Business Tax Expenses

[Benvolio]

Hi All,

This isnt a property tax question however perhaps someone can give me some feedback.

I have a pty ltd company and I often get conflicting advice about what out of work expenses i can claim as a tax deduction. some people swear they can claim lunches and weekday golf rounds.

I suspect it they may be getting confused with being able to get the business to pay for such expenses vs it actually being a tax deduction off your total taxable income.

any feedback / advice welcome

 

[Joe D]

Hi All,

This isnt a property tax question however perhaps someone can give me some feedback.

I have a pty ltd company and I often get conflicting advice about what out of work expenses i can claim as a tax deduction. some people swear they can claim lunches and weekday golf rounds.

I suspect it they may be getting confused with being able to get the business to pay for such expenses vs it actually being a tax deduction off your total taxable income.

any feedback / advice welcome

Anybody can claim anything they want, however, the problem may arise if you are audited by the ATO.

Also, what others do is irrelevant, the real question that you (as Director of your Pty Ltd Company) should be asking your accountant is " Under what circumstances might this <insert item> expense be considered a business expense deduction?"

 

[Paul@PFI]

Common question. I would add another common one - Running a few cars used for private purposes too. Maybe even the wife's. Its a Lexus on HP. She doesnt do a bit of actual work. Oh and paying her a salary too to split incomes and keep taxes down. Problem is ATO ask Fred the warehouse guy who "Shela" is. He doesnt know. Never heard of her. Oh Oh. Co is paying Sheila and she drives a company car claimed to be 100% business use.

Tax laws arent that that generous. If its a private expense its NOT deductible and may also attract Fringe Benefits Tax. Entertainment is NOT deductible and also liable to FBT. FBT isnt optional just cause its a small family owned business. Receipts for golf would be a problem anyday for any employer if no FBT is paid. Ditto the car. Simple question ATO ask - Can we see the logbook. Not later - today. (And they can identify a faked logbook with eyes shut - they compare a few fuel receipts or drivers diary.)

Its easy to just pay it now, claim the GST too and pray....Self assessment means the problem is deferred. But it hasnt gone away and wont for at least 4 years. Maybe even longer. One day the phone call will come. Hello its Mary from ATO. We are doing a routine review of your March BAS. Its not an audit, nothing to be concerned about. Can I ask you some questions ?

Then the shirt hits the fan. It escalates. The ATO officer wanst born yesterday and is probably earning 80k and not impressed by sight of such a wealthy extravagant lifestyle. Their systems profile and compare against industry norms. Your margins look low. Cost look high and a few other things look unusual. They find a few small private expenses - you know they are small. But they keep looking now. And they get personal. They are trained to detect issues and see same issues a lot. "Can you send me a list of all the expenses which were included as paymnets on the march BAS"... Then a few weeks later then arrange for Mary to conduct a site review of those items. They have already noted the problem issues and will expand their audit (its an audit now - They might not have explained that) and ask for logbooks, look at income too and review payroll issues and a bit more. they will review record keeping, filing and bank recs too. Every wrong answer makes it worse and it seems to continue. They strat looking a few quarters. Then three years. then prior year tax returns.

There is a decent checklist I have but its copyright. All businesses are different. Joe Dirts (I mock) suggestion of a reliable sounding board is normal.

For example I was asked something like this by a client other day. Asked me if they can buy a $200 gift for a staff member for good work. I suggested but to give employee a $200 gift card. Its a minor and infrequent fringe benefit. Not subject to FBT and also deductible up to $300. Nothing to hide. Not taxable to employee and no FBT. Win-Win. ATO happy if its expensed as an exempt fringe benefit.

 

[Benvolio]

Thanks for your response paul. Definitely would prefer to stay closer to safe than perhaps push some grey areas.

 

[Paul@PFI]

Thanks for your response paul. Definitely would prefer to stay closer to safe than perhaps push some grey areas.

Dont get me wrong. I like to push. Gray areas can be OK if you check. Keep it legit. Its a better way as sleep comes easier at night.

- Milk exempt fringe benefits. Laptop, ipad etc one a year. Mobile phone etc. maybe even Virgin FF etc. Lounge etc.
- Dont finance vehicles without knowing your options. Lease v's HP etc. Its not always 100% deductible !!! Remember car dealers dont give tax advice.
- Learn strategies to keep taxable business profit down but spending / spending $$ to avoid tax isnt a tax or wealth strategy.
- Know your costs. Intimately. Be a cost killer.
- Will a new employee increase costs or make $$$. Know the answer.
- Logbooks not needed for some vehciles. Know which.
- If you spend more than 10% on something you contract consider buying it out or doing it yourself. It will expand and fill the void.
- Learn which assets to rent + avoid buying.
- Depreciate fast when available
- Do a logbook if you think business use is 33%+. Without a logbook ATO might deny 100%. If its under 33% dont do a logbook. Just claim 1/3rd no logbook needed if total busienss use is over 5,000km a year.
- Have a good sounding board. A practical accountant is far better than one who just cites all rules. You need someone who can help not hinder.

One of best strategies I even implemented at a business I worked was banking profit. Co-owner couldnt spend it either. After 8 months we bought new premises for $1.8m using cash. Zero effect on operations. Lesson learned there was create strategies to bank a small amount every week / month etc and it will grow. If you dont bank it you will spend it.

 

[Terry_w]

This is why I drink milk only at work.

 

[BMan]

what about claiming your meals when your renoing your IP?

 

[datto]

Paul, ATO have a charter. They have to tell taxpayer the scope of the audit.

 

[Paul@PFI]

what about claiming your meals when your renoing your IP?

Eating is generally a private expense. Meals are only ever partly or wholly deductible if the accom and overnight travel is also 100% deductible. In that case the meal is part of a travel expense.

If the travel is for initial repairs or capital expenses (build a deck) then the travel may be incorporated into cost and deprecaited / CA.

 

[Paul@PFI]

Paul, ATO have a charter. They have to tell taxpayer the scope of the audit.

Yes, I'm familiar with my industry and ATO. The charter only applies when it becomes an audit but even then they tell you jack and the scope will be broad and waffly - You will never know what they are looking for until they tell you or cease. The most common 'simple' one is the GST "head to tail audit" issue...They check (review !!) a customer who bought product X. They review ALL your BAS and accounting and admin process and in process sample some items - Incl the one item that triggers their search. They want to see it was incl in sales and details match. Then then take copies form your records and audit others and so on.... Their process is forensic accounting based.

By the time you get a "Charter letter" its already a problem. Its why I always recommend clients NEVER EVER answer an initial ATO enquiry no matter how trivial. Worst thing I hear is "I have nothing to hide happy for them to look". No you dont ! Audits are very time consuming and get expensive. Ditto if you buy or sell property then make sure all docs (contract, tax inv, bank statements, solicitors settlement sheet, agent comm, legals etc) are already scanned and ready to go. Probability of review can be around 30-50%

Rule 1 is be co-operative. Rule 2 is tell them / give them nothing more than they ask without breaking rule 1. Dont worry they will explore and it will cost a heap when they find that there is no bank rec process, register rolls are binned or not printed and cash isnt banked intact daily. What clients think and what ATO expect can differ. Fines or review issues can arise even with a basic BAS. If record keeping is poor.

They almost never start as an audit - Just an initial (phone) review.