Biggest small business tax time mistakes to avoid this EOFY

It is almost the end of the current tax year (2020–21) and the start of a new one (2021–22). It may not be long before you start thinking about lodging your 2020–21 tax return.

If you anticipate a tax refund, the quicker you lodge the return the quicker you will get that refund. But if you believe you will have to pay more tax (i.e. in addition to the PAYG instalments you have paid), then it might be worth delaying the return as long as possible.

If you don’t use a tax adviser to lodge your return, you will have to do it by 1 November 2021 (you get an extra day this year because 31 October is a Sunday). Of course, if you use your tax adviser to lodge your return, you may have until May 2022 to complete it.

The ATO has identified the most common errors small businesses make when completing their tax returns. They are failing to:

• declare all income – this includes cash and online sales, dividends, interest, capital gains and one-off transactions such as selling equipment or other capital items;
• account for private use of business funds or assets, such as trading stock taken for private use and shareholder loans;
• keep all required records or have adequate record keeping systems.

If your tax adviser prepares and lodges your return on your behalf, find out when it is due under their lodgement program; and make sure they have all relevant information.

How to work out PAYG instalments

When you pre-pay your income tax using pay as you go (PAYG) instalments, you can usually choose between 2 options to work out how much you pay:

• Option 1 – Using the instalment amount: The ATO calculates the amount of each instalment from information reported on your latest tax return. This is the simplest option as you don’t need to work anything out.
• Option 2 – Using the instalment rate: You work out your instalment amount yourself using the instalment rate the ATO provides and your instalment income.

Option 1 – Using the instalment amount

You can use the instalment amount option if you are an individual (including sole traders), a trust or a super fund that:

• is an annual payer; or
• has business and/or investment income of $2 million or less.

A company can use the instalment amount option if it:

• is an annual payer;
• has business and/or investment income of $2 million or less; or
• is a small business entity with an aggregated turnover of less than $10 million a year.

From 1 July 2021, business entities with an aggregated turnover of more than $10 million but less than $50 million a year will also be able to use the instalment amount option to pay PAYG instalments.

Option 2 – Using the instalment rate

All taxpayers can use this option, although some taxpayers must use it (your tax adviser will know).

The advantage of using the instalment rate option is that your payments are based on your income as you earn it (e.g. in the quarter or month just gone). This helps with your cash flow management. For example, if your income decreases in a quarter, you apply the instalment rate to that lower income and therefore pay a lower instalment amount.

Varying PAYG instalments

You can vary your instalments multiple times throughout the year. Be careful, however, not to underestimate your PAYG instalment amount, income or rate as you could be subject to interest (the GIC) and penalties if the varied instalment turns out to be too low. (Although the ATO will not apply penalties or charge interest to varied instalments relating to the 2020–21 financial year if you have made your best attempt to estimate your end of year tax liability).

Talk to your tax adviser before varying a PAYG instalment or if you are thinking of switching from one payment option to the other.

Simplified trading stock rules

Under the simplified trading stock rules, you don't have to:

• conduct a formal stocktake;
• account for the changes in your trading stock’s value.

You can use the simplified trading stock rules if you:

• are a small business with an aggregated turnover of less than $10 million a year (or from 1 July 2021, with an aggregated turnover of at least $10 million but less than $50 million a year); and
• reasonably estimate that the value of your trading stock changed by less than $5,000 in the year.

Electronic invoicing

The Government will spend $15.3 million to enhance the value of electronic invoicing to help businesses reduce costs and increase productivity. This is part of the Government’s Digital Economy Strategy.

According to the ATO website, the Australian Peppol Authority (ATO) and Treasury will deliver activities, including:

• pilots to gain insights into the use of e-invoicing and e-procurement;
• educational activities to raise business awareness;
• working with payment providers (for example, EFTPOS, Visa, Mastercard, NPP Australia) to explore opportunities on how e-invoicing can complement the payment experience for business; and
• further consultation on potential regulatory and non-regulatory ways to accelerate e-invoicing adoption.

R&D applications – new online portal

A new customer portal has been launched to make it easier for companies to manage their applications for the Research and Development (R&D) tax incentive.

Applications can be submitted via the portal from 5 July 2021, but you can log in now to become familiar with the new portal and start drafting your application.

The portal’s web address is https://incentives.business.gov.au.

In the future, you'll also be able to use the portal to apply for and manage your Advance and Overseas Finding applications, request to withdraw or vary your R&D tax incentive application, apply for an extension of time, and even check the status of your submitted applications.