New to small business and still trying to figure out this whole tax thing? As the end of financial year is quickly approaching, it's probably best you take a crash course!
Remember when you were an employee and tax provisions were done for you? Well hopefully before now that you have your own small business you've realised that payments like GST, superannuation for employees and Pay As You Go tax (PAYG) don’t happen automatically.
With the 2019 financial year coming to an end, now is a good time to get out your receipts and statements, book a meeting with your accountant to get a tax estimate and advice on what deductions you can claim. In the meantime, we have a few tips to get you on your way.
$20,000 to $30,000 instant asset write off
The ATO has extended its instant asset write-off to 30 June 2020. This means if you have bought, or buy, an asset for your small business and for less than the relevant threshold amount you can write off the business portion of it in your tax return for the relevant income year. The amount you can write-off depends on when you purchased your asset and first used or installed it ready for use in your tradie business.
Assets you can write off include vehicles or equipment like office furniture, computers, printers, mobile phones and even TVs or other recreational items, provided they are used in your place of business.
Your business is eligible for the instant asset write off if it turnovers $10 million or less from 1st July 2016 (or $2 million or less in prior years) and the asset was first used or installed ready for use in the income year you are claiming it in.
Using automatic payments
With online banking and paperless bills commonplace today, managing monthly or periodic expenses is super easy through automatic debits. While that's handy through out the year, when it comes to tax time make sure you remember to add them to your deductions.
Go through your bank statements carefully to include any automatic payments to your list of deductions. These kinds of expenses usually include telephone and internet plans, insurance premiums, subscriptions to trade or professional organisations, rent or leasing agreements, electricity and water usage, conferences or seminars/webinars.
Prepaying expenses for next year
If you can afford to, consider prepaying for expenses that are due early in the following financial year, such as income protection insurance, interest, next months rent. This is a common way to help reduce your tax bill.
Writing off bad debts
As a small business owner, chances are you’ve probably encountered a bad debt i.e. a client that hasn’t paid you for your services no matter how many times you've tried phoning, emailing or sending them invoices.
You can only write off a bad debt in your tax return if you record your income on an accrual basis, that is, you recognise income in your accounting system when it is invoiced, not when it is banked into your business account.
A debt is considered ‘bad’ if a debtor:
has died leaving no, or insufficient, assets to meet the debt
can't be traced nor any assets found
is bankrupt or in liquidation and insufficient funds exist.
Sufficient steps must have been taken to recover the debt and there must be justification for no longer pursuing the debt.
It's important to remember that if your bad debt is later paid, after you have written it off, you will need to include it as income in the year the debt is recouped.
Small business tax deductions
Superannuation and bonuses
If you have employees you will be paying superannuation to them. Ensure you pay it, and check the superfund has received it, before the end of the financial year to claim it as a deduction on your tax return. If you give bonuses to your employees you can also claim it is a tax deduction, but only if it is paid before the end of the financial year.
Employee and related trade deductions
Any expense you pay for your employees can be deducted. Employee deductions can also extend to contractors you employ for the purpose of completing a job. Expenses that may be deducted include training workshops, uniforms, work phone and overtime meals.
According to the ATO, any expense related to your business is deductible. These can include car servicing, uniform and protective clothing, stationery, petrol, dry cleaning, ink and paper for your home office, parking fees, self education expenses and last years tax lodgement fee can be claimed. If work is performed outdoors you can even claim for costs for safety glasses, sunglasses, sunhats and sunscreen.
Remember though, you must be able to prove that:
you needed to incur the expense to earn an income
the expense is not private or domestic in nature
the expense is not related to capital asset.
Beware of claims you aren’t entitled to
With the ATO cracking down on dodgy deductions, particularly focusing on claims around travel expenses and electronic devices used for the home office, be sure you know what you are legally entitled to claim.
Some of the most common deduction mistakes include claiming:
travel expenses for private use of a vehicle, and between your home and worksite, unless you are a home-based business (then you can generally claim the cost of trips you make between your home and other places for business purposes)
fines you incurred when you were at work, such as parking fines.
100% of the expense when you only use a portion for business.
Remember that over-claiming and illegitimate claims can send warning bells to the ATO. You will have to pay back the deduction and receive a hefty fine. If in doubt about what you can claim, seek the advice from your tax professional.
Records, records, records!
To be sure you do the right thing, KEEP RECORDS.
Claiming all legitimate deductions, big and small, can add up making the difference between a high tax bill and a manageable one. To make it easier to handle and store your records, look at tax record-keeping software. Talk to your bookkeeper or accountant about a record system that is easy to understand and operate to suit you and your business. Not only will it show what you are entitled to, it can save on the cost of managing your tax affairs providing clear, organised records, rather than a shoebox of paperwork.
While keeping tax records, receipts and logbooks can be time consuming, long term they can save you money this financial year and later ones. And if you are audited you can rest easier knowing you have records to back up your claims.
Disclaimer: None of the above constitutes tax or legal advise for your own business, be sure to talk to your accountant about the rules mentioned and impact on your business structure.