It’s tax time again, and we’re here to help you navigate the process of filing your small business taxes. This blog post will provide some helpful tips on what you need to know for your small business tax return.
One of the sectors that face the most difficulty during tax filing is small businesses. These are highly unorganised and don’t have special employees to look after-tax filing like large corporations.
Moreover, since they employ around 5.1 million people, their contribution to the Australian economy cannot be ignored, and therefore they are eligible for various concessions. Therefore, keeping updated with these and other tax policies before June 30 is essential for these businesses.
Below are a few tax-saving tips that will help small businesses file tax returns effectively in this financial year. We will go through tax depreciation, how to reduce taxable income and the most beneficial strategies for tax minimisation in Australia.
From a tax perspective, a small business is usually defined as an annual turnover of less than $10 million, except for 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.
Temporary Full Expensing
To give the business a boost out of 2021’s 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 applied from October 6 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)
- Solar systems
To be eligible, businesses must have an aggregated annual turnover of less than $5 billion. “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). For businesses with an annual turnover of $50 million or more, second-hand assets are excluded.
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 about 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. Crucially (for tradies, for example), some larger utility vehicles are also regarded as commercial vehicles rather than cars. If the ute has over one-tonne carrying capacity (the dealer or manufacturer should confirm this), it isn’t regarded as a car, and the car limit does not apply. 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.
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.
A small business can also get an immediate tax deduction for certain pre-paid business expenses made before the end of the financial year. For example, suppose a payment covered 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 June 30 to see if anything qualifies.
Avail Immediate Asset Write-Offs
As per the government’s taxation guidelines, small businesses are eligible for instant asset write-offs for capital assets up to $30,000. In this manner, a company can gain much-needed capital assets and avail deductions against yearly profits simultaneously.
This applies to second-hand assets as well. However, there are certain prerequisites to be kept in mind, such as that the asset should be ready for use and should be used only for business purposes. Also, it should be purchased in the financial year for which you want to avail deductions. Other than this, the small business should be an operational one with a GST number.
It is also vital to remember that on an asset worth $30,000, you can avail of a 27.5% deduction which will not cover the entire value of the asset. Therefore, hoarding onto capital purchases to avail deductions is not advisable.
Keep Your Financial Data Organised
One of the most significant points to file taxes efficiently and productively is to keep your financial records updated and organised throughout the year. There are two ways of achieving this constructively. These are explained below.
a. Cloud Accounting
A cloud accounting system makes it easier to record and calculate financial expenses, incomes, gains, and losses.
A small business should latch onto one to keep all financial transactions organised in a single place.
Cloud accounting allows you to search up transactions easily, thereby preventing the displacement of receipts and such.
Meanwhile, it also facilitates staffing, inventory, and invoicing. Your business advisors and accountants can easily access your financial data and work on it, helping you keep up with all financial requirements and obligations.
b. Digital File Sharing
Another way of streamlining financial reporting and keeping it organised is through digital file-sharing.
This can be done through dropbox files consisting of reports as well as accounts arranged in separate files.
Alternatively, you can also share Google Excel files with your accountant and keep recording transactions in them. This also facilitates important comments against entries.
One more way of staying on top of your tax returns is through the Australian Taxation Office app, in which you can conveniently record your business travel-related logbook activity as well as receipts.
Be Informed About CGT (Capital Gain Tax) Changes
When a small business sells its active capital assets like business buildings or a trade, the government allows them up to 50% tax deduction. However, to be eligible for such deductions, a small business must pass a $6 million net asset test.
This exemption is deferred if a replacement asset is purchased within two years of selling the CGT asset. In this case, the gain is deferred until the replacement asset is disposed of.
Furthermore, the rate of the deduction varies as per several criteria set by the authorities. Therefore, changes in terms need to be researched and applied accordingly.
Income Tax Offset
If a small business’s revenue is less than $5 million, it is eligible for around $1000 off its tax bill. This offset rate is currency 8% but may increase to 16% in the later years.
Such an exemption allows more innovation by small businesses and increases productivity. It also saves micro-businesses from high-income tax.
Cuts In Company Tax Rate
Incorporated small businesses can benefit from cuts in company tax rates. Firms with a turnover of less than $10 million will be eligible for a 2.5% off the company tax rate, while businesses with around $ 25 million will get an extended cut in the tax rate.
Businesses falling under these criteria will be eligible to pay a 27.5% tax rate instead of 30% if they defer invoices before the year-end. This is because such profits and income will be calculated in the new tax year.
Additionally, this will impact the rate of free dividends allowing the owner to reward himself with dividends.
Carry Out Loan Balancing
If a director borrows capital outside of his wage, this can be termed the director’s loan. If this is left unpaid till the end of the financial year, it will be eligible for interest but no tax deductions. Therefore, balancing loans is prime to avail exemptions.
Refrain From Using Company’s Capital For Personal Use
If a shareholder borrows money from the private company whose share it holds, these will be unfranked taxable dividends under the deemed dividends rules.
Therefore, if these aren’t repaid before the end of the tax year, they will be treated as income and will be set off as franked dividends.
Apart from this, if a business asset is used for personal use for less than market value, these will also be subjected to deemed dividend rules. Therefore, one will be eligible to pay a predicted amount for the use of assets less than the actual amount.
