Is Your Business On the ATO’s Radar?

The Australian Taxation Office (ATO) is paying close attention to small businesses that incorrectly report income, over-claim deductions, claim GST credits incorrectly or use business money and assets for private purposes.

For most business owners, this does not mean there is a problem.

But it does mean the ATO is looking beyond the final figure in a tax return. It is increasingly focused on whether business income, expenses, GST, payroll, super and private use of business assets are being recorded correctly.

That makes it important for business owners to understand the areas currently attracting ATO attention.

Business money used for personal expenses

One of the ATO’s current focus areas is business money and assets being used for personal benefit.

This can include personal expenses paid from a business bank account, private purchases made on a company card, business vehicles used privately, loans to directors or shareholders, and assets owned by the business but used outside the business.

For small business owners, this can happen gradually. A few personal expenses may be paid from the business account. A work vehicle may also be used by family members. Money may be taken from the business without being properly treated as wages, dividends, drawings or a loan.

The issue is not the spending itself, it is whether it has been recorded and treated correctly.

Business owners should make sure personal expenses are clearly identified, private use has been accounted for, and any money taken from the business has been dealt with properly.

Over-claimed deductions

The ATO is also focused on businesses claiming deductions they are not entitled to.

A business expense generally needs to be connected to earning business income. If an expense is partly private, only the business portion should be claimed.

This is where errors can occur. A business may incorrectly claim the full cost of a mixed-use vehicle, phone, subscription, travel expense or home office cost, even though part of the expense relates to private use.

The ATO may also look more closely at expenses that appear high for the size or type of business, expenses without records, or expenses that do not match the business activity.

Before claiming a deduction, business owners should be able to show what the expense was for, how it relates to the business, and how any private portion has been excluded.

Incorrect GST credits

GST is another area the ATO is watching.

Businesses can generally claim GST credits for GST included in the price of goods and services bought for the business. But GST credits should not be claimed where the purchase does not include GST, where it relates to private use, or where the business does not hold the right supporting records.

Common GST issues include claiming GST on expenses that are GST-free, claiming GST on the full amount of a mixed-use purchase, coding transactions incorrectly in accounting software, or claiming GST credits without a valid tax invoice.

This is why business owners should regularly check that GST has been claimed correctly on business expenses.

Contractor income and data matching

The ATO receives information from a range of sources, including other businesses, banks, government agencies and payment platforms.

This means the ATO may already have information about income a business has received.

Contractors are one area of focus, particularly where income has been omitted or reported incorrectly. In some industries, businesses are required to report payments made to contractors through the Taxable Payments Annual Report system. This information can then be used by the ATO to check whether income has been included correctly.

Business owners should make sure all income has been recorded, including cash payments, online payments, contractor income, grants, rebates and other business-related amounts.

If income has been reported to the ATO by someone else, it is important that the business records match.

Cash income and off-the-books payments

The ATO continues to focus on businesses that use cash to avoid tax, GST, payroll or super obligations.

Accepting cash is not a problem. Failing to record cash income is.

The ATO is concerned with businesses that under-report cash sales, pay workers cash in hand, fail to report GST, or operate outside the tax and super system.

Businesses that receive cash payments should make sure those amounts are included in their accounting records and reconciled properly.

Cash expenses should also be recorded correctly. Otherwise, the business may end up with incomplete records and a tax position that does not reflect what actually happened.

Work vehicles and FBT

Work vehicles are another area where business owners can get caught.

Many people assume that if a vehicle is owned by the business or mainly used for work, there is no private use issue. That is not always correct.

Fringe benefits tax may apply where an employee, director or related person has private use of a business vehicle.

This is particularly relevant where vehicles are taken home, used on weekends, used by family members or used for travel that is not strictly business-related.

Even where an exemption may apply, records are still important. The business may need to show how the vehicle was used and whether private use was limited.

ATO debt and unpaid obligations

The ATO is also taking a firmer approach to unpaid tax debts, especially where businesses do not lodge, do not pay and do not engage.

If a business cannot pay on time, the debt should not be ignored. The general interest charge will continue to accrue on unpaid debt, and this amount is not tax deductible, making tax debt expensive to carry. The interest accrued on business finance generally is tax deductible, so if you’re struggling to pay your tax debt, a cash flow review might be warranted. 

In some cases, overdue business tax debts may also be disclosed to credit reporting bureaus.

For business owners, this means ATO debt should be managed early. Lodgements should be kept up to date, payment arrangements should be reviewed, and cash flow issues should be addressed before the debt becomes harder to manage.

What business owners should do

The best way to reduce ATO risk is to keep accurate records and address issues before they become larger problems.

Business owners should review whether:

• all income has been recorded
• cash payments have been included
• expenses are genuinely business-related
• private expenses have been excluded or apportioned
• GST credits have been claimed correctly
• contractor payments and income have been reported properly
• business vehicles have been reviewed for private use and FBT
• payroll and super obligations are up to date
• ATO debt is being actively managed

These checks are not just about avoiding ATO attention. They also help business owners understand their real financial position.

Speak to Bonerath & Co.

If you are unsure whether your business records, GST, deductions, payroll, super or ATO debt position are being handled correctly, it is worth getting advice before the issue becomes more difficult to fix.

Bonerath can help you review your business tax position, identify potential risk areas and make sure your records are accurate, complete and properly supported.