Tax Essentials For Small Businesses
Tax season can be overwhelming for small business owners, but it’s important to understand the basics to make the most of your return.
This article will overview key tax concepts for small businesses, including deductions, exemptions, and filing requirements. Then, with a little knowledge ahead of time, you’ll be ready to file your return confidently and get the most out of your business taxes.
Starting a small business in Australia can be a great way to make money and be your boss, but it’s important to understand the tax requirements before you get started. This blog post will outline the basics of taxation for small businesses in Australia, including income tax rates, deductions, and GST.
Did you know that you’re responsible for managing your tax affairs as a small business owner in Australia? This can seem daunting, but it’s achievable with a little organisation and planning.
In this blog post, we’ll outline some of the key tax essentials you need to be aware of as a small business owner. We’ll also provide some handy tips on how to stay on top of your tax obligations throughout the year.
Small business owners have to deal with Australia’s paperwork and complex legal requirements. Filing your taxes correctly is one of the most important things you need to do as a small business owner, but it can be unclear where to start.
This blog post will provide an overview of the Australian taxation system for small businesses and outline the most important things you need to know to file your taxes correctly. So if you’re looking for a guide to tax season, you’ve come to the right place!
As a small business owner in Australia, tax time can seem daunting. But with the right information, it doesn’t have to be! This post will outline the key essentials you need to know about Australian taxes for small businesses.
We’ll cover everything from how to register for an ABN to what deductions you can claim. So whether you’re just starting out or you’re gearing up for tax time, read on for our top tips!
Nearly every small business owner is responsible for managing their taxes. However, tax laws can be complicated and confusing.
This guide provides a basic overview of the most important tax concepts small business owners need to know. By understanding these essentials, you’ll better manage your tax obligations and avoid any costly mistakes.
It’s important to be aware of the various tax essentials and deadlines of owning a business. In this blog post, we’ll outline some of the key things you need to know about Australian taxes so that you can stay on top of your paperwork and compliance obligations.
We’ll also provide tips for making the tax filing process as straightforward as possible. So if you’re ready to learn more about Australian taxes, keep reading!
Are you a small business owner who is confused about tax essentials? Do you know what you need to do to stay compliant and avoid penalties? If not, don’t worry – this blog post is for you.
We’ll go over the most important things you need to know about taxes, including what kinds of taxes apply to your business, how to file your return, and more. So read on for helpful tax tips that will make filing your return a breeze!
As a small business owner in Australia, you must know the different tax requirements and obligations you need to meet. This handy guide provides an overview of the key essentials you need to know, from registering for GST to recording income and expenses.
So if you’re looking to take some of the stress out of your tax planning, read on for our top tips!
Let’s get started!
Tips for Understanding & Categorising Your Business Expenses
According to data from the Australian Bureau of Statistics, almost 2.5 million businesses actively trading in the Australian economy. Around 97% of these businesses have less than 20 staff, which adds up to approximately 5 million workers employed by small businesses.
As such, it’s no exaggeration to say that small businesses are the lifeblood of our nation’s economy.
And to keep the economy moving, small business owners need to maximise their profits and control their cash flow. That means understanding all their financial matters, including recording and categorising small business expenses for tax deductions.
1. What Are Business Expenses?
Any necessary and ordinary costs incurred for a business to operate and trade are what is business expenses. If a business is operating to make a profit, these expenditures can be deducted at tax time, reducing the overall amount of taxable income you’re required to pay tax on.
The ATO uses the following formula to work out how much of income is your taxable:
Assessable Income – Tax Deductions = Taxable Income
The Assessable Income part of this equation is generally all of the gross pre-tax income earned from carrying out a business.
It also includes all other forms of income from transactions intended to make a profit, such as capital gains, stock trading, crowdfunding, government payments, sharing economies, foreign income, and cryptocurrency investments.
Tax Deductions will be able to be claimed for most of the day to day costs incurred when running a business for profit, not including GST. Therefore, your small business expenses need to be tracked and categorised to increase savings substantially.
