End of Financial Year Tax Tips for Australian Small Businesses
You’re a small firm with an Australian company, and it’s the end of the financial year. You’ve put in long hours, your company is thriving, and now it’s time to file your tax return.
This blog post will go over some pointers for completing this process quickly and without making costly blunders that could cost you more than money.
The end of the financial year is likely to be like any other month for the few small business owners who are confident in their finances and tax responsibilities (which must be nice). As the dreaded July 1 deadline approaches, the vast majority of filers are scrambling to gather faded receipts and furiously Google what deductions they might claim.
We have developed a list of tax tips and guidance for the last days of the 2017–18 fiscal year to help you get your affairs in order and your claims finalized before it’s too late.
1. Take advantage of the instant asset write-off of $20,000
Despite repeated appeals for the government to make the popular $20,000 rapid asset write-off permanent, the government has continued to entice SMEs by extending the program for only a year at a time.
Regardless, it’s still in effect until June 30 this year, and small business owners can claim up to $20,000 in assets for their company until then. You can immediately claim a deduction for the business element of an asset (for example, a new coffee machine or circular saw) if you buy it (up to $20,000).
The proposed extension of the $20,000 instant asset write-off until June 30, 2019, was included in this year’s federal budget; however, the bill still needs to pass the Senate. On Thursday, it will be debated, and it is likely to pass without alterations.
Tax expert and director of Solo & Smart, speaking to SmartCompany The $20,000 rapid asset write-off, according to Patrick Harrison, is especially essential for self-employed employees who rely on equipment, cars, and other assets.
Cash flow is vital for business owners in this field, and any support that encourages business growth through improved cash flow is excellent.
A word of caution for small business owners and the self-employed particularly is not to over-extend your business in pursuit of tax benefits if it doesn’t leave enough operating cash in the bank.
2. Get those deductions!
At tax time, a popular tip for SME owners is to make sure they’re claiming all of the required deductions. This covers rent, utilities, and commercial or professional repairs, as well as legal and financial guidance.
Tax advisors frequently advise businesses to carry forward as many expenses as possible before July 1, such as rent or repair costs. Tax experts and the Australian Taxation Office, on the other hand, have urged companies to examine themselves, “Can you justify this expense?”
The ATO is targeting standard deductions this year, with assistant commissioner Kath Anderson warning taxpayers against claiming standard deductions just because they believe they are entitled to them.
People believe they are entitled to something even if they have not spent any money. You must still have spent the money.
It must be tied to your earnings, and you must be able to demonstrate how you computed the claim.
3. Understand the CGT changes
The government has finally offered clarity for small business owners on how the small business capital gains tax reductions would change when SME owners sell their enterprises, as first announced in last year’s budget.
Additional tests to assess if a CGT asset is “active” and new requirements that SME owners be carrying on a business before the CGT event were revealed in draft legislation unveiled in February (the sale of the business).
The most significant change is that firm owners must pass a $6 million net asset test, which requires that their entire net assets be less than $6 million. The company must also pass the same examination. Treasury had planned to apply this legislation retroactively to July 1 of last year but changed its mind after learning that some business owners would have been struck with $500,000 tax bills.
This week, Parliament will debate the exact details of the amendments. If passed, they will take effect immediately, with retroactive application beginning in February, when the draft legislation was released.
4. Take advantage of the tax credit
If your small business is unincorporated, you may qualify for the small business income tax offset, which can save you up to $1000 if your revenue is less than $5 million.
The offset is now set at 8% of tax payable on business income, but it is set to rise to 16 percent by 2027.
This benefit is only available to lone traders or individuals who share in the net small business revenue of a partnership or trust. These offsets are critical, especially for microbusiness owners who are just starting.
These entrepreneurs’ support will help to increase productivity and innovation throughout the economy.
5. Know what the ATO is looking for
The ATO likes to let Australians know what it’s looking out for when it comes to tax time every year, and 2018 is no different.
