entries instead of actual payments.
Minimum Yearly Repayment Issues
Errors also arise when minimum yearly repayments are not met, such as:
- Missing the 30 June repayment deadline.
- Miscalculating repayments due to using the wrong interest rate.
- Borrowing funds from the company to make repayments.
Understanding and addressing these issues can help you avoid penalties and stay compliant.
Focus Area 2: Claiming the Correct Deductions and Concessions
The ATO is targeting individuals who incorrectly claim or offset business losses against other income sources, such as wages or investments.
What Are Non-Commercial Business Losses (NCL)?
NCL refers to losses incurred from business activities that lack substantial or business-like characteristics, such as hobby activities or consistently unprofitable ventures.
To claim an NCL against other income, the business must:
- Exhibit business-like characteristics, such as proper planning and record-keeping.
- Show an intent to make a profit and have a significant commercial purpose.
- Meet the income or activity thresholds set by the ATO.
If these criteria aren’t met, the loss must be deferred and used to offset profits in future years.
Common NCL Errors
- Claiming losses from hobby or non-business activities.
- Misapplying rules when taxable income (excluding business losses) exceeds $250,000.
- Failing to meet any of the four eligibility tests.
- Not applying for the Commissioner’s discretion to allow the claim or failing to comply with guidance in PCG 2022/1.
By understanding and following the rules, you can avoid errors and ensure your deductions are valid.
Focus Area 3: Maintaining Compliance
The ATO has identified several common compliance mistakes that small businesses should avoid:
- Failing to report all income: Not declaring all income, especially cash sales, is a significant contributor to the small business tax gap.
- Late lodgements: Consistently submitting tax returns and BAS after the deadline can lead to penalties and scrutiny.
- Over-claiming deductions: This remains a common issue and a major factor in the small business tax gap.
- Poor record-keeping: Inadequate records or unreliable systems make it difficult to meet compliance requirements.
- Mixing personal and business assets: Failing to account for private use of business assets or funds.
- Missing GST registration: Failing to register for GST when reaching the $75,000 threshold.
- Not setting aside funds for tax payments: This often results in cash flow problems and difficulty meeting tax obligations.
- Errors in rental property deductions: For example, claiming capital expenses as repairs and maintenance.
Stay Ahead and Stay Compliant
By addressing these key areas, small business owners can avoid unnecessary stress, penalties, and compliance issues. Take the time to review your business operations, maintain proper records, and seek advice from us if needed.
