In 2021 Tax Tips

Australian Small Business Tax Guide

Are you a small business owner in Australia looking for information on your tax obligations? This guide provides an overview of the taxes you may be liable for, as well as tips on how to stay compliant. 

Whether you’re just starting or have been in business for a while, it’s important to understand your tax obligations and make sure you’re paying the right amount. So read on to find out more!

Running a small business in Australia can be difficult, but it can also be very rewarding with the right information and advice. 

This guide provides an overview of the Australian tax system as it applies to small businesses so that you can make sure you are doing everything correctly and taking advantage of all available deductions and allowances. 

So whether you are just starting or are well-established but want to make sure you’re up-to-date on the latest changes, read on for all the information you need.

As an Australian small business owner, it’s important to be aware of the different tax rules and regulations that apply to you. 

This guide will overview the most important aspects of Australian small business taxation, including income tax, goods and services tax (GST), company tax, and Fringe Benefits Tax (FBT). So whether you’re just starting out or you’re looking for ways to reduce your taxable income, this guide is for you!

 It’s important to familiarise yourself with the tax regulations that apply to your business. In this guide, we’ll provide an overview of the tax requirements for Australian small businesses. We’ll also offer some tips on how to reduce your tax bill and keep more money in your pocket.

Have you started your own small business in Australia, or are you thinking of doing so? If so, it’s important to be aware of the taxes that apply to small businesses in this country. This guide will provide an overview of the most important Australian small business tax rules. So whether you’re just starting out or are already running a small business, make sure you read on for all the latest information!

This guide provides an overview of the tax process, including what deductions you may be able to claim. We also explain how to register for an ABN and lodge your return. So whether you’re just starting or you’re already up and running, this guide has everything you need to know about Australian small business taxes.

When it comes to your taxes, there’s no one-size-fits-all answer. However, the Australian small business tax guide is a comprehensive resource that will help you understand taxation basics as a small business owner in Australia. 

From understanding what constitutes taxable income to claiming deductions and allowances, this guide has everything you need to get started. So whether you’re just starting in business or want to make sure you’re taking advantage of all the available tax breaks, read on for essential advice.

Did you know that the Australian small business tax rate is 27.5%? If you’re a small business owner operating in Australia, it’s important to know about the changes in tax rates and regulations this year. 

In this guide, we’ll provide an overview of Australia’s small business tax system, including information on how to claim deductions and file your annual return. We hope this information will help you manage your taxes and keep your business running smoothly.

Let’s get started!

What Is A Small Business?

From a tax perspective, a small business is usually defined as one with an annual turnover of less than $10 million, except concerning the small business CGT concessions, where the turnover threshold is just $2 million.  

To stop businesses splitting activities so they can slip under the $10 million threshold and gain access to the various tax concessions, the law stipulates that turnover needs to be calculated from the ‘aggregated’ amounts, which means annual turnover (gross income, excluding GST) of every ‘connected’ or ‘affiliated’ business.

Small Business And Tax

home salesman stretches holding black pen.

The importance of small business is demonstrated by the government giving the small business sector a break on a range of tax matters.

Temporary Full Expensing

To give the business a boost out of COVID-related blues, the government has implemented a generous package of reliefs for businesses to invest tax effectively in new capital assets.

The tax break – called “temporary full expensing” (or TFE for short) allows businesses to deduct the full cost of eligible capital assets from their profit for the year rather than depreciating the cost over several years. The new measure applies from 6 October 2020.

For small businesses, in particular, the new measures could (with some fairly significant caveats) represent a significant opportunity to boost your business this year.

Businesses can now immediately deduct the full cost of all purchases of capital items, including:

  • Fixtures and fittings (such as a shop or café fit-outs)
  • Technology, such as laptops, computers, EFTPOS systems and security equipment
  • Tools, plant and equipment
  • Office furniture
  • Motor vehicles such as utes, delivery vans and most cars (excluding cars costing over $59,136)
  • Motorbikes
  • Solar systems

Businesses must have an aggregated annual turnover of less than $5 billion to be eligible. “Aggregated” turnover means that the turnover of any parent company (including overseas parents) and subsidiaries need to be included.

