Common Errors When Completing Tax Returns and How to Avoid Them

tax return

At the end of every financial year, business owners get incredibly busy as they have to lodge their tax return. Working closely with tax agents and accountants, they have to get everything in order before the end of the filing period. But since filing tax returns is no simple task, sometimes mistakes are made.

It can be as simple as not having all the required records. This is why businesses need to start getting their affairs in order 2-3 months before the end of the financial year. 

In this post, we will list some common issues associated with filing small-business tax returns and some tips to avoid them. 

What are the most common errors made when completing tax returns? 

The Australian Taxation Office (ATO) identified the most common mistakes that small businesses make when filing their tax returns. These include failing to declare income including cash and online sales, interest, capital, dividends, gains, and one-off transactions for selling equipment, and other capital items. Failing to account for the private use of business assets or funds (including stock taken for private use and shareholder loans) is another common mistake. 

The ATO also observed that small businesses fail to have adequate record-keeping systems. When completing tax returns, they have to keep all required records. Otherwise, they might have to redo the whole thing.

How can these errors be avoided? 

The Australian Taxation Office (ATO) expressed its support for small businesses during the filing season. As per the ATO, there is a range of services and tools available to help businesses address the errors mentioned above. From lodging their returns and ensuring recordkeeping and claiming of expenses, there are golden rules that businesses can follow: 

  • Ensure that money has been spent on the business and not for personal use; 
  • Only claim the business portion where there is a mix of business and personal use; and 
  • Keep adequate records to be used later when substantiating expense claims.

For tax agents and accountants, the ATO advised the following:

  • Ask clients about all their income (online sales, capital gains, interest, dividends, etc.)
  • Also, ask if they created a clear distinction between business and personal services income or PSI.
  • Confirm if the client split their income appropriately (where the PSI rules apply). Is the income attributed to the individual performing the work? 
  • Gather all source documents. 
  • Ask the client if they have undertaken reconciliations on a regular basis and if they have accounted for directors’ fees and stock taken for private use. 
  • Also, ask if they used loan accounts in an appropriate way (and meets with the ATO view). 
  • Confirm if the expenses (e.g., rent expenses or motor vehicle expenses) for both private and business use are correctly apportioned.

Businesses claiming loss may need the assistance of a tax agent in Sydney to understand how to correctly claim current and prior losses. For the current tax year (2020—21) and the next one (2021—22), businesses that anticipate a tax refund should take note that the quicker they lodge the return, the quicker they will get the refund. If you’re a small business owner, you will have to lodge your return by 1 November 2021.

How to pre-pay income tax? 

Businesses have the option to pre-pay their income tax. With pay as you go (PAYG) instalments, businesses can work out how they can pay and how much they pay. The first option is using the instalment amount and the instalment rate for the second one.

Let’s take a closer look at these PAYG instalment options below:  

  • Using the instalment amount option 

For this option, the Australian Taxation Office calculates the amount of each instalment from the information reported on the business’ latest tax return. This is usually the option that works for individuals (including sole traders), and a trust or super fund that is an annual payer, with business/investment income of $2 million or less.  Companies can use this option if they are an annual payer and have a small business entity with an aggregated turnover of less than $10 million a year. Business entities with an aggregated turnover of more than $10 million but less than $50 million a year can also use this option from 1 July 2021. 

  • Using the instalment rate option

Here, the business works out the instalment amount using the instalment rate that the Australian Taxation Office provides and the business’ instalment income. Some taxpayers are required to use it, and a tax adviser will know if a business must use this option.

This instalment rate option has some great advantages. For one, payments are based on the business’ income as they earn it (it could be from the month just gone or in the quarter). This helps with cash flow management because a business can apply the instalment rate to a lower income (if their income decreases in a quarter) and pay a lower amount. 

Avoid small business tax time errors

Small businesses can get professional help from a tax agent in Sydney when filing their income tax return. If you own a small business and have been searching the internet for a “tax agent near me,” turn to Practical Accountants. To get started, kindly contact us on 02 9517 4726. 

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