Small business ATO debt at tax time | Tax Audits

5 min read
28 August 2020

Does your small business owe money to the ATO? What to do if you have an ATO audit.

Owning and running a successful business is a team effort. Your team may number just a few, or it may be many. However, as most businesses operate to make a profit, it makes sense to have an accountant as part of your wider team.

Not just any accountant you stumble across on the internet either. You’ll want a great accountant. One who’s always working to make you better off.

Never will it be more important to have a great accountant on board than when your small business owes the Australian Tax Office (ATO) money at tax time.

If you want to avoid that nasty tax time surprise, or even if you already owe the ATO money and you’re not sure what to do next, we can help.

Tax Time ATO Shock - How did you get here? 

There are many reasons you suddenly owe the ATO money, but often it can come down to a lack of or bad accounting advice. In this case, it really isn’t you….it’s them.

Sadly, not all accountants are created equal and all too often, a business owner finds this out a little too late. The accounting work has been done, the numbers fed into the system and you’re staring down the barrel of a tax debt. 

A tax debt you simply don’t have the cash flow to be able to pay.

And while we’d never say a tax debt can be entirely avoided (although wouldn’t that be nice), when you have a great accountant as part of your team, like those you’ll find at Kelly+Partners, you will have planned for this.

The two main things we advise our clients so they can avoid a surprising tax debt are:

  • Regularly set aside funds to pay your tax, and;
  • Tax planning.

If you aren’t doing either of these then read on to ensure debt shock is a thing of the past.

What do you need to put money aside for at tax time to keep on the right side of an ATO audit?

Depending on your circumstances, there are a few ways you can effectively put aside money to pay the taxman at tax time. Using any of these methods ensures you’ll always have enough money to pay your taxes. On time. Every year.

We take a look at some of the tax-related expenses you will need to consider. 

Income Tax

If you’re self-employed, you need to pay income tax. You can check out the ATO website for more information on tax rates.  

We suggest you open a separate bank account and regularly put aside a percentage of your earnings. At tax time, it’s all there waiting when you lodge your annual tax return. 

Not sure how much to put aside each week or fortnight? 

We’ll talk a little more on that below or you can contact one of our specialist Tax Team now who are experienced in this area and ready to help.

Pay As You Go (PAYG) 

As an employer, you’re required to withhold tax using the PAYG system if you:

  • have employees
  • use contractors who agree you’ll withhold tax from them, or;
  • work with businesses who don’t quote you their Australian Business Number (ABN)

These payments are calculated on the employee or contractors expected income for the financial year. It’s easy to register and set up with either a quick call to the ATO or jumping online. The ATO has all the information you’ll need about how to make this all happen. 

With effective tax planning, you’ll be forecasting these costs into your cash flow projections.

Goods and Services Tax GST 

Once your business is earning more than $75,000 per year, you’ll need to register for GST with the ATO. This needs to be done within 21 days of your business reaching the threshold. Once you register for GST, you’ll be lodging a Business Activity Statement (BAS) either monthly or quarterly. 

Failing to register for GST can cause problems for you and your business. You’ll have to pay GST on sales made from the day you reached your $75000 threshold anyway, whether you charged GST or not. You may also have to pay interest and penalties.

With our current GST rate of 10%, it’s easy to see how a successful business could unexpectedly find themselves with a hefty tax bill if they are not on top of putting funds aside.

Business Activity Statement (BAS)

As mentioned above, once your business has registered for GST, you’ll be required to submit a BAS, either monthly or quarterly. The purpose of the BAS is for you to report all your tax obligations, such as GST and PAYG, in a timely manner. 

You must lodge a BAS even if you have nothing to report. Penalties may apply for not lodging on time.

Tax planning and tax audits 

Effective tax planning is what really separates an average small business accountant from a great one. Here at Kelly+Partners, our accountant will estimate your expected tax bill for the next ten months. Allowing you to make calculated decisions during the financial year to maximise returns and foresee any potential problems well before they happen.

Even if you know come tax time you will end up with a tax debt, you’ll be putting money aside each month to ensure you have the funds on hand to be able to cover the debt.

If for whatever reason something unexpected happens with your cash flow, as we’ve seen with the business shutdowns from the pandemic, we’ll guide you through the process of working out an affordable payment plan with the ATO.

Carrying Debt takes a toll on business

My small business already has a tax debt? 

Don’t panic. 

The most important thing is not to ignore the problem. The tax debt and the ATO won’t go away. By brushing it aside, you’ll only make it worse and interest accrues daily on unpaid tax debts.

Contact us today. We can liaise with the ATO on your behalf and then put a plan in place. We’ll then implement planning to future proof your business from more tax debt.

Great accountants keep the ATO happy

If this is all starting to seem a little complicated, you’re not alone. Trying to keep all those business balls in the air can seem daunting. But it doesn’t have to be. 

Whether you’re a self-employed sole trader or an employer responsible for 300 people, having a great accountant can make some of the stress vanish. 

Maybe you just need a one-off meeting to ensure all your business processes are correct and in place. Perhaps you’ll need regular monthly or quarterly meetings to stay on top of things.

Whatever you want, and however you need your accounting done, we’ve got you covered.

Taking control 

Taking control of your financial universe is as simple as contacting us at Kelly+Partners.

When you understand your tax obligations and have plans in place to meet them, it’s unlikely you’ll ever have a nasty tax surprise again. Together, we’ll not only see you through your current financial year, but we’ll also look towards the future and plan ahead for the next year. 

Maybe even the next five.

With Kelly+Partners as part of your team, your business is not only in the safest of hands, you know you’ll always be just that bit better off. 

If you have any questions, please contact your local Kelly+Partners office today. You can also request a call back at a time that suits you.