Australian Small Business Tax Guide
The small business sector has been described as the engine room of the economy, as well as the biggest employer in the country – and it's not hard to see why. Recent research undertaken by the Council of Small Business Organisations of Australia (COSBOA) showed that small businesses were responsible for generating 5.1 million jobs, or around half of private sector employment. The Australian Tax Office (ATO) says that there are about three million small businesses in Australia, including primary production concerns, which represents around 96% of all business.
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 in relation to 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 basically means annual turnover (gross income, excluding GST) of every 'connected' or 'affiliated' business.
SMALL BUSINESS AND TAX
The importance of small business is demonstrated by the fact the government gives the small business sector a break on a range of tax matters.
TEMPORARY FULL EXPENSING
In an effort to give business a boost out of 2020’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 applies from 6th 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 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)
- Motor bikes
- 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).
For small- and medium-sized businesses (with aggregated annual turnover of less than $50 million), full expensing also applies to second-hand assets. 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
Motor vehicles that aren’t regarded as cars for tax purposes are not covered by the expensive car limit. 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 of the larger utility vehicles are also regarded as commercial vehicles rather than cars. Basically if the ute has a carrying capacity of over one tonne (the dealer or manufacturer should be able to confirm this), it isn’t regarded as a car and the car limit does not apply. As 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 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 can 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. If 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) you can claim that deduction in the last financial year. Check your payments for the period before 30 June to see if anything qualifies.
Taking care of your GST obligations can also be simplified, as eligible businesses are only required to account for GST once payment is received. You can also pay GST in installments, and the ATO will work out for you how much the installments are. A small business can also, if using some items privately, 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 are pay-as-you-go tax installments, where you can pay a quarterly installment 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.
Read our GST tax guide for more information.
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).
There are four CGT concessions that may be available to eliminate or reduce capital gains made by a small business or its owners where it disposes of "active" assets, like a trade or business premises but do not extend to passive assets such as an investment portfolio.
The reliefs are available to businesses, which are small business entities (ie, 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:
- 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.
- 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 not necessary to actually retire, the concession can be utilised more than once.
- 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.
- The CGT rollover
A capital gain arising from the disposal of a CGT asset may be deferred provided a replacement asset is acquired within a two-year period – the gain is deferred until disposal of the replacement asset.
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 to be taxable unfranked dividends for the shareholders. The intention of these rules is to stop the profits of private companies 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 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 this can also be caught by the deemed dividend rules. 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 actually paid for the use.
It's also worth considering transferring the asset to the shareholder in lieu 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 a 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. 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 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, then 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 actually 'out-of-pocket', and that the expense has been incurred to run your business.
HERE ARE 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 to hire staff. Take care to 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 in order 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 period of the loan. These deductions are quite separate from the interest actually 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
If your work is done from home, or is partly home-based, 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 a five year period) 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 things like painting, plumbing and electrical maintenance, upkeep to windows and fences, guttering and machinery maintenance. Generally it means fixing defects, not totally replacing an item, and ds not include improvements or work done immediately after acquiring an asset.
You can claim a deduction for a contribution made to your own super fund if self-employed, although care must be exercised if you also have some earnings from employment upon which super contributions have been paid by the employer. Contributions to an employee's fund should also be deductible. 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 to yourself provided the salary is in respect of 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 for 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 using 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.
WANT TO KNOW MORE ABOUT TAX DEDUCTIONS?
DON'T FORGET TO KEEP RECORDS
When it comes to running a small business, keeping on top of your paperwork may be the last thing on your to-do list. So while you focus on running and growing your business, our team at H&R Block can help with getting your records in order and discovering the right deductions.
To make the most of tax time and get your refund as fast as possible, call 132325 and lock in an appointment at your local H&R Block office today.
H&R Block can help you navigate the accounting and tax responsibilities that come with running a business. We can advise you on the best structure to set up your business. We can also assist you in the setting up of a Company, Partnership, Trust or Self Managed Super Fund.
Our small business accountants are experienced and qualified accountants dedicated to providing timely and proactive solutions for all your small business tax return needs. In fact our experience covers the whole realm of tax and associated accounting and business advisory, from compliance to growth and tax-effective strategies. Contact our Tax and Business Services team for more information.
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