2. Types Of Business Expenses
Business expenses are split into four main types: General, Operating, Capital, and Inventory. More information about each is below:
1. General Expenses
These are all general costs associated with managing and supervising your business. This includes expenditures for employing staff such as wages or salaries and super contributions.
2. Operating Expenses
This includes any of the necessary costs of running a business. Sometimes also known as revenue or working expenses, these include the costs of rent, utilities, marketing, maintenance, vehicles, and anything else required to operate the business.
3. Capital Expenses
Any assets purchased to make goods, provide services, or otherwise increase the growth or profits are categorised as capital expenses. This includes the purchase price of equipment, machinery, and furniture, as well as cash, vehicles, patents, manuals, and real estate.
4. Inventory Expenses
These are any direct and indirect expenses associated with inventory, such as storage, taxes, insurance, and shortages.
The three main types of inventory are:
- Raw Materials
- Finished Goods
While business inventory isn’t tax-deductible, it can be used to reduce the gross receipts. This is why the total value of all trading inventory must be accounted for at the end of each Financial year.
3. Deductible Business Expenses (Partially Or Fully Deductible)
When it comes to the general costs incurred when running your business, the good news is that the vast majority of expenses can be offset to reduce your taxable income.
That being said, some exceptions are only eligible for a partial reduction, whereas others are excluded outright.
According to the ATO, business expenses can be claimed as tax deductions as long as:
- They are related directly to earning income for the business
- You keep records to substantiate your claims
- They are solely for the business and not private use*
*If an expense is for a mixture of both business and private use, only the portion used for business can be claimed.
Below is a list of categories most businesses can claim as deductible business expenses.
- Payroll, Salaries, & Employee Benefits
- Rent or Mortgage
- Maintenance & Repairs
- Cars & Other Motor Vehicle Expenses
- Communications, Internet & Cloud storage
- Inventory & Stock
- Licenses & Permits
- Legal, Accounting, & Professional Services
- Office Furniture, Equipment, & Supplies
- Marketing, Advertising, & Sponsorship
- Software & Subscription Services
- Business Travel & Accommodation
- Public relations
While this is not an exhaustive list, it should give you a good idea of where to start. In addition, educating yourself about the most common expense categories for small businesses should make it much easier to determine what you can deduct at tax time.
4. Non-Deductible Expenses
While most small business expenses are considered tax deductions, not all are allowable.
Some small business expenses that cannot be used to reduce taxable income include political contributions or lobbying, social memberships, and obviously any illegal activities. Some of the most common non-deductible business expenses are:
- Fines or Penalties
- Expenses For Client Entertainment
- Gifts Not Connected to Earnings
- GST Component of Expenses
- Personal Expenses
Even though the business has paid for the expenses above, they’re considered non-deductible by the ATO.
Small Business Tips For Your 2022 Business Tax Return
1. Claim, claim, claim
Even as we start to move into recovery mode, the financial outlay required to keep many small businesses up and to run in response to the COVID-19 pandemic has been huge.
From safety equipment to rising production costs, every small business in Australia has had to spend money to keep making money.
So when it comes to what tax deductions you can claim – if you have had to spend money on it to keep carrying on your business and it directly relates to earning your assessable income, you can generally deduct it.
The ATO website has a detailed list of goods and services you can claim, but some of the standout items for 2021 include:
- COVID Safe personal protective equipment (PPE) gear for you, your staff, and your customers for use in your business
- Self-education for small business owners who have been upskilling for their role during lockdown
- New technology is required to allow you to continue to operate your business and replicate complex office environments while working from home
- Small business accounting fees
The Government’s Instant Asset Write off and Temporary Full Expensing schemes in place during FY21 also allow you to claim an upfront tax deduction for most assets, such as furniture and computer equipment, instead of depreciating over several years. Visit the ATO website for more details, or contact your tax accountant to discuss your situation.