ATO told small businesses what the tax office is looking for earlier this month. This time, work expenses for automobile use, laundry, and home offices are included.
If you work from home, you may be able to deduct work furniture, heating and cooling, computers, and equipment in a home office, but only if those items are housed in a separate home office space, according to Stacey Price, the founder of Healthy Business Finances.
ATO encounter a lot of people who work from home but don’t have a defined home office. They work from their couches, kitchen tables, and any other available space. However, [the deduction claims] are supposed to be for a specific, distinct location.
A cryptocurrency is also on the ATO’s hit list, following a year of incomprehensible gains for several digital currencies. The ATO has issued a warning to cryptocurrency investors, claiming that it has “advanced systems that allow us to match data from banks, financial institutions, and online exchanges.
The tax office is also focusing on laundry claims, advising business owners to avoid making “irrational” garment claims.
Many taxpayers have legitimate claims and wear uniforms, occupational-specific or protective clothes. However, far too many people are claiming ordinary attire like a suit or black pants.
6. Get across the company tax rate changes
Unless you’ve been living under a rock, you’re probably well aware of Australia’s changes to the corporate tax rate, which have been the subject of heated controversy since the government initially announced them last year.
It’s good news for incorporated small firms, as all businesses with a turnover of less than $10 million already benefit from a 2.5 percent tax drop (to 27.5 percent). Furthermore, from July 1, that cut will be extended to enterprises with a revenue of up to $25 million. (However, if the Labor Party wins the next federal election, everything might change.)
In light of this, Mark Chapman, director of tax communications at H&R Block, encourages small business owners who fall below the new tax rate levels to consider postponing bills until the next fiscal year.
By doing so, the income will be taxed at 27.5 percent rather than 30 percent in the new tax year.
The reduction in the corporation tax rate will have an impact on how these businesses pay dividends. As a result, there will be tax consequences for business owners who choose to reward themselves with dividends.
7. Bad debts (done dirt cheap)
No company likes to be in a position where they are unable to collect outstanding debts, but we must be realistic and accept that it does happen.
Despite this harsh reality, there is some good news for SMEs: you may be eligible for a tax discount on the amount of debt you must write off, sometimes known as “bad debts.”
One thing to remember is that the debt must be reported as assessable revenue in either the current or preceding income year.
It makes sense to go through your debtor list at this time of year, and if there are any creditors on it who you suspect can’t or won’t pay, write off those debts by June 30 to claim the deduction this year.
To prove that the debt has been written off, the company must retain a written record.
8. Get your super in on time
An oldie but a goodie: if small business owners wish to claim a tax deduction for employee super contributions, the super must be completed and paid before June 30; otherwise, the deduction is lost. You must pay super, and if you don’t do so before June 30, you won’t get a deduction.
When people do not pay their super by the end of the financial year, they are frequently startled that they do not receive the deduction. Staff must be paid super 28 days after the quarter ends. You will not be able to claim a tax deduction if you miss that deadline in any quarter.
9. Maintain solid records
Finally, more of a reminder than a tax tip: it’s never too late to start gathering your records for next year. When the taxman comes knocking, tax agents constantly warn that a well-presented and precise collection of documents will rapidly answer any difficulties they may have.
If you have the correct procedures and processes in place, you can respond swiftly and show the tax office that you’re not making any mistakes and that it’s not a problem.
You have to implement those systems and processes if you do not already have them.
Xero has five tax advice for small businesses that you may not be aware of
As a small business owner, the only thing more frustrating than tax season is hearing the same advice again and over.
Maintain your receipts. Look over your deductions. Use a professional accountant. Get a head start.
1. Go through your subscriptions
The end of the fiscal year (EOFY) is a great time to check if your company is paying for services and software it isn’t using.
