The top 5 tax mistakes small business owners make

20 Aug The top 5 tax mistakes small business owners make

Tax is an unavoidable part of running a small business, but it is also one of the areas that can create the most confusion.

For many business owners, tax sits somewhere between administration, compliance and financial planning. It is often pushed aside while the more immediate demands of customers, staff, suppliers and day-to-day operations take priority.

The problem is that small misunderstandings can become much larger issues over time.

Here are five common tax-related mistakes worth being aware of:

Treating Every Dollar in the Bank as Available CashOne of the easiest mistakes to make is looking at the business bank account and assuming the balance represents money available to spend.

It may not.

Some of that money may ultimately be required for GST, PAYG obligations, income tax, superannuation, wages, suppliers or other commitments.

A healthy bank balance can therefore create a misleading picture of the financial position of the business.

The important distinction is between cash in the bank and cash that genuinely belongs to the business after future obligations are taken into account.

Thinking a Tax Deduction Means Something Is FreeThe words “tax deductible” can sometimes influence business purchasing decisions more than they should.

A deductible business expense may reduce taxable income, but the business still has to spend the money in the first place.

Buying a new vehicle, computer, piece of equipment or other asset purely because there may be a tax benefit can overlook the more important commercial question:

Did the business actually need it?

Tax considerations and good business decisions are not always the same thing.

Leaving Everything Until Tax TimeFor some small businesses, tax becomes an annual event.

Receipts are gathered, bank statements are located, expenses are reviewed and paperwork is finally organised shortly before the tax return is prepared.

By that stage, however, the financial year has already happened.

Looking at tax retrospectively may reveal what occurred, but it may provide limited opportunity to understand the business position while decisions are actually being made.

Regular bookkeeping and financial reporting can also provide a much clearer picture of profitability, expenses, cash flow and business performance throughout the year.

Mixing Business and Personal SpendingSmall business finances can become complicated when the line between business and personal expenditure starts to blur.

A business credit card might occasionally be used personally. A personal account might pay a business expense. Vehicles, phones, travel, entertainment and home-office expenses may potentially have both business and private elements.

The difficulty is not necessarily that these situations occur — it is ensuring they are identified, recorded and treated correctly.

Clear records can make an enormous difference when the time comes to explain where money has gone and what an expense actually relates to.

Focusing Only on How Much Tax You PayPerhaps the biggest mistake is assuming the ultimate measure of financial success is how little tax the business pays.

A business generating strong profits may naturally have tax obligations.

A business paying very little tax may simply be earning very little profit.

The more meaningful question may be:

What is the business actually building after tax?

That could include cash reserves, business value, equipment, intellectual property, investments, debt reduction or personal wealth generated from the success of the business.

Tax is important, but it is only one part of the overall financial picture.

The Bigger Picture

For small business owners, tax has the good, the bad and occasionally the ugly.

The good is that understanding the numbers can provide greater visibility over how a business is performing.

The bad is that unexpected liabilities can place pressure on cash flow.

And the ugly can emerge when poor records, assumptions or misunderstandings are allowed to continue for too long.

Tax should therefore be viewed as part of the broader financial management of a business rather than simply an annual compliance exercise.

Every business is different, and taxation outcomes depend on individual circumstances, business structures and applicable tax rules.

Understanding the difference between revenue, profit, cash flow and tax can ultimately provide small business owners with something particularly valuable: A clearer picture of what their business is really achieving.

If this article has inspired you to think about your unique situation and, more importantly, what you and your family are going through right now, please get in touch with your advice professional.

This information does not consider any person’s objectives, financial situation, or needs. Before making a decision, you should consider whether it is appropriate in light of your particular objectives, financial situation, or needs.

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