Eight in 10 start-ups in the dark over tax deductions: report

More than eight in 10 start-up entrepreneurs do not know what constitutes an allowable tax deduction, new figures reveal, suggesting tomorrow will be a fraught end of financial year for many emerging companies.

Galaxy Research recently surveyed more than 500 Australian businesses aged under two years on behalf of American Express, highlighting start-ups’ inadequacies in relation to tax time.

According to the survey, 91% of new small business owners don’t have a thorough understanding of their yearly tax obligations, while 84% are unsure of what they can claim as a business expense.

Alarmingly, about 10% of survey respondents admit they simply hope for the best when it comes to tax requirements.

Taxation expert Adrian Raftery says the survey highlights a huge level of uncertainty among small business owners about tax reporting, particularly what they can and can’t claim.

“[This uncertainty] contributes to negative feelings about completing tax returns,” Raftery says.

According to the survey, 74% of business owners regard the completion of business activity statements as a burden.

They report that on average, their quarterly BAS includes about 124 transactions, forcing them to spend long hours on its preparation – typically, up to eight hours.

Fryer says the majority of small business owners report having to prepare their tax information at night or at weekends, stating: “That burden can put a strain on their family and personal lives.”

Small business lobbyist Peter Strong agrees business red tape continues to have a detrimental effect on the families of small business owners.

“A major issue for small business people is the need to relax [and] to spend more time with the family… Red tape and compliance costs have taken our attention from our businesses and from our families,” Strong told StartupSmart earlier this year.

Jason Fryer, American Express head of small business services, says small business owners believe attracting and retaining customers is less stressful than tax reporting, particularly among start-ups.

“Setting up your own business can be like jumping into the unknown. Completing the business tax return for the first time is often fraught with anxiety,” he says.

“The research shows that almost all new business owners wonder at some stage if they have complied with the latest tax legislation and whether they will fall foul of the tax office if they make a mistake.

“New businesses particularly are concerned about ATO audits. They are also worried about any legislative changes which may affect them,” Fryer says.

Raftery says only one in five small business owners believe they have a sound knowledge of the tax system, “so they hand over their financial matters almost entirely to their business advisers or others”.

In addition to seeking professional assistance, about half survey respondents say they use an accounting software package, while 31% use a spreadsheet.

Fryer says start-ups should also speak to other more experienced entrepreneurs about how they handle tax issues.

Other tips offered by American Express include keeping track of receipts, and using a specific business card to keep personal and office spending in order.

Meanwhile, debt collection agency Prushka is urging small businesses to review their bad debts before June 30.

According to Prushka chief executive Roger Mendelson, writing off a bad debt before the end of the financial year could reduce the amount of tax paid.

Mendelson says if the debt is unlikely to be recovered, it makes sense to write it off now. This would prevent the debt becoming taxable income, which would require the business owner to pay tax on the amount.

He says there are a number of other steps small businesses should undertake before June 30, including checking their current debtors ledger, identifying debts where the other party is bankrupt or has entered into liquidation, and noting debts that are more than six months old.