13 Apr 2019
Small Business Tax -- did you know that the Australian Tax Office (ATO) is one of the most powerful government agency in the country?
Perhaps even more powerful than spy agencies?
The ATO can search your house or office without a warrant. The ATO can divert all your income to their coffers without your approval. If the ATO accuses of tax fraud, you are guilty until proven innocent. (Source: https://www.abc.net.au/news/2018-04-10/ato-what-the-tax-office-has-the-power-to-do/9633658)
This when it coincides with the announcement of an ATO mobile strike force to visit 10,000 small businesses in 2019 should stir up some real fears in small businesses. ( Source: https://www.smartcompany.com.au/finance/tax/common-tax-errors-revealed-ato-compliance-push/ )
In my 2016 book, I warned small business owners to expect “More Rigorous ATO Audits & The Confiscation Of Unexplained Wealth”
Inch-by-inch the ATO is tightening the noose on small business tax cheats. The legislative power to confiscate unexplained wealth may soon extend beyond criminal syndicates and drug kingpins. Pretty soon, the ATO might just be able to seize your house, your car, your assets if they simply say you owe them tax.
The deputy commissioner for small business Deborah Jenkins said “ ‘mobile strike teams’ are being deployed to weed out tax dodgers.” This is enough strike fear into most business owners.
Owing the taxman can destroy your business. Photo: Pixabay.com
Flying Under The Radar Of The Taxman
Firstly, a caveat and disclosure that I don’t work for the ATO and you should not rely on this information in any way. Now, having said that, the ATO publishes on their website that they intend or has begun visiting high risk businesses in 2019: https://www.ato.gov.au/General/Gen/Protecting-honest-business/
Businesses or business owners that exhibit these traits should be wary:
- Unreported or misrepresented sales
- Omitting income, including missing payments and online transactions
- Discrepancies between activity statements and tax returns
- Businesses that are operating outside the tax system
- When lifestyle and assets don't match up, like owning property and vehicles that they would need much higher incomes to cover
- Businesses reporting outside of the business benchmarks.
This is all good and sensible. Every business should be compliant. Still, I can share a disturbing story with you. A client (business owner) approached me to sell his business. For years, he has battled the ATO over alleged unpaid taxes.
According to his unverified story, the ATO audited his small business tax returns and slapped him with a $1 million tax bill. The greatest irony was he claimed to be one of the few honest businessmen who has done the right thing and declared his actual business turnover, his real income and paid his rightful taxes to the tax office.
His woes with the taxman are all the more puzzling because his books are in good order, prepared by a good accountant and compliance with the law. He lamented that his problems begun when he bought a $3 million dollar house.
My client believed that it was no mere coincidence that the ATO targeted him soon after the purchase of the house. Since then, he has spent $300,000 legal fees fighting the ATO. The banks have refused to lend him any funds until he resolves his tax troubles. He has been battling cash flow problems and rising legal fees to fight the ATO. He slams the audit as a mere revenue-raising exercise.
Well, he is not alone. The ABC story on the Tax Office in April this year seemed to add credence to his claims: https://www.abc.net.au/news/2018-04-09/the-high-cost-of-taking-on-the-tax-office/9623416
For this client at least, it'd appear that even doing the right thing is no guarantee that the ATO won't come knocking. So perhaps we should all live below our means to fly under the radar of the ATO?
The Taxman has extraordinary powers under legislation. Photo: Pixabay.com
Using Benchmarks - A Critical Tool
The worst possible time to sell a business is when the business is having troubles with the tax office. This just scares off buyers who are fearful that there may be something wrong with the business and they may be a target too if they bought the business.
As a business, the common-sense thing to do is to ensure that your business falls within the ATO benchmarks. This not only helps to avoid attention from the tax office, but also ensures that your business is healthy and makes a decent, verifiable cash flow that buyers are willing to pay you for.
The ATO publishes the benchmarks here: https://www.ato.gov.au/Business/Small-business-benchmarks/
Benchmarks help to compare your business in the same industry against other businesses.
However, many businesses and their accountants do not check against these benchmarks until unwanted attention from the ATO. Your accountant may charge you a fee to do this and since checking benchmarks are not mandatory in the annual tax returns, many businesses won’t bother.
When a client wants to buy or sell a business, one of the first things I look at are the benchmarks. In consulting for business owners, I analyse these benchmarks to identify areas for improvements and problems shunning buyers away.
For example, a florist would be expected to fall within these benchmarks as per the ATO:
ATO Florist Benchmarks 2015-16. Source: https://www.ato.gov.au/Business/Small-business-benchmarks/In-detail/Benchmarks-by-industry/Retail-trade/Florists/
If a florist has monthly rent higher than the benchmark of 9-14% x turnover, it tells me that the business is perhaps under-performing, or the owners overpaid on rent when they signed on the lease agreement. Thus this may be an issue with buyers.
Of course, the florist may have other unique features or mitigating factors which are attractive to buyers, such as a huge 10-year contract to deliver flowers to a hotel group. It is always pseudo-art and pseudo-science to ready and 'sculpt' a business for sale.
In my consulting with clients, benchmarks and KPIs serves as important tools in my Three Pillars Triangle Formula To Exit.
For businesses that don’t meet these benchmarks, I may have other consulting methods to assess the business for value that buyers want. The First Pillar To Exit is to create a business that buyers want, but the job does get harder if the benchmarks are not met.
It is immensely helpful to meet these benchmarks for at least the two financial years prior to listing on the market.
Ultimately, meeting benchmarks is not only good for business but also good for keeping yourself from unnecessary attention from the powerful taxman.
And if you haven’t completed your small business tax returns for the last two years, you should get this ready because many business owners are forced to sell at a moment's notice for reasons beyond their control.
Josh Foo contributed to this post.
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