Small Business Planning Tips for Maximum Tax Effectiveness
Every year at tax time, small business managers scurry around to get their paperwork in order and prepare to lodge their tax returns. There has to be a better way, and in this article, we seek to provide a few tips on how Australian small businesses can organise and plan to reduce their tax burden. These businesses can optimise their small business tax deductions with the Australian Tax Office by ensuring they are aware and, take advantage of every tax concession available.
What Deductions Can I Use for My Small Business?
- ATO tax concessions available to small business
- Small business tax deductions for Australian businesses
- Staying ahead of tax time for small business
The small business sector in Australia is important. It employs more than 5m Australians and, as such, is treated as a special category by the Australian Tax Office (ATO). The ATO defines a small business as a company with less than $10m turnover (gross income).
By way of a disclaimer, this article is not written by a tax professional. These suggestions are ideas and tips for small businesses like you to consider and discuss with your certified accountant.
ATO tax concessions available to small business
Small business owners or managers should ensure they are aware of and understand the tax concessions available for their business. It’s a good idea to be mindful of these concessions as they can dramatically impact decision-making throughout the financial year. A few concessions that should be on your radar include:
Loss carry-back scheme
Launched in 2020 and due to end after the 2022/23 financial year, the temporary loss carry-back scheme enables eligible entities to carry back losses to earlier years in which there were income tax liabilities. The offset effectively represents the tax the eligible entity would save if it could deduct the loss in the earlier year using the loss year tax rate. As it is a refundable offset, it may result in a cash refund, a reduced tax liability or a reduction of a debt owed to the ATO.
Read here to find out if you are eligible for a loss carry-back offset and learn more about this tax concession.
Full expensing of assets
Like the loss carry back concession, the full expensing of assets tax concession was launched in 2020 and is due to expire at the end of the 2022/23 financial year. This concession allows small businesses to claim a deduction for the purchase in full. Again there are specific eligibility requirements and regulations about its use. It is probably a helpful idea to discuss this with your tax agent or accountant.
These are just two of several concessions that you should be aware of and consider within your future business planning. Whilst they may seem complicated, it is essential that you are aware of these concessions and that you get the very best advice on identifying the most appropriate tax concessions for your business. These additional tax concessions include:
- Simplified deprecation rules (Instant asset write-offs)
- Accelerated depreciation for primary producers
- Deductions for professional expenses for start-ups
- Immediate deductions for prepaid expenses
Bearing in mind that the small business tax rate is 25%, it is vital that every small business fully understands and capitalises upon available tax concessions and optimises its company’s tax-deductible expenses. The best way to do that is to take advice from your accountant or registered tax agent.
Small business tax deductions for Australian businesses
One of the most effective small business tax minimisation strategies is to ensure you claim every eligible deductible expense.
If you incur an expense to produce ‘assessable’ income, then your business should be able to claim it as a small business tax deduction. Surprisingly, many companies miss out on deductions they could have claimed.
Remember, you need to prove that you have spent money on the deductible expense and that the payment is a legitimate cost of doing business. Think about the implications for your record-keeping systems.
While every small business is different, most will likely have eligible tax deductions from the following list:
Salary and wages
You can claim a deduction for salary paid to employees or yourself for work completed in connection with the business.
If self-employed, you can usually claim a deduction for a contribution to your super fund. Contributions to an employee's fund should also be deductible.
Plant and equipment (depreciating assets)
Refer to the information provided above about depreciation. Larger items like cars, fishing charter boats or even buildings can be claimed over time as depreciating assets.
Repairs, replacement, maintenance
A deduction is available for the upkeep of machinery, tools or premises used to produce assessable income.
As well as interest paid, expenses incurred to get borrowed funds can be claimed as a deduction. These might be legal fees, valuation costs, fees to guarantee an overdraft and any commissions paid.
Working from home
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 air conditioning, lighting or cleaning.
Insurances premiums for cover such as worker’s compensation, public liability, theft, loss of profits etc., can be included as legitimate small business tax deductions in Australia.
Advertising and sponsorship
Costs to promote your brand and business are deductible, as is advertising or sponsorship.
A debt that is unpaid and deemed 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.
Travel for business purposes can usually be claimed as a deductible expense. Beware of any personal activity expenses that may be included in these costs, as these expenses are non-deductible.
Car expense deductions
All expenses are fully deductible if your vehicle is used purely for business purposes. If the car also serves your personal needs, you will only be able to claim a portion of those running expenses.
Tax management expenses
Managing your business tax affairs can be complicated. But at least you can claim the cost of a bookkeeper, tax agent and accountant. As mentioned, having an expert ensure you optimise your small business tax minimisation efforts can save you much more than the deductible expense.
Staying ahead of tax time for small business
There is much to be aware of at the end of the financial year. Besides using the skills and knowledge of a tax professional, you can do several things to transform your business and make tax time less arduous. Here is a quick tip list for your consideration. Central to them is the need to start thinking about the end of the financial year at the beginning of the year. Consider what information you will need so that when tax time comes around, you can brief your agent in an efficient and timely manner:
- record cash income and expenses
- account for personal drawings and use of company money or assets
- record goods for your personal use
- separate private costs from business expenses
- keep valid tax invoices for creditable acquisitions when registered for GST
- keep adequate stock records
- keep sufficient records to substantiate motor vehicle claims.
- exploit opportunities to prepay expenses
- if you have staff maintain all employee records
- maintain a master file of all insurance expenses
- ensure you generate regular creditor and debtor reports
There is much to do every day of the year for small businesses. It is easy to say I’ll worry about tax at the end of the financial year. Spending some time at the beginning of the year planning for tax may well simplify the process and enable you to claim every small business tax deduction the Australian Tax Office will allow.
If you have only one takeaway from this article, let it be this: you should always seek professional advice. It’s one expense deduction well worth the cost, regardless of whether you intend to claim it or not.