Looking at the last time, you logged in is one of the simplest ways to get started with subscriptions. You often end up with a slew of small subscriptions. Spotify is also $10 per month. And why pay for Hootsuite if you’re using it for social media platforms but uploading straight to all of them?”
Depending on your cash flow, you might want to consider paying premiums in advance.
If you have the financial means, pay the premium in advance for a year rather than month by month. This can sometimes increase the cost of a premium by $100 or $200 per year. Even if it isn’t stated as such, there is a built-in interest charge.
2. Do not consider your accountant as a “taxman.”
Despite understanding the benefit of what they give, many business owners regard compliance costs as a “necessary evil.”
The problem could be due to business owners’ lack of understanding of deductions. They [company owners] are unaware that while running a business, the distinctions between individuals are not as clear.
If you’re self-employed, you can deduct your earnings from your taxable income.
There must be a direct link between how that expense contributes to your employment revenue, as well as how you receive your pay and wages. When you’re in business, however, it’s a little bit different.
Solomons advises small business owners to consider outsourcing accountants “like everything else” if they see the benefit in them.
Getting someone to prepare your tax return is outsourcing a necessary company job.
When you outsource anything, you usually expect it to be done better than you could. I don’t know how to change a washer, for example, or how to install a bathroom, so I’ll call a plumber.
3. Some deadlines aren’t inflexible
Some tax deadlines are unavoidable (the due date of your small business tax return, for example). Others, on the other hand, aren’t fixed in stone. So don’t assume you’ve missed the boat if you wish to switch to a digital accounting platform for the upcoming fiscal year but haven’t done so by July 1, 2017.
Because it’s digital, you can upload bank statements from the previous three to twelve months at any time. It is feasible to begin uploading manual bank statements today.
You can start whenever you want once you have the system set up and the bank feeds connected. July 1 is a wonderful day to start, but if you’re making your company activity statements quarterly, the first of any quarter is also an excellent time to start.
There is always a learning curve involved in this, and there is always time to catch up.
4. You can’t rely on your accountant for everything
When it comes to taxes, small business owners still have some responsibility.
While the accountant should have a strong understanding of the situation, the business owner should remain curious and ask questions about their account. ‘Can I get a refund if I spend this?’ Is that something I can claim?’ It then becomes a question about whether it should be included in the tax return.
Both the accountant’s and the business owner’s experiences contribute to the balance. An accountant, for example, can contribute tax and business insights from a number of businesses, whereas a business owner might bring insights from his field to the table.
From a legal standpoint, small business owners must always verify deductions in their written returns.
5. Accountants aren’t merely for tax purposes
Small businesses that will or already hire an accountant should take advantage of the opportunity to have your accountant review their financial situation. Accountants aren’t simply for tax purposes.
According to Solomons, having your accountant provide insights into how you could boost your sales or profit margins at this time or other times throughout the year is a wise move.
Because your accountant also runs a small business, make use of their abilities. We understand the pressures that small businesses face because we are also affected by the current economic situation.
Use tax season to talk to your accountant about your business in general and find out how your accountant may assist you to benefit in the coming year.
Coronavirus stimulus: Tax tips for self-employed people and small business owners
The coronavirus outbreak is wreaking havoc on small enterprises. The economic picture for the entire country is looking dismal, following a bushfire-induced slump.
The federal government announced a $17.6 billion stimulus package last week, with many of the funds going to small business initiatives. There are signs that a second stimulus package will be proposed before the first is even passed into law.
Much of the original stimulus package is focused on a series of tax reductions aimed at encouraging small business investment, keeping money circulating in the economy, and lowering overall tax burdens. So, what do the measures that have already been outlined entail for Australian small businesses?
The rapid asset write-off has gotten a big boost.
The $30,000 quick asset write-off threshold has been raised to $150,000. Additionally, until June 30, 2020, enterprises having an aggregate annual turnover of less than $500 million (up from $50 million) are eligible for the write-off.
