In recent years there has been an escalation in the conflict between the Australian Taxation office (ATO) and small business owners. It’s been a hot topic in the media this week and was discussed at length on 4 Corners last night. The ATO have been accused of deliberately targeting small business owners, rather than big business or high net wealth individuals, because they lack the funds to fight back. They’ll just “pay up so the problem goes away”.
I honestly can’t say whether that is true or not. In my 10 years of dealing directly with the ATO on a daily basis I’ve experienced significant variation in the treatment my client’s have received for what I believe were exactly the same issues. Most of this I had chalked up to the different phone operators I was dealing with. It’s an inside joke in the accounting industry that if the ATO doesn’t give you the answer you want just hang up, call back and hope to get someone in a better mood.
I will concede that many small business owners (and their advisors) have been guilty of not taking the ATO seriously. Ignoring requests for information, consistently paying late and generally not managing thee relationship very well.
Rather than bash the ATO, I wanted to cover off on a few things you can do to improve your relationship with them. That way you can try to avoid being on the receiving end of the powers they seem to be increasingly happy to use.
Use Professional advisors
I often hear comments along the lines of “I don’t need an accountant, I just lodge my own tax return online”. Is this a good idea? In my opinion, only taxpayers who meet the following requirements should consider taking a DIY approach to tax:
- They earn a Salary/wage with PAYG withheld from it (they are employed, not self employed);
- They claim very basic deductions – amounting to a couple hundred dollars at most; and
- Have no investments or other complex tax issues.
Everyone else should be using a professional.
You’re free to disagree with me. However, my opinion is shared by the majority of tax professionals in Australia. Everyday we hear examples of taxpayers having their businesses crushed by the ATO for having misinterpreted a section of tax legislation.
The ATO Website
The ATO website is a great resource but should be used in conjunction with professional advice. The general information they publish is intended to simplify what is otherwise quite complex tax legislation. Their aim is to present it in a way that the general public will understand. While this is a noble venture you must keep in mind:
- The information is often over simplified;
- It gives very limited guidance on how to apply it to your specific set of circumstances; and
- None of it is binding on the tax office – if you inadvertently misuse the information you have no defence. Their response will be “you should have obtained professional advice on the matter”.
Implement Profit First
Using Profit First will dramatically improve your relationship with the tax office. That might seem like an odd statement to make but let me explain:
Every year the ATO compares the information you report in your tax return with the data collected from everyone else in Australia that uses the same industry code as you. They calculate averages and standard deviations and use that information to look for tax payers who are reporting profits well below average for their industry. They want to audit these businesses to see if they are claiming tax deductions incorrectly.
By implementing Profit First you can ensure your business is above average from a profitability stand point and lower your risk of an audit.
Meeting tax obligations
For decades now small business owners have used withholding taxes, GST and unpaid superannuation as a source of working capital. Personally, I believe the real reason the ATO seems to be targeting small business owners can found right here. As business owners we should be taking out business loans at market rates and managing our cashflow effectively. What’s happening in reality is that business owners using the ATO as a source of interest free capital. What we are seeing is the ATO’s attempt to ‘call in the debts’.
In recent years the ATO has:
- Rolled out super stream so that superannuation funds can report late super payments to the ATO;
- Started regularly rejecting payment plan applications where the debt is GST and PAYG. In the words of an ATO operator I was speaking to just last week “business owners shouldn’t need a payment plan for GST or PAYG. It was never their money to spend in the first place!”;
- Referred debts to their internal Debt collection team just days after the first reminders have been issued to the taxpayers;
- Launched single touch payroll (effective 1 July 2018). Now your own payroll system will report your withholding tax obligations directly to them.
Profit First helps fix this situation via the Tax Account. The whole purpose of the Tax Account is to accumulate the amounts you need to meet your various tax obligations. Taxpayers who regularly lodge on time and pay in full are far less likely to be audited.
My initial interest in Profit First as a service offering for my Accounting firm was specifically to help my clients break out of the tax debt cycle and get the ATO off their back!
Read our comprehensive review of Profit First here
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