Assets can also be transferred to shareholders instead of capital dividends and can be used for repayment against loans given by shareholders. Again, this will help solve tax problems. Nonetheless, the market value of the asset will determine whether it is a cost-effective deal or not.
By keeping in mind all these important tax tips, a small business will ace tax filing in Australia for the year 2021.
Don’t Blur The Lines Between The Company’s Money And Your Own
Many small businesses get caught out 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 a complying loan agreement, complete with 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.
The Golden Rule – Keep Records
Tax law requires that records be kept for five years, and they should include:
- Sales receipts
- Expense invoices
- Credit card statements
- Bank statements
- Employee records (wages, super, tax declarations, contracts)
- Vehicle records
- Lists of debtors and creditors
- Asset purchases
Records can be kept on paper or electronically but should be easily retrieved. Unfortunately, in our experience, businesses often stumble when asked by the ATO to verify transactions by providing supporting records, with the consequence that even “innocent” businesses can find themselves struggling to be unable to provide the requested evidence.
And What About Your Deductions?
We all know you’ve got to spend money to make money, and if you spend it to produce ‘assessable’ income, your business will usually be entitled to a tax deduction.
Many businesses trip up by inflating their deductions or claiming for something they shouldn’t, but a surprising number also miss out on deductions they could have claimed.
In reality, there are legitimate, not-to-be-forgotten deductions that almost every business can take advantage of.
The basic rule, of course, to avoid the attention of the ATO, is that you need to show you are ‘out-of-pocket’ and that the expense has been incurred to run your business.
Here Is Tax Deductions You May Be Able To Claim:
Advertising And Sponsorship
Costs to promote your brand and garner publicity for your business are deductible and can be claimed, as can advertising or sponsorship to sell ‘trading stock’ and hire staff.
Ensure that the costs incurred do not fall within the definition of ‘entertainment, which is not usually deductible.
A debt that is unpaid and deemed to be a ‘bad debt is an allowable deduction as long as it was included as assessable income in the present or even a previous income year, and that it is written off as bad (uncollectable) in the same year that a deduction is claimed.
Expenses incurred to get the borrowed funds can be claimed as a deduction, the proviso being that the money must be used to produce assessable income.
These expenses can include legal costs, registration fees, valuation costs, fees to guarantee an overdraft and any commissions paid. But you may have to spread the deductions over more than one year, depending on the extent of the expenses, to cover the loan period. These deductions are separate from the interest incurred on the borrowed funds, which is also deductible if the borrowed money is used to produce income.
Travel for business purposes can usually be claimed. Keep all receipts and your itinerary or diary, and of course airline tickets. Note the nature of the travel, its purpose, and where, when, and for how long (and look out for any personal activities that are mixed in, as these expenses are non-deductible).
Car Expense Deductions
You can claim a full deduction for any expenses your company incurs while running a vehicle, leased or owned, provided the vehicle is used only for business purposes.
If your business operates as a sole trader or partnership, you can claim certain proportions of deductions for vehicle expenses, but they are subject to substantiation rules.
You can generally claim a deduction for any costs involved with providing a fringe benefit to an employee.
Home Work Claims
Suppose your work is done from home or is partly home-based. In that case, you can usually claim deductions for expenses such as interest, telephone, insurance and a portion of running expenses like heating, lighting or cleaning.
Workers compensation insurance premiums are deductible, as are insurance costs for fire, business-use cars, public liability, theft and loss of profits.
Plant And Equipment (Depreciating Assets)
Larger items like cars or even buildings can be claimed over time as depreciating assets. And you may also be able to claim (either immediately or over five years) certain capital costs in setting up or ceasing a business, as long as an outright deduction can’t be claimed for that expenditure.
Repairs, Replacement, Maintenance
A deduction is available for the upkeep of machinery, tools or premises used to produce assessable income (provided they are not ‘capital’ costs).
These deductions include painting, plumbing and electrical maintenance, upkeep to windows and fences, guttering and machinery maintenance.
Generally, it means fixing defects, not replacing an item, and does not include improvements or work done immediately after acquiring an asset.
You can claim a deduction for a contribution made to your super fund if self-employed. However, care must be exercised if you also have some earnings from employment upon which the employer has paid super contributions. Contributions to an employee’s fund should also be deductible. This is because employers legally must contribute to employees’ super under the superannuation guarantee laws.
Salary And Wages
Operating as a trust or a company means you can claim a deduction for salary paid to employees or yourself, provided the salary is related to duties connected with the business.
Partnerships can’t claim for salary paid to a partner, but a deduction is available for salary paid to other employees. Sole traders can’t claim for salary paid to themselves (and you can’t claim for amounts taken from the business for private purposes).
Tax Management Expenses
Managing your business tax affairs can cost, and you can claim these as deductions. This includes paying a bookkeeper, having a tax agent prepare and lodge tax returns and activity statements, attending to a tax audit or the costs of appealing or objecting to an assessment.
For a telephone you use for business only, you can claim calls and rental, but not installation. If the phone is used for both business and private calls, you’re able to claim all business calls and a proportional part of the rental. An itemised phone account will guide this, but you can also base the claim on a representative four week period to get an average rate for the whole year.
Losses incurred by theft or stealing by an employee may be allowable deductions.