Similarly, with the process that you followed last week of reviewing income accounts, you need to ensure that expense figures on your Profit and Loss Statements are accurate. It is these expenses that you are claiming a tax deduction for, so if you have items on the Profit and Loss Statement that are not tax deductible, then they need to be allocated somewhere else. If you are unsure, you are best to code the entry to a “Suspense” account.
Likewise with what I said last week, your accountant hopefully will reallocate items that are not eligible tax deductible expenses at the end of the year, but isn’t it on your agenda to have more accurate reports in the 2015/2016 year? Also it can be a costly exercise to a business if their accountant has to reallocate hundreds and hundreds of entries for expenses that may have been personal in nature.
As a guide, the main expenses on a Profit and Loss Statement should be cost of goods sold and other overheads. Expenses like ATO payments, loan payments, credit card payments and personal drawings should be coded to a balance sheet item. If you think about some of these payments and how large they often are what effect they would have on your profit figure if incorrectly coded.
- Print a Profit and Loss Statement for the period 1 July 2014 to 30 April 2015 and diarise again to do for 31 May 2015 and 30 June 2015.
- What you are looking for is that the only items that are really business expenses and that will be claimed as a tax deduction are included as expenses. It is also a good idea to check that the correct GST has been used.
Review all expense accounts
- Is the expense business related? The expense incurred must be directly related to earning assessable income
- If the expense is private, it should be coded to either a Director’s loan for companies, Beneficiary’s Loan and trusts or Owner’s drawings for sole traders and partnerships
- All expenses have been entered, eg. 12 lease payments if you have leased something for the whole year, 12 rent payments, 12 telephone bills etc.
- Ensure the correct GST codes are on the transactions – you may need to go back and check the invoices (see table below)
- Ensure there are adequate narrations for the transaction so that when we review the file or in the event of an ATO audit, the details in the file are self-explanatory
As a guide the following deposits should be coded as follows:
|TYPE OF EXPENSE||OTHER NOTES||GST CODE TO BE USED|
|Bank Charges||N – T|
|Monetary Donations||N – T|
|Sponsorship||Check invoice for correct codes as some sporting clubs not registered for GST|
|Entertainment||Ensure adequate narration so it can be treat correctly for tax & FBT (if applicable)||N – T|
|Filing Fees (ASIC)||N – T|
|Fees & Permits||Check invoice for correct codes as many Department of Fair Trading fees have no GST on them|
|Gift Vouchers||In memo ensure narration as to who the voucher was given to||N – T|
|Equipment < $1,000 (SBE)Equipment <$300 (non SBE)||Ensure less than the threshold||Usually GST or CAP|
|General Expense||Ensure adequate narration or reallocate to applicable account|
|Insurance||Check that adequate narration eg income protection, liability, workers compensation||Check invoice for correct codes|
|Motor Vehicles (Fuel)||Ensure fuel is for this vehicle only & no private fuel||GST|
|Motor Vehicles (RTA Registration)||Ensure registration is for this vehicle only||N – T|
|Motor Vehicles (Greenslip Registration)||Ensure registration is for this vehicle only||GST|
|Motor Vehicles (Repairs )||Ensure repairs are for this vehicle only||Usually GST|
|Lease Payments||Ensure 12 payments (one in each month)||GST|
|Rent||Ensure 12 payments (one in each month)||Check lease|
|Council Rates (business premises only)||Ensure 4 payments||N – T|
|Water Rates (business premises only)||Ensure 3 payments||N – T|
|Electricity (business premises only or business % of home electricity)||Ensure 4 payments (if quarterly) or 12 (if monthly)||GST|
|Telephone (business premises only or business % of home telephone)||Ensure 4 payments (if quarterly) or 12 (if monthly)||GST|
|Internet (business premises only or business % of home internet)||Ensure 12 payments||GST|
|Interest Expense||Ensure 12 payments for loans||N – T|
If you find after the review you have had to change a lot of GST codes you can actually go into the Account List are and change the default GST code for either the Expense Account or the Supplier and that way you don’t have to remember if the correct code is GST or N-T.
If you missed last week’s blog, head to countdown to tax time: What you need to do four weeks from 30 June – review income accounts
MYOB online accounting software will ensure your business is always compliant with tax changes, including the government’s new SuperStream system for paying super contributions. If you don’t have MYOB online accounting software, there’s an online accounting solution for every stage of your business.
The information provided here is of a general nature for Australians and should not be your only source of information. Please consult an experienced and registered tax agent as each small business’s circumstance will vary.