Financial year tax tips
It’s the end of the financial year, and you’re a small business with an Australian company. You’ve been working hard, your business is doing well, and now it’s time to file your tax return.
This blog post will explore some tips for completing this process promptly, without running into any costly mistakes that could cost you more than just money.
For the handful of small business owners who are confident across their finances and tax obligations (must be nice), the end of the financial year is probably like any other month. But for the vast majority of taxpayers, it’s a scramble to gather faded receipts and furiously Google what deductions can be claimed as the dreaded July 1 deadline approaches.
To help take some of the pressure off, SmartCompany has compiled a list of tax tips and advice for the last few days of the 2017–18 financial year to help you get your affairs in order and your claims perfected before it’s too late.
1. Take advantage of the $20,000 instant asset write-off
Despite continual calls for the government to make the much-loved $20,000 instant asset write-off a permanent fixture, the government has continued to string SMEs along, extending the scheme for just 12 months at a time.
Regardless, it’s still around this year until June 30, and small business owners can still claim up to $20,000 worth of assets for their business up until that point. If you purchase an asset (for example, a new coffee machine or circular saw), you can immediately claim a deduction for the business portion of that asset up to $20,000.
This year’s federal budget included a proposal to (again) extend the $20,000 instant asset write-off until June 30, 2019; however, the bill still needs to pass the Senate. It’s set for debate on Thursday, where it’s expected to pass with no amendments.
Speaking to SmartCompany, tax expert and director of Solo & Smart Patrick Harrison says the $20,000 instant asset write-off is particularly important for self-employed workers who rely on tools, cars, and other assets.
“For business owners in this space, cash flow is critically important, and any assistance that encourages business growth with better cash flow is beneficial,” Harrison says.
“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!
A common recommendation for SME owners at tax time is to make sure you’re claiming all the appropriate deductions you can. This includes rent, utilities or repairs for your business or professional, legal and accounting advice.
Tax agents often recommend businesses bring forward as many expenses as possible to be pre-July 1, such as pre-paying rent or repair expenses. However, tax experts and the Australian Taxation Office have urged businesses to ask themselves: “Can you justify this expense?”.
This year, ATO’s hitlist is a crackdown on ‘standard’ deductions, with assistant commissioner Kath Anderson warning taxpayers about trying to claim standardised deductions simply because they believe they are entitled to them.
“People think that they have an entitlement even though they have not spent the money. You have to have still spent the money,” Anderson told Fairfax.
“It has to be related to earning your income, and you have to be able to show us how you calculated the claim.”
3. Understand the CGT changes
First mentioned in last year’s budget, the government has finally provided clarity for small business owners around how the small business capital gains tax concessions will change when SME owners sell their businesses.
Draft legislation released in February reveals there will be new tests to determine if a CGT asset is “active” and new requirements that SME owners must be carrying on a business before the CGT event (the sale of the business).
However, the biggest change is that business owners have to pass a $6 million net asset test, where their total net assets must be below $6 million. The business itself also needs to pass the same test. Treasury initially planned to implement this legislation retrospectively to July 1 last year but backflipped on the decision when it was revealed some business owners would have been unwittingly left with $500,000 tax bills.
Parliament is debating the final aspects of the changes this week. If they pass, they will come into effect immediately, slated for retrospective implementation from February when the draft legislation was released.
4. Use the income tax offset
If your small business is unincorporated, you’re likely eligible for the small business income tax offset, which can fetch you up to $1000 off your tax bill if your revenue is under $5 million.
Currently, the offset is 8% of tax payable on your business income but is set to increase to 16% by 2027.
“Importantly, this benefit applies to sole traders or those who share in net small business income from a partnership or trust. These offsets are very important, particularly for micro-business owners in the early stages of growth,” says Harrison.
“The support of these entrepreneurial individuals will help to drive productivity and innovation across the economy.”
5. Know what’s on the ATO’s watchlist
Each year the ATO likes to let Australians know what it’s keeping an eye on when it comes to tax time, and 2018 is no exception.
Earlier in June, assistant commissioner Kath Anderson let small businesses know what the tax office is keeping in its sights. This time around, it includes work expenses for car use, laundry, and home offices.
If you’re working from home, you may be eligible to claim a deduction for work furniture, heating and cooling, computers and equipment in a home office, but only if those things are contained in a separate home office space, warns the founder of Healthy Business Finances Stacey Price.
“We see a lot of people that don’t have a designated home office, but they do work from home. They work from the couch, the kitchen table, anywhere they can. But it’s [the deduction claims] are supposed to be for a designated, separate area,” she said.
Also on the ATO’s hit list is a cryptocurrency, following a year of unfathomable gains for many digital currencies in the market. The tax office has warned investors in currencies such as Bitcoin or Ethereum that the ATO has “sophisticated systems that allow us to match data from banks, financial institutions and online exchanges”.
Laundry claims are also focused, with the tax office warning business owners away from “unreasonable” clothing claims.