2. Do you declare Job Keeper and Job Seeker?
Like 2020, lodging your tax return this year is slightly more complex than in normal years with the introduction of various government support measures for small businesses in response to COVID-19.
However, it’s pretty straightforward when it comes to claims – you must declare any Job Keeper and Job Seeker payments as income.
For more information about incorporating the COVID-19 financial packages into your FY2020/21 tax return, check out the ATO’s handy guide.
3. Unpaid invoices can work in your favour
If you have unpaid invoices that your customers cannot pay (which is not uncommon given the spate of lockdowns many small businesses have had to endure), then the good news is there’s a chance you can write those off as a bad debt.
‘Bad debt’ refers to any unpaid invoices you might have, where you are confident those outstanding invoices are not going to be paid, and you have made several attempts to redeem payment.
Writing off bad debts can reduce your taxable income; however, as always, it’s best to chat with your business tax accountant about your specific circumstances and how to write off bad debts.
4. Boozy lunches are (still) not a tax write off
Thinking you can sneak in some pub lunches on your small business tax return this year? Think again. Although it might be tempting to lean into some ‘creative accounting’ at tax time, it’s important to play by the rules regarding what you can claim as a small business write off.
Aside from the penalties (which can incur fines of up to $360,000 and jail time in some cases), you must also bear in mind that you have a business and staff to consider.
It’s a good idea to check what you can and cannot claim, but some of the more common mistakes made by small business owners include claiming items such as:
- Client lunches or dinners
- Personal UBER or taxi fares
- Uniform dry cleaning for non-uniform items
- Luxury bags posing as ‘laptop bags’
- Vehicle costs over 5,000km without a logbook
Tax Deductions And Write-Offs For Your Small Business
1. Claiming the instant business asset write-off
This is a rule that may allow you to claim eligible business assets, like vehicles, machinery and equipment in the year of expenditure.
If your business meets the eligibility tests, you may be able to claim asset purchases in your tax return for 2021. This is provided they are first used or installed and ready for use within the periods required by the ATO.
There may be time to make purchases for your business and claim the eligible amount against your income in that year. However, not every purchase or expenditure may qualify, and the rules are complex, so you’ll need to seek your independent taxation advice before buying the asset.
2. Claiming depreciation of business assets
Tax deductions are generally not available immediately (except in special conditions like the instant asset write-off – see above.) Rather, the asset’s cost is claimed over time, reflecting its decline in value.
This is commonly referred to as tax depreciation. Tax depreciation is complex and different rules can apply, depending on the type of asset and its use. In addition, certain small business entities may also elect to use the simplified depreciation rules to work out their tax depreciation claim.
3. Prepaid expenses
Running your own business can be expensive, but you may be able to claim some running expenses as tax deductions – including ones you pay for ahead of time.
Prepaying some expenses before 30 June can increase your allowable deductions for the financial year they are paid. Eligible expenses include a service period of 12 months or less, for example, annual policies, utility bills or professional subscriptions.
Keep in mind that if you claim them this year, you won’t be able to claim them next year, meaning you may have more tax to pay next year.
4. Business account and loan expenses
It would be best to consider whether you can claim the fees and interest from your business accounts and loans around tax time.
5. Deductions for personal super contributions
If you’re aged under 751, you may be able to claim a tax deduction for personal super contributions made to an eligible super fund.
Those aged 67 and 74 need to meet the work test to contribute, which means you need to be employed for at least 40 hours over 30 consecutive days during the financial year.
From 1 July 2019, if you are aged 67 to 74 (measured at the time of the contribution), you may be able to continue making voluntary contributions for a further 12 months from the end of the financial year in which you last met the required work test, due to the work test exemption.
To qualify to make contributions under the work test exemption, your total superannuation balance (just before the financial year of contribution) must be less than $300,000. Once you have used the work test exemption for a financial year, it cannot be used again in the future.