The rapid asset write-off allows entrepreneurs to purchase major capital equipment items for their company and get a tax break right away (rather than depreciating the cost over several years, as was previously the case).
Over 360,000 enterprises took use of the current immediate asset write-off in 2017-18, claiming over $4 billion in deductions. With this new boost, the administration hopes to increase that amount significantly.
If the item is acquired and in operation by June 30, 2020, the full cost can be written off if the cost is less than the threshold (currently $150,000).
Amongst the items small businesses could look to purchase are:
- Cars, utes and delivery vans;
- Computer equipment, including laptops, tablets and printers;
- Premises fit-out, including office furniture, works of art and TVs;
- Solar systems for business premises; and
- Plant, equipment and tools.
It’s important to note that there’s another proposal that allows for a 50 percent asset write-off.
Businesses with annual revenues of less than $500 million will be permitted to deduct half of the cost of a qualifying asset at the time of installation, with standard depreciation rules applicable to the remaining cost.
This offer is valid for orders made through June 30, 2021. (a year later than the instant asset write-off scheme).
In reality, both plans appear to run concurrently until June 30, 2020, but any eligible business will take advantage of the instant asset write-off rather than the 50 percent write-off during that time. After the instant asset write-off program expires on July 1, 2020, the 50 percent write-off scheme will kick in.
The instant asset write-off has long been a popular tax incentive for small businesses, and this significant increase in both the threshold and the number of enterprises eligible to claim means that businesses can take advantage of large acquisitions until June 30, 2020.
What’s less obvious is whether businesses that are struggling and are likely to continue to do so for several months are willing to invest money on significant capital goods, even if they receive a generous tax cut. The future will tell. Furthermore, an instant tax benefit is not particularly beneficial to a business that is losing money, as many small enterprises are present.
This is a fantastic opportunity for businesses that have previously planned purchases. Businesses with an immediate need to make purchases (such as primary producers who lost plant and equipment in the bushfires and need to re-equip) will also benefit. So, while this is a commendable move as part of a larger rescue package, it is unlikely to be enough to motivate small businesses to spend in isolation.
The government will make tax-free payments of up to $25,000 to small and medium-sized businesses, with a minimum of $2,000 for eligible businesses.
The payment is intended to provide cash flow support to businesses with an annual turnover of less than $50 million but is only available to those businesses that employ staff.
Whilst the exact details are not yet available, it appears the Australian Taxation Office will administer these payments. Eligible businesses will automatically receive a payment equal to 50% of their PAYG withheld, delivered as a credit in their BAS for the June 2020 quarter.
The ATO has also announced a series of administrative concessions to assist businesses affected by COVID-19.
- Deferring the payment of tax amounts by up to four months, including payments due through the BAS (including PAYG instalments), income tax assessments, FBT assessments and excise by affected businesses.
- Allowing businesses on a quarterly reporting cycle to opt into monthly GST reporting to get quicker access to any GST refunds.
- Allowing affected businesses to vary PAYG instalment amounts to zero for the April 2020 quarter. In addition, businesses that vary their PAYG instalment to zero can also claim a refund for any instalments made for the September 2019 and December 2019 quarters.
- I am remitting any interest and penalties incurred by affected businesses on or after January 23, 2020, applied to tax liabilities.
- They are allowing affected businesses to enter into low-interest payment plans for their existing and ongoing tax liabilities.
What are the next steps?
The federal government has already acknowledged the measures announced last week won’t be sufficient to keep the small business sector afloat, and it appears more stimulus measures will be announced imminently as the economic clouds darken.
Whilst additional tax deductions and reductions in compliance burdens are welcome, these sorts of measures don’t address the fundamental problem, which is a collapse in customer demand and a drying up of cash flow.
The next round of stimulus must be aimed at boosting customer demand and injecting cash into struggling businesses so they can carry on trading through the downturn and hopefully return to profitability once some degree of normality returns.
Watch this space.