There is more to running a successful business than just providing great products or services. It requires diligent record keeping, effective tax planning, and proper management of directors’ loans. These practices are essential for ensuring compliance with tax regulations, maximising deductions, and maintaining the health of your business.
Here are the some of the biggest mistakes small business owners can make.
1. Not Meeting Superannuation Guarantee Obligations
As a business owner, meeting your Superannuation Guarantee (SG) obligations is not only a legal requirement but also crucial to ensuring the financial well-being of your employees and your own business. Failing to meet these obligations can lead to significant consequences, such as fines, interest and director penalities.
What happens when you pay super late, neglect to submit SG forms, or fail to pay super for contractors when required?
Paying Super Late
Super is required to be paid the following dates each quarter:
| Quarter | Period | SGC Due Date |
| Q1 | 1 July – 30 September | 28 November |
| Q2 | 1 October – 31 December | 28 February |
| Q3 | 1 January – 31 March | 28 May |
| Q4 | 1 April – 30 June | 28 August |
When SG payments are received into the Superannuation Fund after the quarterly super due date, they are considered late payments. You are not only failing your employees but also exposing your business to severe penalties, as the ATO imposes a Superannuation Guarantee Charge (SGC) on late payments.
The SGC includes:
- The shortfall amount: The amount not paid in the quarter.
- Interest: Nominal interest of 10% per annum, which starts accruing from the start of the relevant quarter and continues until the date the SGC statement is received by the ATO.
- An administration fee: $20 per employee, per quarter.
As you can see, not paying your superannuation on time incurs additional expenses, impacting your profitability.
Not Submitting SGC Forms
Failing to submit the required SGC forms will lead to harsher penalties (Part 7 Penalty), which can be up to 200% of the SGC. This penalty is designed to ensure compliance and deter employers from neglecting their obligations.
Not Paying Super for Contractors
Business owners mistakenly believe that they do not need to pay superannuation for contractors; however, this is not the case. If a contractor works for your business principally for labour, they are considered an employee for SG purposes. Failing to pay super for eligible contractors can lead to the same penalties as failing to pay for regular employees and will be included in the SGC.
2. The Risks of Incorrectly Classifying Employees as Contractors
Incorrectly classifying employees as contractors is a common mistake that can have serious repercussions for your business, as the misclassification can lead to non-compliance with Fair Work, Superannuation, and WorkCover requirements.
What are the consequences and how to avoid them?
Fair Work
Misclassifying employees as contractors can result in breaches of the Fair Work Act. Employees are entitled to certain rights and protections, such as minimum wage, leave entitlements, and unfair dismissal protections. Contractors, on the other hand, do not receive these benefits as they negotiate their own fees and working arrangements. Therefore, if you misclassify employees, your business may face claims for unpaid wages, leave entitlements, and other benefits.
Superannuation
Under the Superannuation Guarantee, employers must pay super contributions for their employees. If you incorrectly classify an employee as a contractor, you fail to meet your superannuation obligations, which can lead to Superannuation Guarantee Charges as mentioned above.
WorkCover Requirements
Employees are generally covered by WorkCover, as they are considered workers under the legislation. However, business owners, partners, trustees, and, in most cases, self-employed sole traders and contractors are not covered. Therefore, if an incorrectly classified employee suffers a workplace injury, your business could be liable for their medical expenses, lost wages, and other damages. This not only exposes your business to financial risk but also legal action from the injured worker.
3. The Risks of Ignoring Fringe Benefits Tax (FBT) Obligations
As a business owner, you may provide benefits like vehicles and entertainment to your employees, which can be a great way to boost team morale and productivity. However, such benefits can be subject to Fringe Benefits Tax (FBT). Read our previous article, Navigating Fringe Benefits Tax, for more information.
What happens when you provide vehicles to employees and when you provide entertainment?
Providing Vehicles to Employees
When you provide a vehicle to an employee, it is considered a fringe benefit if the vehicle is available for private use, such as any time the vehicle is garaged at the employee’s home. To comply with FBT requirements, it is recommended that you keep detailed records of the purchase and sale of any vehicle, odometer readings on 31 March each year, as well as operating costs and logbooks. Failing to keep a detailed logbook that shows business and private use could result in a greater portion of expenses being classified as private, leading to a higher taxable value and increased FBT liability.
Providing Entertainment
Entertainment provided to employees can include things such as meals, drinks, social functions, and gym memberships. To accurately calculate your FBT liability, you need to keep records such as a detailed register or, when reconciling your software, a description that outlines the following:
- Who is attending? How many staff, associates, or clients?
- Where is the entertainment occurring? Is it in the office or out of the office?
The ATO requires that you maintain detailed records, including invoices and receipts, to support your FBT calculations, as there has been an increase in audits and reviews.
4. The Importance of Good Record Keeping for Your Business
Record keeping is essential for the smooth operation and financial health of your business. Good record keeping helps you stay organised, ensures compliance with tax regulations, and maximises your deductions.
Let’s explore some key practices for maintaining effective records.
Separate Business and Personal Expenditure
The first key practice for maintaining effective record keeping is to keep your business and personal expenses separate. Mixing these expenses can lead to confusion when preparing BAS and end-of-year tax work. Here are some tips to maintain clear boundaries between business and personal expenses:
- Separate Bank Accounts: Open a dedicated business bank account in the name of the business and use it exclusively for business transactions. This makes it easier to track business expenditure.
