Tax return time 2018 is underway. To best ease your way into the process of submitting your tax return, we review the ATO’s guide on the most common tax return errors.
We also highlight the risks of tax avoidance through cash trading by taking a look at severe penalties imposed from a recent Tribunal case.
The ATO suggests that you are most likely to run into trouble with your tax if you
The key is knowing what you can legitimately claim, and ensuring you have records that attest to what you are claiming. For work related expenses, keep in mind you must have spent the money yourself on something related to your earnings, you must not have been reimbursed for this expenditure, and you must have a record to prove it. And, above all this, the overarching principle is to ensure that all your income is including in your return, from all sources.
The government has engaged in a strong crackdown on the Black Economy in recent years. This includes recent Single Touch Payroll measures, the expanding Taxable Payment Reporting System (TPRS), and ongoing anti-phoenix activity.
Overall, this points to the increasing risk of using cash payments in business. A recent court case (Salser v FCT) highlights this in a practical and potent manner.
The taxpayer in question ran a restaurant business. A significant portion of the business — between 25 and 30 per cent of total takings — was by way of cash transactions. The restaurant used a ‘basic’ cash register but the register did not record sales and did not produce ‘till tapes’.
Instead of depositing the majority of this income into the company's bank account, the director/shareholder deposited the money into his own bank account. He was audited, and upon the conclusion of the audit, the ATO imposed a significant tax bill on the company based on estimations regarding takings drawn from industry standards.
In addition, because the director deposited the money in his bank account, the ATO declared that the company paid the taxpayer a dividend which is unfranked as a deemed dividend (under Division 7A).
After proceedings went to the Tribunal, the Tribunal found that:
The penalties were considerable; the impact on the business was disastrous. As a result of the above, the taxpayer has ended up paying approximately 76.5% tax on this income (30% for the company and 46.5% for the shareholder without the benefit of the tax already paid by the company). In addition to this, the ATO imposed a 50% penalty on the tax unpaid. His deductions were also denied - while the taxpayer maintained that a substantial amount of cash earnings was used to pay for business expenses, he did not present relevant receipts.
This case highlights the importance of:
This case and its example fall in line with the recommendations from the ATO regarding common mistakes in tax returns. Calibre’s business advisors are experts in ensuring our clients avoid these pitfalls and don’t follow the paths leading to tax disasters – contact us today for a consultation.
Important Disclaimer: Readers should not act solely on the basis of the material on this page. Items herein are general comments only and do not constitute or convey advice. Legislation and proposals of legislation are also subject to constant change. We therefore recommend that formal advice be sought before acting in any of the areas. This news article is issued as a guide to the readers. Calibre Business Advisory Pty Ltd and its associated entities disclaims any losses that may be incurred as a result of the reader undertaking any action based on this article.
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