As small business owners ourselves, we’ve learnt first-hand just how easy it is to make mistakes on any given day.
Of course, some mistakes are bigger than others.
While forgetting to send an email or missing a deadline might cause some embarrassment, they are generally mistakes that can be resolved with a polite apology or a friendly chat. However, the mistakes that have a more profound impact on your business are those that affect its financial health, especially during the early rollercoaster years when cash flow is tight.
If you're like most business owners, tax isn't your area of expertise. With tax laws changing regularly, navigating your business's tax obligations can quickly become tedious and wearisome. Unfortunately, many business owners fall into the same tax traps, leading to unnecessary costs during this critical stage of your business's journey.
In this article, we’ve outlined five of the most common types of tax mistakes that small business owners make and the steps you can take to avoid them.
1. Not Separating Business and Personal Accounts
One of the most fundamental mistakes we see small business owners make all the time is failing to separate their business and personal accounts.
Mixing personal and business expenses is one of the best ways to completely confuse your finances, making it hard to perform a number of important tasks. This includes being able to effectively track the performance of your business, set and maintain accurate budgets, forecast and manage your cash flow, as well as identify tax deductions from your business expenditure.
To avoid this mistake, it is crucial to establish dedicated business bank accounts and credit cards. This simple step will enable you to segregate all your business and personal expenses, ensuring a clear delineation between the two.
Additionally, we recommend further organising your business accounts by keeping separate ones for operations, taxes, and savings. By implementing this practice, you can streamline your financial management, protect yourself from unforeseen expenses, and ensure greater clarity and control over your business's financial health.
2. Not Having Tax Planning Strategies in Place
The most effective tax planning strategies need to be put in place long before tax season comes around. Unfortunately, many business owners wait until the end of the financial year to start tax planning and miss out on the opportunity to maximise their tax savings.
One of the best ways to get the most out of tax planning is to sit down with an accountant to identify and discuss the strategies that could save your business the most. A tax accountant can help identify eligible deductions, create a tax plan that budgets for upcoming tax expenses, and assist with implementing other strategies that can either limit or postpone some of your tax liabilities.
Here’s a list of some great tax planning strategies that any small business can use:
- Bringing forward necessary expenses before June 30
- Deferring income/invoices until after June 30
- Changing your business structure to a more beneficial entity
- Keeping a vehicle logbook
- Taking advantage of the instant asset write-off well before June 30
- Pre-paying ongoing expenses
You can check out our full list of tax planning strategies for small businesses here.
3. Not Properly Budgeting and Cash Flow Forecasting
Proper budgeting and cash flow forecasting are crucial for a small business's success.
Without a clear budget, it becomes difficult to keep track of your expenses, control spending, and ensure your business maintains a healthy cash flow.
As a small business owner, it’s essential that you have a regular process for tracking, forecasting and reviewing all the money that flows in and out of your business.
Create a comprehensive budget that includes anticipated revenue, expenses, and plans for your upcoming tax obligations. Regularly review and adjust the budget based on actual performance to maintain control over your finances.
A well-planned budget provides insights into cash flow patterns, highlights areas for cost reduction, and enables effective financial decision-making.
4. Not Knowing Each of the Business Taxes Your Small Business Is Subjected To
There are many different types of business taxes in Australia, and owners often fail to understand the full scope of taxes they are subjected to.
Unfortunately, the penalties for failing your tax obligations can be severe and even threaten the survival of your business.
To avoid this, it's best to stay up-to-date with all the relevant rules and tax laws that apply to your business. In Australia, these are the eight types of business taxes you should be aware of:
- Goods and Services Tax (GST)
- Company Tax
- Income Tax
- Payroll Tax
- Capital Gains Tax (CGT)
- Fringe & Benefits Tax (FBT)
- PAYG Withholding
- PAYG Instalments
You will need to work with an accounting or tax professional to ensure your small business remains compliant and reports all necessary documentation within the required deadlines.
5. Not Staying on Top of Your STP & Superannuation Obligations
The rules surrounding Single Touch Payroll (STP) and Superannuation are updated all of the time, and small businesses must keep up with these to avoid penalties and legal consequences.
As an employer, you are required to make regular contributions to your employees’ superannuation funds as part of the Superannuation Guarantee.
In the 2023-2024 financial year, the super guarantee increased to 11% of the salary or wage of eligible workers. Ensure your super contributions have accounted for this change, and that your super contributions are received by the super fund before the quarterly deadline.
Employers reporting through Single Touch Payroll are also required to make a finalisation declaration by July 14 each year.
With the rules surrounding Superannuation and STP tighter than ever and strict enforcement in place, it is essential to ensure that both you and your accountant are meeting these obligations diligently.
Hire an accountant
The best way to make sure that you don’t make any critical tax mistakes is to enlist the help of an accountant you trust.
Whether you’re only just starting out or have been around for a while, a qualified accountant will help you meet your tax compliance hurdles, report necessary information and keep you informed of changes in the latest tax rules and laws.
If you need help managing the tax obligations for your small business, please reach out to a member of Elephant Advisory’s business accounting team today.