In addition, businesses whose aggregated turnover is more than $5 billion but whose Australian income is less than $5 billion can also claim the tax break provided they have previously spent more than $100 million in the period 2016-17 through to 2018-19. 

This means that big international companies (whose global turnover often exceeds $5 billion) can potentially still benefit.

In effect, the high turnover threshold means that almost every Australian business is included in the scheme.

TFE applies to new depreciable assets and the cost of improvements to existing eligible assets (even if the existing assets were acquired before the scheme started).

Full expensing applies to second-hand assets for small- and medium-sized businesses (with an aggregated annual turnover of less than $50 million). Second-hand assets are excluded for businesses with an annual turnover of $50 million or more.

The main categories of assets that are not eligible for full expensing are:

  • “Expensive’ cars (meaning cars costing over $59,136)
  • Buildings and other assets that are eligible for capital works deductions
  • Assets located overseas
  • Some primary production assets (such as fencing and water facilities) that already have an existing instant write-off scheme in place
  • Assets that are not used in a business

So-called expensive cars can be written off up to the $59,136 limit (excluding GST), but anything over that cost cannot be depreciated at all. 

That rule has been in place for many years concerning car depreciation and carried over to TFE. The rule exists to prevent businesses from spending up on lavish luxury cars at the taxpayer’s expense!

The expensive car limit does not cover motor vehicles that aren’t regarded as cars for tax purposes. This means that commercial vehicles such as vans, buses and trucks can be fully written off whatever the cost. But, crucially (for tradies, for example), some larger utility vehicles are also regarded as commercial vehicles rather than cars. 

Basically, suppose the ute has a carrying capacity of over one tonne (the dealer or manufacturer should be able to confirm this). In that case, it isn’t regarded as a car, and the car limit does not apply. Although some of the bigger, more luxurious utes do cost more than $59,136, this gives a potential opportunity to purchase the vehicle and write off the entire cost.

Note that the last exclusion prevents TFE claims for capital assets used in a non-business capacity, such as assets purchased by investment property owners or assets used in your employment.

Any deduction you can claim under TFE must also be apportioned if you use the asset for private purposes. For example, if you purchase a new computer for $2,500 and use it 50% in your business and 50% for personal purposes, you can only claim a deduction for $1,250.

Trading Stock

The Tax Act provides a set of simplified trading stock rules whereby if your trading stock did not change in value over the tax year by more than $5,000, you could include the same stock value at year-end as at the start of the year.

Prepaid Expenses

A small business can also get an immediate tax deduction for certain prepaid business expenses made before the end of the financial year. For example, suppose a payment covers an expense that has gone into the new financial year (such as insurance premiums, rent or membership of a trade or professional body). In that case, you can claim that deduction in the last financial year. But, again, check your payments for the period before 30 June to see if anything qualifies.

GST

Taking care of your GST obligations can also be simplified, as eligible businesses only need to account for GST once payment is received. You can also pay GST in instalments, and the ATO will work out for you how much the instalments are. 

If using some items privately, a small business can also choose to claim the full GST credits and make one single adjustment for the percentage of private use at the end of the tax year.

Another concession available to small businesses is pay-as-you-go tax instalments, where you can pay a quarterly instalment calculated based on your most recently assessed tax return. The income recorded is adjusted to align with the latest increase in gross domestic product and will save you the time and the effort of ‘long form’ calculations.  

Help For Capital Gains Tax (CGT)

The special small business CGT concessions are in addition to the 50% general CGT discount applying to individuals, trusts and super funds (but not companies).

Four CGT concessions may be available to eliminate or reduce capital gains made by a small business or its owners. It disposes of “active” assets, like trade or business premises but does not extend to passive assets such as an investment portfolio.

The reliefs are available to businesses, which are small business entities (i.e., they carry on a business and satisfy the $2m turnover test) or where the net CGT assets of the taxpayer (plus its connected entities and affiliates) do not exceed $6m:

1. The 15-year exemption

Available where a taxpayer who is at least 55 years of age and is retiring disposes of a CGT asset that has been owned for a minimum of 15 years.

2. The retirement exemption

A taxpayer may apply capital proceeds from the disposal of a CGT asset to the retirement exemption, up to a lifetime maximum of $500,000. As it is unnecessary to retire, the concession can be utilised more than once.

