Taxpayers may not claim GST input tax credits on purchases made while carrying on a hobby
In a recent Nexia top tax tips we said that GST registered businesses can claim GST input tax credits on purchases made in relation to the making of taxable supplies (e.g. sales of goods or services) or GST-free supplies (e.g. most sales of medical and education services).
In contrast, a taxpayer who is conducting a hobby by generating relatively small amounts of income from conducting irregular activities without a business plan will not be able to claim GST input tax credits on purchases – such as a person running a small number of sheep on a small acreage. Such taxpayers can therefore cancel their GST registration and - if they have claimed GST credits for purchases associated with their hobby - they should amend their past activity statements.
ATO visiting cash only businesses
As part of their campaign against businesses operating in the cash economy, the ATO is visiting businesses that predominantly make cash sales (e.g. restaurants, cafes, hair and beauty salons, building and construction industries).
Other factors that may prompt an ATO visit include businesses that:
- fail to register for GST or lodge activity statements or tax returns;
- fail to meet superannuation or employer obligations;
- operate outside the normal small business benchmarks for their industry; or
- have been reported by the community for potential tax evasion.
The ATO also makes extensive use of data matching which can determine whether income is being under-reported by comparing data from third parties.
Penalties can be significantly reduced by making a voluntary disclosure to the ATO of any unreported income or over-claimed tax deductions. In that event, the ATO is more amenable to arranging a debt repayment plan. The ATO is definitely less amenable if avoided tax is discovered during the course of an audit.
If you are deriving cash income from any business activities, please contact us so that we can help you comply with your tax and GST registrations, reporting, lodgement and payment obligations.
Are you entitled to claim fuel tax credits?
Please ensure that fuel tax credit (FTC) claims are made at the correct rate because the fuel tax credit rates have increased from 5 February 2018. FTCs are calculated on the amount of fuel tax payable and the type of fuel (petrol, diesel, kerosene, blended fuels) used. FTCs are available for vehicles with a gross vehicle mass exceeding 4.5 tonnes that travel on public roads. FTCs may also be available for eligible business usage of machinery, plant, equipment and light vehicles travelling off public roads or on private roads. Simplified fuel tax credit rules apply for claims of less than $10,000.
We would be pleased to assist with making FTC claims as well as reviewing whether correct rates for claiming FTCs have previously been used.