The Australian Tax Office (ATO) recently said it’s expecting a ‘tax time like no other’. That’s because, in the wake of an entirely extraordinary, unprecedented few months, the government has implemented a number of new policies, and tweaked a number of existing ones, to help provide a little financial relief for the millions of Australian small businesses battling the coronavirus pandemic.
So with tax season upon us, it’s time for you to be thinking about what deductions you can claim in relation to the running of your small business.
When determining which deductions you might be eligible for, it’s important to keep in mind that the expenses must be for your business rather than for private use, that if the expense is for a mix of both business and private use you can only claim the business portion, and you must have records to prove it.
Whether you’re preparing to submit your tax return yourself, or are compiling the relevant information and reports for your accountant, here are a couple of deductions to keep in mind, so you can make the most of this year’s tax return.
Setting yourself up
In response to the pandemic, the government recently increased the instant asset write-off threshold from $30,000 to $150,000 for eligible businesses from 12 March 2020 until 30 June 2020.
Eligibility has also been expanded to cover businesses with an aggregated turnover of up to $500 million, allowing for immediate deductions on the business portion of the cost of an asset in the year the asset is first used, or installed ready for use. So, if you own a small retail store, for instance, and recently bought a new CCTV system for added security, ensure it’s included in your tax deduction.
Many small business owners know that they can deduct current expenses, but some don’t realise that you can also deduct capital expenses that are more than the instant asset write-off threshold, or the costs of getting your business started, over a longer period of time.
This means that business assets which were purchased prior to 12 March over $30,000, such as a new work van, are combined into a pool which can then be deducted by 15% in the first year and 30% in each subsequent year.
The home office
If you have a dedicated work-only space such as a home office, you can claim deductions for home-based business expenses. Particularly over the last couple of months, many small business owners found themselves working from home more than usual.
In response to this influx, the ATO created the shortcut method of calculating additional running expenses; business owners can now claim 80 cents per hour for the additional running expenses incurred, including electricity, phone and internet expenses, stationary and home office equipment, from 1 March 2020 until at least 30 June 2020.
You can also claim occupancy expenses, which are costs relating to the space you use to run your business, including rent, mortgage interest and council rates. However, the claim is dependent on the percentage of your home that is used for business.
For instance, it’s likely you can claim bigger deductions if two or three rooms of your house are dedicated rooms for your fashion retail business – designing and making clothes in one, packaging and sending in another and admin from a third – than if you run a copywriting business from your desk.
Insurance premiums that protect your business’ capacity to earn an income are deductible, such as income protection and commercial car insurance. You can claim against premiums that protect you against a loss of income, while the percentage you use the car for work is the percentage of your car insurance you can deduct.
Travel and transportation
There are a number of deductions that you can claim relating to expenses for motor vehicles including cars and other vehicles which are used in the running of your business.
For instance, fuel, maintenance, lease payments, depreciation and registration costs can be deducted for business owners who use their personal car for work-related reasons, apart from driving to and from work.
If the vehicle is used for both business and private use, it’s important to be able to correctly identify and justify the percentage that is for business use. For ease, consider using a logbook or diary to record private vs. business travel.
Also, if you’re travelling anywhere for business, you can claim deductions on airfare, train, bus or taxi fees. Make sure to keep track of all business-related receipts to make figuring out this deduction easier.
If you use a credit card or personal loan to finance a business purchase, such as a new piece of large machinery if you’re a contractor, the interest on the transaction can be tax-deductible. If you’re claiming deductions on this interest, it’s important that you keep records to prove the funds were used solely for business purposes.
Fees for the services you use to conduct your business are tax deductible in the same year that you incur them. These services can include anything from credit card and money transfer fees, to business-related internet use.
Expenses relating to repairs or maintenance can be tax deductible, provided that they’re not capital expenses. For instance, expenses incurred in repairing electrical appliances, mending leaks or replacing broken glass in windows relevant to your business are deductible. So, if you’ve done some maintenance around the office, ensure you have the records to prove it.
Salary and wage expenses are a type of operating expense so, if you have employees, you might be eligible to claim a deduction for their salaries and wages, as well as their super contributions. The deductions you can claim depend on the type of business you operate, so make sure you know what you’re entitled to.
If you spend money on improving your business-related skills, you can claim back on expenditure, providing the course you undertake leads to a formal qualification and is likely to result in an increase in your income from your current work activities.
For many small business owners, tax can be a cause for headaches and stress – particularly so this year, perhaps, as we collectively and individually seek to mitigate the impacts of the post-lockdown economic crisis. However, by not only being diligent with documenting and reporting everything throughout the year, but understanding the financial relief you may be eligible for, you may have a little more peace of mind as the new financial year approaches.
Disclaimer: Invoice2go does not provide tax, legal or accounting advice. This article has been prepared for informational purposes only, and is not intended to be relied on for tax, legal or accounting purposes. You are strongly encouraged to consult your own tax, legal and accounting advisors to determine how the information may relate to you or the specifics of your business.
Mark Bartels is the CFO of Invoice2go, the mobile invoicing app that gives small businesses and contractors control over their time and business.