- Separate Cards: Use a business credit card exclusively for all business-related purchases. This helps you avoid mixing personal and business expenses, simplifying your bookkeeping and saving you time.
System for Keeping Receipts
There are multiple ways to keep receipts, and implementing a system that works for you is crucial for accurate record keeping. Properly managed receipts ensure you don’t miss out on any tax deductions, claim the right portion of GST, and make it easier to substantiate your claims during audits. Here are some strategies:
- Digital Receipt Management: Use digital tools such as apps to scan and store receipts electronically. This reduces the risk of losing physical receipts and makes them more accessible for your accountant.
- Organised Filing System: If you prefer not to store your receipts electronically, create a filing system with folders or envelopes. File categories could include:
- Monthly/Quarterly – For your BAS
- By expense type – Fuel, Repairs and Maintenance, Tool Replacement
Required Records
Maintaining all necessary records is essential for substantiating business expenses. Here are some key records you should keep:
- Logbooks for Vehicles: If you use a vehicle for both business and personal use, keep a logbook that details each trip, including the date, purpose, and distance travelled. You need to do this for 12 consecutive weeks for your accountant to calculate the business use percentage, but it is only required every five years.
- Travel Logs: When your employees work away, it is highly recommended that they keep a travel diary to determine the portion of travel that was for private purposes, including dates, destinations, and the purpose of the travel.
- Home Office Hours: If you work from home, keep a timesheet of the hours you spend working in your home office. This helps you claim deductions for home office expenses, utilities, and internet.
5. The Importance of Adequate Tax Planning for Your Business
Ahead of the new financial year, effective tax planning is crucial for the financial health and smooth operation of your business. Without proper planning, you could face unexpected tax liabilities that can strain your cash flow and lead to penalties.
What should I be setting aside funds for?
Setting Aside for GST
Goods and Services Tax (GST) is a consumption tax on most goods and services that you consume in your business or sell. Businesses with a minimum turnover of $75,000 must register for GST and include it in the price of their goods or services. Here are some tips for managing your GST obligations:
- Regularly Review GST Liabilities: Periodically review your GST liabilities to ensure you are setting aside the correct amount. This helps you avoid cash flow issues when it’s time to pay your monthly or quarterly BAS.
- Separate GST Funds: Consider setting up a separate bank account for GST collections. This ensures that the funds are readily available when you need to pay your BAS.
- Timely BAS Lodgement: Ensure you lodge and pay your BAS on time to avoid interest charges that will affect your cash flow and profitability.
Setting Aside for PAYG Withholding
Pay As You Go (PAYG) Withholding requires employers to withhold tax from employee wages and remit it to the ATO. It ensures that employees meet their tax obligations gradually and manageably. Here are some tips for managing your PAYG Withholding obligations:
- Set Up Single Touch Payroll (STP): STP has been designed to streamline the reporting of payroll information to the ATO. With STP, employers report payroll information, including salaries, wages, PAYG withholding, and superannuation, each time they pay employees. This ensures that all tax withheld is correct according to the current tax rates, avoiding under or over-withholding.
- Timely PAYG Lodgement: Ensure you lodge and pay your monthly PAYG on time to avoid interest charges that will affect your cash flow and profitability.
Setting Aside for Income Tax
Planning for your income tax liabilities is a key component of tax planning to ensure that at the end of the financial year you don’t receive an unexpected and large tax bill. Here are some tips for managing your Income Tax obligations:
- Estimate Tax Liabilities: Regularly estimate your income tax liabilities based on your business profit by calculating your income tax obligation as 30% of profit. This helps you set aside the necessary funds throughout the year.
- PAYG Instalments: Consider registering for PAYG Instalments, as they allow you to pay tax on your business’s profits progressively each quarter (as part of a BAS), rather than in a lump sum.
MJJ Accounting and Business Solutions offers tax planning each year, so you can seek advice to help you plan and manage your obligations to the ATO. They provide valuable insights, so make sure you take advantage of this service.
6. Not Addressing Directors’ Loans in Companies
Directors’ loans can be a useful financial tool for business owners, but they must be managed carefully to avoid legal and tax issues. Failing to address directors’ loans properly can lead to significant consequences under Division 7A (Div 7A) of the Income Tax Assessment Act 1936.
Why is it Important to Comply with Division 7A? What are the Strategies for Managing Directors’ Loans Effectively?
Complying with Division 7A
Div 7A is designed to prevent private companies from making tax-free distributions of profits to shareholders and their associates in the form of loans. It covers any advance of money, provision of credit, or other financial accommodation provided by a company to a shareholder. These loans must be repaid within 7 years, but if secured by a mortgage over real property, they must be repaid within 25 years.
Declaring Dividends or Wages
To prevent directors’ loans from accumulating and to manage them effectively, consider declaring dividends or paying wages:
- Declaring Dividends: You can declare a dividend to clear an overdrawn director’s loan. The dividend will be credited to the loan account to reduce the outstanding balance. This ensures that the loan is repaid and avoids the tax implications of an unpaid loan. However, you need to ensure that the company has sufficient retained profits to declare this dividend.
- Paying Wages: Another strategy is to pay wages to the director or shareholder via the loan account to repay the loan. This method ensures the director’s income is taxed at their marginal tax rate and will gradually reduce the loan.
These practices not only help you avoid legal and financial issues but also contribute to the overall success and sustainability of your business. Remember, seeking professional advice and staying informed about your obligations can make a significant difference in managing your business effectively.
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