“Many taxpayers do wear uniforms, occupation-specific or protective clothing and have legitimate claims. However, far too many are claiming for normal clothing, such as a suit or black pants,” Anderson said.
6. Get across the company tax rate changes
Unless you’ve been living under a proverbial rock, you’ll likely already know about Australia’s changes to the company tax rate – a debate that’s been ongoing since the government first proposed the changes last year.
It’s good news for incorporated small businesses, with a 2.5% cut in the tax rate (to 27.5%) already in place for all businesses with a turnover of under $10 million. Moreover, that cut is set to be extended to businesses with a turnover of up to $25 million come July 1. (Although this may all change if the Labor Party wins the next federal election).
With this in mind, Mark Chapman, H&R Block’s director of tax communications, advises small business owners who fall into the new tax rate thresholds to consider deferring invoices until the next financial year comes around.
“By doing that, the income will fall into the new tax year and [profits] will be taxed at 27.5% rather than 30%.
The cut in the company tax rate for these businesses will also affect how they can pay dividends. So there will be flow on tax effects to the owners of the businesses, where owners choose to reward themselves with dividends,” Chapman told SmartCompany.
7. Dirty debts (done dirt cheap)
According to Chapman, no business wants to be in a position where they can’t recover outstanding debts, “but we have to be realistic and acknowledge that it does happen sometimes”.
Despite this harsh reality, there’s good news for SMEs: it’s possible to receive a tax deduction on the amount of debt you have to write off or your ‘bad debts’.
According to Chapman, the one thing to keep in mind is that the debt has to be included as assessable income in the current or a previous income year.
“At this time of the year, it makes sense to go through your debtor’s list, and if there are any debtors on it who you believe can’t or won’t pay, write off those debts by June 30 to claim the deduction this year,” he says.
“The business must keep a written record to document that the debt has been written off.”
8. Get your super in on time
An oldie but a goodie: if small business owners want to claim a tax deduction for super payments they make for employees, the super has to be done and paid before June 30; otherwise, the opportunity for a deduction passes.
“You’re required to pay super, and if it’s not paid by June 30, no deduction,” Murray Howlett, partner at accounting firm Pilot Partners, told SmartCompany last year.
“I’m forever seeing people surprised they don’t get the deduction when they haven’t paid their super by the end of the financial year. Super needs to be paid to staff 28 days after the end of each quarter. For any quarter you miss that deadline, it’s not tax-deductible.”
9. Keep strong records
Finally, less of a tax tip and more of a reminder: it’s never too late to start getting your records together for next year. Tax agents repeatedly warn that when the taxman comes knocking, a well presented and detailed set of records will quickly resolve any issues they may have.
“If you have the right systems and processes in place, any time the tax office is having a look at your business, you can answer quickly and show you’re making no mistakes and it’s not a problem,” Howlett told SmartCompany.
“If you don’t have those systems and processes, you need to get them in place.”
Five small business tax tips from Xero you might not have heard of
The only thing more stressful than tax time as a small business owner is hearing the same advice time and time again.
“Keep your receipts.” “Check your deductions.” “Use an accountant.” “Get started early.”
We sat down with James Solomons, head of accounting at cloud-based accounting heavyweight Xero, to find some small business tax tips that are not what you might expect.
1. Review your subscriptions
According to Solomons, the end of the financial year (EOFY) is a perfect time to see if your business is paying for services and software that you don’t use.
“One of the easiest ways to start with subscriptions is by looking at the last time you logged in,” he says. “Often, you end up having lots of little subscriptions. Even Spotify, it’s $10 a month. And if you use Hootsuite for your social media platforms, but you’re actually posting directly to all of your social channels, then why pay for it?”
Solomons also says that you may want to consider paying premiums in advance depending on your business’s cash flow.
“If you have the ability, pay the premium in advance, you know, for 12 months rather than doing it month by month. Sometimes that will add maybe $100, $200 a year to the cost of a premium. So it’s a built-in interest charge, even if it’s not said to be that.”
2. Don’t think of your accountant as the “taxman.”
Solomons says that despite seeing value in what they provide, he admits that many business owners see the cost of compliance as a “necessary evil”.
“A lot of business owners view their accountants as the taxman… but I pull them up and say ‘I’m not the taxman. I’m here to help you.’ I’m here to save you money, get back deductions, get you refunds and make deductions possible.”
Solomons says that the issue may lie with business owners not fully understanding deductions.
“They [business owners] don’t realise that when you run a business, the lines are not as direct concerning individuals.
If you’re an individual, you claim a deduction against your employment income.
There has to be a direct connection between how that expense helps you generate your employment income, how you got your pay and your wages. But, of course, when you’re in business, it’s a little bit wider.”
For small business owners to see the value in accountants, Solomons encourages them to consider outsourcing, “like anything else”.
“Getting someone to do your tax return is an outsource of a function of your business that’s required,” he says.