When claiming a personal superannuation deduction for the financial year, it’s important to remember that the combined total of your superannuation guarantee payments, salary sacrificed amounts, and your personal tax-deductible contributions do not exceed $25,000 in a financial year or extra tax will apply.
To make a personal tax-deductible contribution, you need to submit a valid ‘Notice of intent to claim or vary a deduction for personal super contributions’ form to your super fund within the prescribed time limits and receive an acknowledgment for a valid notice from the fund in writing. Refer to the ATO website if you intend to claim a tax deduction for personal contributions.
6. Other deductions
If you have been recently working at home due to the coronavirus, you may be entitled to claim tax deductions for expenses related to generating your income.
There are several criteria to consider before claiming an amount in your tax return; for instance, you should consider whether you can claim the temporary ATO approved “shortcut method” (of 80 cents per hour for all additional running expenses) for the period 1 July 2020 until 30 June 2021.
Other calculation methods may also be acceptable and more appropriate to your circumstances. However, it would be best to consider which method is best for you and the criteria required to claim a deduction. Further information is available on the ATO website.
You pay many other expenses to keep your business running or help you earn business income, which may be tax-deductible. You can find more information about claimable deductions on the ATO website or by speaking to an accountant or tax adviser.
Small Business Accounting Tips For Managing Your Cash Flow
Developing good cash flow management habits is crucial to the success of any business – whether it’s a start-up, established small business (SME) or big business.
Cash management must be a top priority for small business owners. You’ll find yourself in deep water if you have insufficient cash flow. This is a business risk you want to avoid.
Here are our top small business accounting tips to help businesses manage their cash flow for success.
Rule 1: Never be too busy to invoice
Running a small business from day to day can be time-consuming, and it’s easy to let paperwork (whether it’s physical or digital) pile up. But if you’re not invoicing on time, you’re not getting paid on time or generating the revenue to support your business goals.
Tip: Use invoicing software that triggers an invoice to be sent when a product or service is delivered and sends a reminder before the due date if needed. An alert can also be programmed to tell you when someone doesn’t pay on time.
Rule 2: Always have a cash reserve
Having a cash reserve is a must when running an SME business. At any moment, an unexpected personal, local, or global crisis could send your small business into a tailspin. So, having a cash reserve to help protect your small business could be vital to its survival.
Part of managing your cash flow is making sure you’re covered in case of an emergency. Therefore make sure you save those extra dollars and don’t touch your business savings account unless you absolutely need to.
Tip: If you hit a rough patch with your cash flow, consider applying for a small business loan. You can use your cash reserve to pay it back later if necessary, but if you use up your reserve and your cash flow situation looks bad, getting a business loan down the track could be harder.
Rule 3: Keep your bookkeeping meticulous, no matter what
Having immaculate accounting records can keep you out of trouble and make it easy to resolve issues if questions are ever raised about your cash management. If bookkeeping isn’t your thing, use accounting software and hire out the tricky bits, but don’t let your record-keeping slide.
Tip: Remember that if you use a business credit card to pay for anything, it doesn’t impact your books until you pay the credit card bill. Don’t make the mistake of double-debiting your books!
Rule 4: Be nice to your customers, but not too nice
Being too lenient with your customers can lead to putting yourself in an unnecessary cash crunch.
Carrying a balance for a customer weakens your cash flow, so make sure you send them an invoice, follow up and follow up again until you get paid. Australia makes payment terms part of contract law, so the only one preventing you from getting paid is you if you aren’t sending out invoices promptly.
Tip: You don’t have to be mean, but you can’t afford to be a pushover. Track your accounts receivable turnover and have a plan in place for aggressive pursuit of payments owed if necessary.
Rule 5: Don’t mix business and personal finances
If you invest your own money in starting or running your small business, make sure you only invest what you can afford. Your small business may succeed or fail, but protecting your personal finances should always take priority.
Tip: Have a completely separate business banking savings account and business debit card, or small business credit card, for your business. This will keep your business transactions separate from your own money and will help you track how your business cash flow is doing.