3 traps SMEs should avoid when claiming deductions by Clive Barrett from First Class Accounts

Between January and November last year, the ATO successfully prosecuted 27 individuals for serious tax crimes, with 23 of these individuals receiving jail sentences. These offences involved criminal activity such as falsified invoices to claim fake deductions, GST refund fraud, alcohol and fuel tax credit fraud, identity crime, and income tax related fraud. In the same period, 1,541 individuals and businesses were prosecuted for less serious tax crimes, with fines totalling over $10 million.

Clive Barrett | First Class Acounts

Enhancements in technology and the ATO’s increased use of data matching means it is much easier for them to check whether the deductions you are claiming are justified. Every year, the ATO collect new data from financial institutions and online selling sites as part of their data-matching programs for credit and debit cards, online selling and ride-sourcing. This data is then matched with information the ATO has from income tax returns, activity statements and other ATO records to identify any discrepancies.

While claiming justified deductions is the right of every SME and makes good financial sense for your business, you should ensure you are not pushing the boundaries when claiming deductions, as you could be leading your business straight to the tax auditor’s door. Here are the top 3 traps to avoid when claiming deductions at tax time.

1.    Unjustifiable deductions

With profit margins tight for many SMEs, they can fall into the trap of making poor decisions when it comes time to claiming deductions, in a bid to obtain the highest tax return amount possible. Some of the more creative claims bookkeepers have heard include deductions for haircuts from a client in the security industry who argued that security personnel were supposed to look a certain way, deductions for the purchase of shoes for a podiatrist as an ‘example of what not to wear’ and private car expenses from a client who owned both a business and private vehicle.

The golden rule is that you can claim a deduction for most expenses you incur in running your business as long as those expenses are directly related to earning your assessable income. And of course, you must keep records of your expenditure in the form of receipts, logbooks for car use and personal devices such as laptops and mobile phones and records of your travel expenses. By law your records must explain all transactions, be in writing (electronic or paper), be in English or in a form that can be easily converted and be kept for five years (some records may need to be kept longer).

2.    Not knowing what the ATO is targeting

The ATO issue tax alerts throughout the year, which give a clear indication of the areas they are targeting when assessing claims. Towards the end of last year, the ATO reported they had been paying extra attention to people claiming higher than expected deductions during tax time last year. They advised that people should check the occupation guides and other general advice on the ATO website that can assist people in specific industries understand and correctly claim the expenses they might be entitled to. In other words; you have been warned.

Earlier this year, the ATO issued several tax alerts related to their joint efforts with the Department of Industry, Innovation and Science (DIIS) to curb the incorrect use of the Research & Development (R&D) Tax Incentive program, specifically within the building and construction, agricultural, software and IT industries, but more generally for a wide range of businesses incorrectly claiming ordinary business activities against the R&D tax incentive.

3.    Not getting expert advice

Results from a survey of over 250 SMEs by bookkeeping franchise First Class Accounts revealed that over 77 per cent of those surveyed said they or their spouse did the bookkeeping for their business. SMEs who manage their tax obligations without the advice of an expert risk making the wrong decisions when it comes to claiming deductions and miss out on the external checks that a bookkeeper can provide for their business.

The ATO requires tax agents to undertake proper inquiries to determine their clients’ eligibility to deductions. So while you may think a deduction is justifiable, a bookkeeper can provide you with expert advice through their knowledge of the tax system, what the ATO is targeting and the tax crimes people have been prosecuted for, that can help your business avoid being scrutinised at tax time. In the end, honestly is the best policy.

About the author

Clive Barrett is the Executive Chairman of First Class Accounts, Australia’s largest financial support services franchise providing bookkeeping and finance.