As a public accountant, I am never a big fan of people doing their own books. The community must understand that there may be severe consequences if the compliance work is not done accurately and on time.
The following list is a good example, to show us how complicated it can get and how easy to make mistakes, as we are surrounded by detailed legislation from all corners.
Lets have a look at the most common mistakes that come across my way when the client prepares his own business activity statements.
1. Setting up your accounting software with incorrect tax codes in chart of accounts
If you do not set up your chart of accounts with the correct tax codes from the start, this will result in sales, purchases and payroll being processed incorrectly. This will also mean that the resulting figures you use to prepare your BAS will be wrong. This is why, you must leave it to your BAS/tax agent to set up your tax codes before you start using the software.
2. Claiming income tax credits on the BAS without possessing an actual tax invoice
Claiming income tax credits on the BAS without possessing an actual tax invoice. Unfortunately, the ATO does not accept anything other than an invoice in case of an audit. Even bank statements may not help.
3. Using an incorrect accounting method
There are 2 accounting techniques, cash basis or the accrual basis. Using the wrong accounting basis when preparing the BAS will result in incorrect figures being reported. If you don't know which accounting basis to use, check with your BAS agent, tax agent or accountant. Usually the small businesses don't need accrual basis.
4. Failing to report GST received on some government payments
Some government grants and incentive schemes may include GST. Be careful to check if this is the case before reporting the income on the BAS.
5. Sale of business assets
If you are registered for GST and you sell a company vehicle or equipment, you must include GST as part of the sale price. There are some exceptions but generally, if you are registered for GST, you may be liable of passing the GST on the sale of equipment to the government as a part of your income.
6. Reporting purchase of capital items on the wrong BAS label
If you purchase business assets costing more than $1000, you must report these purchases at G10 on the BAS, not G11.
7. Bank Fees
There are two main types of bank fees - general bank charges like monthly/annual fees and merchant banking fees. General bank fees are input-taxed, so no GST to claim there but merchant bank fees do have GST in it.
8. Interest Income
Interest income does not attract GST because it is an input taxed sale.
9. A complex tax invoice from suppliers may include a mixture of GST free and GST-inclusive items. So, you cannot simply apply GST without checking the details of an invoice
10. Motor Vehicle Registration
The rego fee is GST-Free in NSW. Very easy to miss that point.
11. Government charges
GST is not included in land tax, council rates, water rates or ASIC filing fees.
12. Purchases that are GST free
Items such as basic foods, overseas exports and some health services are GST free.
13. GST in an insurance premium
Most insurance policies include a stamp duty component. This is GST-free but the rest of the policy includes GST. However, workers compensation insurance is different.
14. Recharges on prepaid phones
Recharge purchases for mobile phones are GST free. The GST is not accounted for until the recharge purchase is redeemed which means the call charge itself has GST in it even though the recharge doesn't have any.
15. Wages & Superannuation
Neither of these items attract GST. Wages should be reported at W1 and tax withheld at W2 on the BAS. Superannuation is not included on the BAS at all.
16. Donations are GST Free.
Keep in mind that the donation receipts need to be checked to make sure that it bears the business name but not your personal name, before claiming it under the business. Otherwise it can be claimed on personal tax returns.
17. Entertainment expenses
There are very complicated rules about claiming anything for Christmas parties, gifts for clients etc. There are special rules for each business type in relation to entertainment and it is possible that fringe benefits tax may become involved. The ATO is very strict in terms of Fringe Benefits Tax and they have the necessary tools to catch the mistakes.
18. Hire purchases and chattel mortgages
If you account for GST on a cash basis and you purchase goods under a chattel mortgage arrangement, you may claim the entire GST at the time the borrowed funds make full payment for the chattel. If, however, you have entered into a hire purchase agreement, the GST treatment changes according to the date of purchase, same as leasing.
19. Bonds or Security deposits
The GST credits on security deposits can only be claimed when either one of these things occurs the deposit is forfeited or it applied towards the total cost of a purchase. Otherwise, the deposit is not subject to GST.
20. The purchase of second-hand goods from a charitable organisation.
These items are GST free.
21. The purchase of second-hand goods from other sources
If you purchase these items from a private seller or a non-registered entity, you must make sure that the seller is subject to GST before claiming it on your BAS.
However, the best way to ensure that your BAS is prepared correctly is to engage the services of a BAS or Tax Agent.
These professionals have a much better understanding of the accounting behind the above business expense scenarios than most business owners. Bookkeeping and/or preparing BAS is not only a matter of switching on the computer and downloading an accounting software.
In case of a mistake, you can find yourself before a judge.