3. The 50% active asset reduction

The capital gain arising from the disposal of a CGT asset may be discounted by 50%, but there are specific rules about what qualifies.

4. The CGT rollover

A capital gain arising from the disposal of a CGT asset may be deferred. A replacement asset is acquired within two years – the gain is deferred until the disposal of the replacement asset.

Don’t Blur The Lines Between The Company’s Money And Your Own

Many small businesses get caught by the so-called ‘deemed dividend’ rules. Under tax law, loans and advances to private company shareholders or their associates are deemed taxable unfranked dividends for the shareholders. 

These rules intend to stop the profits of private companies from being distributed to shareholders as tax-free “loans”.  

So, if you find yourself borrowing money from a company of which you’re a shareholder, try to ensure those borrowings are repaid by the time the company’s tax return for the year is due. If that isn’t possible, declare a dividend and treat the amount as income, in which case, the dividend would be franked if applicable.

Alternatively, enter into a complying loan agreement, complete with a commercial interest and capital payments and a defined loan period.

Consider the tax consequences of the private use of company assets for less than market value because the deemed dividend rules can also catch this. 

The amount of the deemed dividend is equivalent to the arm’s length price that would have been paid for the use of the assets, less any amount paid for the use.

It’s also worth considering transferring the asset to the shareholder instead of a cash dividend, a so-called “in-specie “Ÿ dividend. 

Whether that’s cost-effective will depend on the market value of the asset. Alternatively, if the shareholder has previously lent money to the company, the asset could be transferred to the shareholder as repayment of that loan, subject to valuation.

Business Tax Deductions

invoice bill paid payment financial account concept

You can claim a tax deduction for most expenses from carrying on your business, as long as they are directly related to earning your assessable income.

See our definitions for explanations of tax and super terms that you don’t understand.

1. What You Can Claim

There are three golden rules for what we accept as a valid business deduction:

  • First, the expense must have been for your business, not for private use.
  • Second, if the expense is for a mix of business and private use, you can only claim the portion used for your business.
  • Third, you must have records to prove it.

For example, if you buy a laptop and only use it for your business, you can claim a deduction for the full purchase price. However, if you use the laptop 50% of the time for your business and 50% for private use, you can only claim 50% of the amount as a deduction.

You can’t claim the GST component of a purchase as a deduction if you can claim it as a GST credit on your business activity statement.

2. What You Can’t Claim

Some expenses are not deductible, such as:

  • entertainment expenses
  • traffic fines
  • private or domestic expenses, such as childcare fees or clothes for your family
  • expenses relating to earning income that is not assessable, such as money you earn from a hobby
  • IF YOU CAN CLAIM the GST component of purchase as a GST credit on your business activity statement.

Remember, if you earn PSI, your deductions may be limited.

3. When You Can Claim Your Deduction

The type of expense – operating expense or capital expense – determines when you can claim your deduction. Generally, you can claim:

  • operating expenses (such as office stationery and wages) in the year you incur them
  • capital expenses (such as machinery and equipment) over a longer period.

You generally incur the expense for operating expenses when you have a legal obligation to pay for the goods or services. An invoice is not necessary for an expense to have been incurred, but you need a record of the expense.

If you use an item in your business for only part of a year, you generally need to restrict your claim to the period used for the business.

4. Claiming A Deduction For A Prepaid Expense

There are different rules for expenses you pay in advance – that is, expenses you incur now for goods or services you will receive (in whole or in part) in a later income year.

Where the expense is $1,000 or more, you will usually need to apportion (or distribute) the expense across the whole supply or service period if you:

  • won’t receive the goods or services in full within 12 months
  • are not eligible for an immediate deduction.

5. How To Claim Your Tax Deduction

How to claim your business deductions depends on your business type:

  • Sole trader – claim the deductions in your tax return in the ‘Business and professional items’ schedule, using myTax or a registered tax agent.
  • Partnership – claim the deductions in your partnership tax return.
  • Trust – claim the deductions in your trust tax return.
  • Company – claim the deductions in your company tax return.

How To Streamline Your Business Tax Reporting In

If getting your business ready for tax time leaves you sorting through a mountain of paperwork, it may be time to make some changes. 

