NAVIGATING tax time as a small business owner can be like trying to run through Shibuya Crossing at 7pm. Knowing what to claim, how to claim it and the best route to take to achieve business success is no easy process.
Fortunately, there are ways you can get to the other side of your tax returns without too many head-on collisions.
BizCover Chief Financial Officer Simon Schwarz said one of the most important things a small business owner could do was not leave all their tax work until the end of the financial year.
"Tax is a year-round effort and you need to keep records throughout the year or you just make life difficult for yourself and your business," he said.
"If you leave it to tax time to reconstruct what you did earlier in the year, it's time-consuming and stressful and you often find that you can't find all the documents you need."
Griffith Business School professor Brett Freudenberg agreed.
"You should start thinking and planning for it now. As a small business this not only involves thinking about your business but also you should think about your personal plans, as these are likely to influence each other," Prof Freudenberg said.
"Your business is likely to be dealing with a number of different taxes such as income tax which includes capital gains, goods and services tax, fringe benefits tax, superannuation which is not technically a tax but it can feel like it, and there can be state taxes such as payroll tax and stamp duty."
Small businesses need to be sure to keep records of their tax returns and supporting documents for five years as evidence of claims being made. If you aren't diligent about record keeping, heavy penalties can apply.
"If you get audited by the ATO down the track they can disallow claims you've made if you can't adequately evidence the basis of making those claims," Mr Schwarz said.
"There can be big consequences. If the ATO reviews and challenges the claim, they can ask for the business to pay back the deduction that would have reduced their tax bill at the time."
Furthermore, if the ATO finds making invalid claims is systematic, bordering on intentional, they have the power to impose penalties and interest as well.
"It's not pleasant. Tax is not for the layman, especially around an audit, so you really need a professional advisor because tax law changes all the time and the application is complex so get the best tax advisor you can pay for because it really does make a difference," Mr Schwarz said.
Tax audit insurance is a growing must-have for business owners as the ATO continues to crack down on tax evasion and compliance across the country.
While your books may be squeaky clean, having this policy means you're covered for any cost of disruption to your business.
"Having tax audit insurance can make a big difference if you are ever audited by the ATO, by covering the costs of fees and expenses of your professional adviser in that circumstance, and assisting in what can be a very stressful experience," Mr Schwarz said.
Another big consideration for small businesses is getting their corporate structure right.
"Don't assume the way your business operates now is the way it should always operate," he said.
"If you're a sole trader think about incorporating or trading through a trust as there are often tax advantages where the tax rates in those entities can be less than personal income.
Part of the challenge is the principal owner wanting to control everything, as well as the financial constraints...Good advice and systems can really make running your business easier.
SIMON SCHWARZ, CFO BizCover
"It also helps protect your personal assets by putting your business into a different entity and shielding it from your personal liability."
A confusing area for many small business owners is separating private and personal expenses from business expenses.
An experienced tax advisor can make life a lot easier in this area. When seeking out a tax advisor, Mr Schwarz recommended finding someone with professional experience and a thorough knowledge of your business.
"I would look for a qualified tax accountant that has experience with businesses of your type and stage," he said.
"Also be aware of the ATO hit list.
"Each year the ATO publishes their areas of focus and provides guidance for small businesses.
"This year the ATO notified they're cracking down on standard deductions.
"If you claim a standard deduction without actually having incurred expense in that area, or not keeping evidence that you did, the deductions can be disallowed, potentially with penalties and interest."
If you're a small business and you're not already taking advantage of the $20,000 instant asset tax break, now is the time.
The break allows small businesses to claim immediate tax deductions for purchase of capital assets which cost less than $20,000.
"The ATO brought it in some years ago and they've extended it on a year by year basis. It is still there, so be aware of it," he said.
"It means you can receive cash back from the ATO by way of deduction for purchase of smaller assets.
"Cash flow is important for small businesses and this encourages business growth."
One of the biggest mistakes small business can make is making decisions based on tax outcomes. "Don't let the tax tail wag the dog and don't make decisions that prioritise tax benefits over commercial outcomes. You need to focus on growing the commercial aspects of your business," Mr Schwarz said.
"You can optimise around the edges, but don't make decisions for tax reasons only, it's better to make sound business decisions based on market conditions and competition and pricing and all the fundamentals of running a business. You'll find yourself in a much better position in the long run."
Running a small business can be greatly rewarding but challenging. According to Prof Freudenberg, seeking professional advice early can help smooth the road.
"Part of the challenge is the principal owner wanting to control everything, as well as the financial constraints," he said.
"Good advice and systems can really make running your business easier.
"As they say knowledge is power, and you should think about learning more about not only your tax obligations, but also how you can better understand your financial statements."
For more business advice and information, head HERE.