Tax return time 2018 is underway. To determine the best way to 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 most common mistakes made when submitting an individual tax return
The ATO suggests that you are most likely to run into trouble with your tax if you:
- Decline to declare some of your income;
- Claim deductions for personal expenses, such as personal phone calls, vehicular usage, etc.;
- Forget to keep receipts or records of your expenses;
- Claim for an expense that you didn’t pay for, under the idea that it is some kind of ‘standard deduction’; and
- Claim personal expenses for a property you rent, whether it’s for property you are renting for yourself or for the interest on loans for personal assets.
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.
Court case highlights the high risk and severe penalties of avoiding tax through cash payments
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 Taxpayer had significant undisclosed cash takings, most of which it had deposited into the bank account of one of its shareholders.
- The Commissioner had appropriately characterised the undisclosed amounts as deemed unfranked dividends in the shareholder’s hands, and not, as the Taxpayer contended, payments of deductible salary and wages.
- The Taxpayer had not established that it was entitled to deductions under s. 8-1 for business-related expenditure purportedly paid out of unbanked cash but for which there was no contemporaneous invoices or receipts.
- The Commissioner’s decision to impose penalties for recklessness at 50% of the shortfall amounts was appropriate.
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:
- The need to ensure that your returns in a cash business are in line with industry standards. If not, are you prepared to explain why this is not so using appropriate documentation?
- The risks inherent to undisclosed sales. This can potential lead to criminal prosecution for fraud and tax evasion.
- The need to keep receipts in order to substantiate expenses.
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.