5 common mistakes startups make at tax time
5th July, 2017
In the flurry of launching your startup during tax time, understanding your tax obligations can be a huge learning curve.
Leaving things until the last minute can lead to costly penalties or legal repercussions – the last things you need when running lean.
The information provided here is of a general nature for Australia and should not be your only source of information. Please consult your tax agent, BAS agent or accountant as each small business’ circumstance will vary.
To make sure your new business is handling its tax obligations properly, run through these five common mistakes:
1. Choosing the wrong legal entity
Your startup’s legal structure affects how you report your taxes and how much you pay, so it’s important to choose the right entity.
For example, many start out as a sole proprietor or partnership, then find themselves paying too much in self-employment taxes.
A quick discussion with a tax advisor can help you figure out which structure is right for your situation.
If you don’t have one, Find the right professional for your business by searching MYOB Partners in your local area.
2. Incorrect tax codes in your chart of accounts
I would advise you to ask your tax advisor or accountant to provide a default chart of accounts or ask a BAS agent to set up your tax codes before you begin using your online accounting software.
3. Choosing cash or accrual accounting method
When you register for GST with the ATO, all businesses with a turnover of less than $2 million must select whether they wish to account for their GST using the cash or accrual accounting method.
Most small businesses select the cash method as their choice, but it’s not always the best choice.
If your business is cash-based, i.e. you are a restaurant that has no debtors and pays creditors on terms, the accrual method is the right choice for you.
This means you can claim the GST back on purchases immediately, even though your supplier must wait for your payment.
This can greatly assist with cash flow.
READ: Top 10 common GST mistakes in BAS reports you’re probably making
4. Not paying on time (monthly or quarterly payments)
Startups are required to pay taxes on a monthly or quarterly basis.
You pay super for eligible employees calculated from the day they start with you. You must make the payments at least four times a year, by the quarterly due dates.
| Quarterly payment due dates for super payments | ||
| Quarter | Period | Payment due date |
| 1 | 1 July – 30 September | 28 October |
| 2 | 1 October – 31 December | 28 January |
| 3 | 1 January – 31 March | 28 April |
| 4 | 1 April – 30 June | 28 July |
All business registered for GST use a business activity statement (BAS) to complete their GST returns.
Your reporting and payment period is shown on your BAS and will be monthly, quarterly or annually.
| Quarterly reporting for BAS/GST | ||
| Quarter | Period | Payment due date |
| 1 | 1 July – 30 September | 28 October |
| 2 | 1 October – 31 December | 28 February |
| 3 | 1 January – 31 March | 28 April |
| 4 | 1 April – 30 June | 28 July |
The best way to stay on top of your quarterly tax obligation is to get into the practice of automatically setting aside a percentage of each payment or revenue.
A tax advisor can help you estimate these payments if you need some help.
5. Mixing personal and business
New startups invest a lot of time and money in their business, often not being able to determine what is personal or business, causing major confusion come tax time.
Avoid legal infractions by establishing a startup financial account from the start and maintaining separate records for the business.
READ: Blurred lines — when business is tied with personal finances
Keeping your books in order has never been easier when you use an online accounting software.
MYOB Essentials is the fast and easy way to manage your cash flow and ATO compliance requirements.
It includes time-saving features to help you take care of the day-to-day bookwork, and you can try it free for 30 days.