Simplifying your tax reporting processes can help you manage your end of financial year (EOFY) requirements and save you time. Here are some ideas to help make EOFY preparation a little easier.

1. Go paperless

Start storing your documents online to save time going through paperwork next year. Some ways of doing this include:

  • Scanning your cash receipts with your phone
  • Filing your paperwork in folders using logical categories – you can use date or document type
  • Backing up your electronic records to a cloud service – this will also allow you to share access with any business partners or your accountant

2. Automate your bookkeeping

Find out if you can synchronise your bank accounts with your accounting software. This can make your tax reporting easier all year round as you may no longer need to reconcile your bank account data manually.

3. Open a separate business account

Having one account for everything can be confusing and time-consuming when doing your taxes—Kick-off the new financial year with simpler bookkeeping by separating your business and personal finances. 

If you already do so, consider opening multiple business transaction accounts for the same reason. You may find it easier to report for your next business activity statement (BAS) and spot any tax deductions you may have missed earlier.

4. Set reminders for key deadlines

Put reminders for key tax due dates in your phone and email calendars if you haven’t already.

5. Look for professional help

If you have any questions about your tax reporting, you can find more information on the Australian Taxation Office (ATO) website or speak to an accountant.

6. Keep good records

You should also ensure that you retain your records for the amount of time required by tax law; for example, you are required to retain records of the acquisition of capital gains tax assets that you may not sell for many years later.

FAQs

1. I am self-employed and have paid personal superannuation contributions all year. What can I claim?

Provided that you satisfy the eligibility criteria, you will be able to claim a deduction for the superannuation contributions you have made to a complying superannuation fund or retirement savings account.

To do so, you must be fully self-employed, or no more than 10% of your assessable income (including Reportable Fringe Benefits and Reportable Superannuation Contributions) is from an employer. 

You must also have first notified your superannuation fund of your intention to make a claim and received a confirmation.

2. I have started my own business and wonder if I need to register for GST.

Australian businesses with an annual turnover of $75,000 or more must register for GST. If your business has a lower turnover, you are not required to register, but you may do so if you wish. 

You will only be required to charge your customers GST if you are registered. Your local office can assist you with your application to register for GST.

3. I keep a room set aside for a home office and would like to claim some expenses.

If a taxpayer carries out all or part of their employment activities from home and has an office set aside to do the work, some of the running expenses can be deducted. A diary should be kept for a minimum of 4 weeks stating the hours the office was used for work-related purposes.

From 1 July 2014, the Commissioner’s rate of 45 cents per hour (increased from 34 cents per hour allowed in the 2014 year) can be claimed for the home office’s hours. 

Only running expenses (electricity, heating and depreciation of office equipment) can be claimed for home office unless the home is being used as a place of business.

Where a home is a place of business (and is easily identified as such – for example, a separate entrance, signage, clients/customers coming to set area of your home etc.), deductions can be claimed on occupancy and running expenses, including:

  • mortgage interest
  • rent
  • house insurance
  • council rates
  • insurance
  • repairs
  • cleaning
  • pest control
  • maintenance
  • decorating
  • telephone
  • heating
  • lighting.

4. I have heard that self-employed people can claim superannuation co-contribution from the government. Am I eligible because I paid money into my super this year and run my own business?

You may be eligible for the superannuation co-contribution if more than 10% of your total assessable income is from running that business, eligible employment or a combination of the two.

Investment income is not eligible income. If you claim any of your superannuation contributions as a tax deduction, only the amount you do not claim will be eligible for the co-contribution.

5. I ran a small business and prepaid 12 months’ rent on the premises that I operate from in June. Can I claim the whole amount on my tax return even though most of the payment is next year?

If your turnover is less than $50 million, you will qualify to claim certain eligible prepaid expenses in the year they were paid.

Some prepaid expenses that can be claimed in the year they are paid are rent, insurance and subscriptions to professional associations.

Eligible expenses will be payments made for 12 months or less, and the period covered ends in the next income year. 

Your prepaid rent qualifies because the period it covers does not exceed 12 months, and that period will end before the end of the next income year. Therefore, the whole amount will be claimable on your tax return this year.

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