Some business owners make the mistake of regarding the Australian Tax Office as the enemy. It can be said the ATO at times places an unfair interpretation on income tax legislation to maximise revenue collection. But on the whole, when the ATO is dealt with in a reasonable manner, that is the way it will treat taxpayers.
When a business is in financial trouble the owners should keep the ATO fully informed and, rather than ignoring income tax or PAYG withholding tax amount outstanding, advise it of the problems and ask for a payment plan.
When it comes to claiming income tax deductions, if a business owner can show they have acted in a reasonable manner and have some basis for how they calculated their deduction, the ATO will also be reasonable in its approach.
In last week's column I answered a question about claiming GST input tax credits included in car expenses. There was some confusion as to what method a taxpayer could use as a result of the four methods previously used for income tax and GST input tax credits related to car expenses, which for income tax purposes have now been reduced to only two methods.
The ATO in responding to my question about this replied: "There are differences between the relevant income tax and GST legislative provisions and therefore the amount of input tax credit allowable cannot be obtained directly from the amount of income tax deduction claimed for business use. What is required is that the method that the entity (taxpayer) chooses is fair and reasonable in the circumstances of its enterprise (business)".
This means although there are no longer four methods of claiming car expenses, where a business can reasonably show how it calculated the business use, the methods of claiming a sliding scale on business kilometres driven up to 5000 kilometres and one-third for cars doing more than 5000 kilometres, could still be used.
Q. I have seen and understand how there are different ways of claiming an input tax credit for car running expenses, but I am not sure how to calculate what percentage of the input tax credit I can claim that was included in the purchase price of a car?
A. When a car is used in the running of a business a claim can be made for the GST input tax included in the purchase price of the vehicle. Just because a small business can claim a 100 per cent tax deduction for a vehicle costing under $20,000, that does not mean 100 per cent of the GST input tax included in the purchase cost can be claimed.
Ultimately the best way of deciding the business use percentage of a car, and therefore what percentage of GST input tax credits can be claimed, is to keep a logbook for 12 weeks. Where a business chooses to use the set rate kilometre method, as long as the owners can reasonably show how they calculated the business percentage they should not have any problems with the ATO.
Email questions to max@taxbiz.com.au. Follow MySmallBusiness on Twitter, Facebook and LinkedIn.
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