“Generally, when you outsource somebody, you expect them to do a better job than you would. For example, I don’t know how to change a washer, I don’t know how to fit out a bathroom, so I’m going to hire a plumber.”
3. Some deadlines aren’t set in stone
With tax, some deadlines are absolute (the due date of your small business tax return, for example). However, others aren’t set in stone. So for businesses that want to move across to a digital accounting platform for the next financial year, but haven’t done so by July 1 2017, don’t think you’ve missed the boat.
“It doesn’t have to be July 1 because it’s digital and because you can upload bank statements from the last 3 to 12 months,” says Solomon. “I could start today and upload the manual bank statements.”
“Have the system set up and have the bank feeds connected, and you can start at any time. July 1 is quite a nice point to land on, but the first of any quarter, if you’re making your business activity statements quarterly, is also a good time that you can get going.”
“There’s always a learning curve that’s involved in this; there’s always time to get up to speed.”
4. You can’t outsource everything to your accountant
While Solomons is all for small business owners using an accountant, especially at tax time, he says that there is still some onus on the small business owners themselves when it comes to tax.
“I think there is a bit of a balance there,” he says. “The accountant certainly should have a good understanding, but the business owner should remain curious about what’s going on and should ask questions about their account. ‘Can I claim this if I spend this? Can I claim that?’ And it progresses from there as a discussion to whether it ends up in the tax return.”
According to Solomons, the balance also comes into play from both the accountant’s and the business owner’s experiences. For example, an accountant works in a variety of industries and so can bring tax and business insights from there, but a business owner has insights from his industry that he can bring to the table.
Solomons also adds that “small business owners are always required to verify deductions in their text return from a legal perspective.”
5. Accountants aren’t just there for tax
“Small businesses that are going to or do use an accountant: when you connect with your accountant, use that as an opportunity to ask them to look over your business position. Accountants are not just there for tax,” says Solomons.
According to Solomons, using this time or other moments throughout the year to have your accountant provide insights into how you could improve your sales or profit margins is a good move.
“Use the skills your accountant has because they run a small business as well. We understand the pressures that small businesses have because we suffer the same fate of what’s going on in the economy.”
“Use the tax time also to have a chat about your business generally and find out other ways that your accountant can help you benefit going into the next 12 months.”
Coronavirus stimulus: Tax tips for self-employed people and small business owners
The coronavirus pandemic is proving to be disastrous for small businesses. Coming hot on the heels of a bushfire-induced slowdown, the economic outlook for the whole country is looking bleak.
Last week, the federal government announced a $17.6 billion stimulus package, with much of that funding allocated to measures targeted at small businesses. The indications are that a second stimulus package is about to be announced before the first tranche is even legislated.
Much of the initial stimulus package is geared towards a series of tax breaks designed to boost small business investment, keep funds circulating in the wider economy and reduce the overall tax burden. So, what do they already announced measures mean for Australian small businesses?
Big boost to the instant asset write-off
The instant asset write-off threshold has been increased from $30,000 to $150,000. In addition, access to the write-off has been expanded to include businesses with an aggregated annual turnover of less than $500 million (up from $50 million) until June 30, 2020.
The instant asset write-off allows businesses to buy large capital equipment items for their business and obtain an immediate tax deduction for doing so (rather than depreciating the cost over several years, as was previously the case).
In 2017-18, more than 360,000 businesses benefited from the current instant asset write-off, claiming deductions to the value of over $4 billion. The government is hoping that amount can be substantially increased with this new boost.
Provided the cost of each purchase is less than the threshold (now $150,000), the full cost can be written off if the asset is acquired and in use by June 30, 2020.
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 is important to note there is also a different measure that provides a 50% asset write-off.
Businesses with a turnover of less than $500 million will be able to deduct 50% of the cost of an eligible asset on installation, with existing depreciation rules applying to the balance of the asset’s cost.
This scheme applies to purchases until June 30, 2021 (a year later than the instant asset write-off scheme).
In effect, both schemes appear to run in tandem until June 30, 2020, but of course, any eligible business will take advantage of the instant asset write-off in the period to June 30, 2020, rather than the 50% write-off. The 50% write-off scheme will come into its own from July 1, 2020, to June 30, 2021, after the instant asset writes off expires.
The instant asset write-off has always been a popular tax break for small businesses, and this very substantial increase, both in the threshold and the number of businesses eligible to claim, represents an opportunity for businesses to take advantage of making large purchases through until June 30, 2020.
What’s less clear is whether businesses that are doing it tough and likely to continue to do so for some months are in the mood to spend money on large capital items, even with a generous tax break attached. Time will tell. In addition, an immediate tax deduction is not especially helpful to a business that is making losses, as many small businesses now will be.
For businesses that already have planned purchases coming up, this is a great opportunity. Businesses that have a pressing need to make purchases (such as primary producers that lost plant and equipment in the bushfires and need to re-equip) are also well placed to take advantage. So, as part of a wider rescue package, this is a good move, but it is unlikely to be enough to encourage 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.