21ST JANUARY, 2021
Occasionally, tax claims made by small businesses extend into the fanciful, and that can land business owners in hot water with Inland Revenue, writes Nina Hendy.
Making sure you make legitimate claims at tax time is paramount for small business owners.
It sounds simple, but the fact is that Inland Revenue has to weed out outrageous tax claims every year.
Last year, the tax authority charged a South Auckland woman, who pleaded guilty to providing false information. She was sentenced to 11 months home detention and ordered to repay more than $60,000 to Inland Revenue after falsely claiming GST and income tax refunds.
The claim was bought against the woman after she was found to apply for refunds on behalf of a church, a trust, someone who lived with her, various contractors and demolition firms and other people she knew. These claims totalled $NZ212,785.87.
It’s a similar scenario in Australia, with media reports revealing that one taxpayer tried to claim a $4,000 wedding.
Other tax payers have attempted to claim a deduction dental costs, private gifts, gambling losses, the cost of a daughter’s first birthday, a phone bill for calling parents and everyday living expenses such as food, rent and paying the mortgage. Another taxpayer tried to claim the Lego sets they purchased for their children, which was also denied.
As a small business owner, you want to avoid joining the list of those attracting attention from IR and the media. Now’s the time to make sure you’re up to date with the basics of tax claims.
So what can I claim?
Business expenses you can claim include:
- Rent paid on a business premises
- Depreciation on items like computers and office furniture
- Interest on borrowing money for your business
- Some insurance premiums
- Work-related journals and magazine
- Membership to professional associations or unions
- Home office expenses
- Work-related communication costs, such as mobile phones
- Office stationery
- Work uniforms
- Tax agent fees
There are lots of costs involved in running a business, and many of these can be claimed.
It works like this: small businesses are able to reduce their tax bill by offsetting business expenses against your business income. This means that the total profit (the amount you need to pay tax on) is your income minus the expenses you can claim.
But, you will need good records, so make sure you hold onto your receipts.
You are required to keep receipts for seven years, and if you have a lot of smaller business expenses, you’ll want to develop a system that handles this recordkeeping as efficiently as possible.
Anyone working from home during the COVID-19 pandemic should also bear in mind that there are payments made to employees between 17 March 2020 and 17 September 2020, so make sure you check if this applies to your business.
A murky area for many small businesses is entertainment, and it’s a pretty grey area. While you can reward staff with an office Christmas party, extravagant events are likely to be queried, so be careful here.
And while this isn’t so relevant this year due to the travel ban, bear in mind that you can’t claim full travel costs when you’ve taken a trip away. You can only claim the business portion of the trip.
Small businesses can also depreciate assets purchased for business use, such as computers, vehicles or machinery.
To do this, you claim for the amount it depreciates each year – so the value lost through wear and tear or becoming out of date.
Expenses are claimed as part of your tax return by entering totals into the relevant boxes on your tax return registered with Inland Revenue. And while you won’t need to send in the receipts, you will need to keep them handy in case you’re asked to provide evidence of a purchase.
A great way to keep track of expenses is to have a work-related credit or debit card, and to pay for everything you need for your business through this card. Make sure you also keep a record of all of your expenses, so you’ve got a trail.
Recording your invoices in your accounting software each week is a great way to do this. For example, almost 70 percent of the tax return is pre-filled with MYOB, creating an online and seamless workflow.
With all this information readily available, you can breeze through your tax obligations. Discover more about how MYOB makes tax time easier for you and your business.
Australians & New Zealanders would be wise to utilise the skills and experience of an accountant or tax agent to make sure their tax claims are legitimate and accurate.
Also, it’s worth getting your ducks in a row sooner rather than later, given the 2021 tax year began on 1 July 2020 and finishes 30 June 2021.