A mess if the sum's too tidy

There are many tax mistakes a business owner can make. But three stand out as the most repeated and easiest to avoid - and they tend to revolve around cash. The mistakes are hiding cash, not managing cash flows, and when there is not enough cash, making sure any loan taken out is the most tax-effective.

The biggest mistake owners can make, where their businesses take large amounts of cash, is to dive into the black economy. The problem with black money is it must be spent on non-essentials such as entertaining, booze and holidays. In extreme cases this can lead to a combination of drinking too much, obesity and all the medical problems that result.

Even when cash is spent on discretionary items the Tax Office can still detect tax evasion. This will happen when the results of a business where cash is being skimmed does not match the results of businesses in the same industry.

When this occurs the Tax Office can check critical items of expenditure and easily prove that cash has been taken.

One of the biggest problems caused by not declaring cash is the effect this has on the value of the business. The true worth of a business is the amount of profit it makes.

Where large amounts of cash are not declared, the profitability of the business decreases. Unless a business owner can find someone stupid enough to accept a nod and a wink that the business is worth more because of the cash they have taken, they will find it hard to sell it for what it is truly worth.

Not managing the cash flow of a business can lead to the next biggest mistake made by business owners, which is to ignore Tax Office deadlines.

This often takes the form of not lodging tax returns and GST statements on time, or failing to pay tax, GST or superannuation by the due date. It has been my experience that when a business starts to delay paying PAYG withholding amounts from employees, GST collected, and the 9 per cent superannuation contribution for employees, they are digging a financial hole that can be hard to get out of. Just because the Tax Office is not constantly phoning and demanding payment does not mean it can be ignored.

The Tax Office is showing it is prepared to take an increasingly hard line with people and businesses that owe it money.

It is using the services of debt collection agencies and is only too willing to wind up businesses and put people into bankruptcy for non-payment of tax.

In some circumstances the Tax Office can get behind the corporate veil and chase directors where PAYG withholding amounts are owed.

When cash is in short supply, not borrowing correctly can lead to increased tax being paid. Interest charged on business or investment loans is tax deductible, while for private loans it is not. How borrowed money is spent is what dictates its deductibility, not the type of security used.

Where a loan is taken out to extend a home, with a factory being the security, no deduction will be allowed for the interest. Conversely, the interest on a loan taken out to buy a shop, with a home being used as security, will be tax deductible.

Max Newnham is a chartered accountant and regular contributor to The Sydney Morning Herald. His new book, Tax For Small Business: A Survival Guide is published by John Wiley & Sons Australia.