23 June 2021
The most common errors found in tax returns of private business entities are ones where entities do not declare all their income or do not adequately account for the private use of business funds or business assets (i.e. Division 7A).
To avoid such errors, it is important to account for all income, which might include:
- Cash sales.
- Online sales.
- Capital gains from one-off transactions such as selling capital items such as a property that is not used for private purposes.
Furthermore, it is important to adequately apportion expenses, such as motor vehicle or rental expenses, into their business use and private use parts and properly account for the private use of trading stock and director’s fees or drawings.
Compliance with the Division 7A private company loans provisions are also often neglected at tax time. If such loans have been put on complying terms, a minimum yearly repayment (MYR) of the loan must be made by 30 June 2021, either through a cash payment or through dividend set-off in some cases. Failure to make the MYR on time will result in a deemed dividend.
When making the MYR by dividend set-off, it is important to understand that journal entries of dividend payments are not enough to extinguish the MYR. A journal entry is only evidence of a transaction. Where actual money does not pass hands, a MYR repayment via dividend payment can only take effect where the company with an obligation to pay the dividend to the shareholder and the shareholder who has an obligation to pay the MYR to the company, have mutually agreed to set off their liabilities against each other before the journal entry was made. The journal entry only records the transaction and does not create the transaction.