The small business sector is the backbone of the Australian economy, representing over 95% of Australian enterprises and providing over five million jobs.
The Australian Taxation Office (ATO) provides concessions to support small businesses on a range of tax matters, often in the form of deductions.
Optima Partners offers a suite of taxation services to help you understand your tax obligations and prepare you for tax time.
Here’s what you can claim, what you can’t and how to keep records that stand up at tax time.
What are deductions?
Tax deductions can be used to decrease your taxable business income which can result in significantly less debt owed to the ATO. You can claim a tax deduction for most expenses you incur in carrying on your business if they are directly related to earning your assessable income.
A business deduction must typically meet three criteria to be accepted by the ATO:
- The expense must have been incurred for a business, not for private use
- If the expense is for both private and business use, only the business portion can be claimed
- There must be records as proof of the expense
What tax deductions can small businesses claim?
Deductions available to businesses are governed by the Income Tax Assessment Act 1997 and Income Tax Assessment Act 1936.
As a small business owner, it’s important to understand your potential deductions well in advance of tax-time so that you can maintain accurate records and streamline lodgement.
Here are some of the most common deductions for small businesses:
1. Operating expenses
Costs incurred during the day-to-day operations of your business may be eligible for deduction. These include:
- Purchasing of trading stock
- Office stationery
- Rent, mortgage, lease
- Occupancy costs
- Subscriptions
- Clothing and uniform expenses
2. Employee salaries and wages
Employers can generally claim a tax deduction for salaries, wages and super contributions paid to employees, providing that compliance is met with PAYG obligations. This includes personal super contributions for the business owner.
3. Depreciation
A depreciating asset is an asset that has limited life expectancy or can be reasonably expected to decrease in value over time. There are formulas that can be used to calculate the value of the asset and amount that can be deducted. Examples of depreciating assets include:
- Machinery
- Motor Vehicles
- Furniture
- Computers
- Phones
4. Business travel
Expenses incurred for business related travel can also be used as a deduction. This can include:
- Airfares
- Public transport
- Accommodation
- Meals
- Car hire
5. Vehicle expenses
If your business uses motor vehicles in regular operation, you may be able to claim deductions for costs associated with them, such as:
- Fuel/oil
- Servicing
- Interest on loans
- Leasing
- Insurance
- Registration
6. Marketing and advertising
You may be able to claim deductions related to marketing and advertising materials for your business, including:
- Signage
- Publications
- Advertising
- Sponsorship
7. Professional fees
Hiring professional consultants to assist your business is sometimes necessary to maintain healthy operation. In many cases, deductions can be made for these fees as well, such as:
- Legal fees
- Accounting fees
- Professional consultancy, such as business advisory
8. Insurance premiums
- Business insurance
- Public Liability
- Vehicle insurance
9. Home office expenses
If you regularly work from home as part of your business operations, you may be able to claim a portion of your at-home costs as business deductions, such as:
- Occupancy costs
- Running costs
- Travel to business locations
- Be aware that the above claims may jeopardise the main residence exemption
- The ATO have a fixed rate method of 70 cents per hour worked from home. This rate encompasses the costs of internet, home and mobile phone calls, power for heating and cooling, stationery and computer incidentals.
10. Inventory costs
- Purchase or production of stock
- Associated costs
11. Bad debts
A bad debt is income that cannot be recovered from a customer or debtor on reasonable grounds. If it can be determined that the debt is unrecoverable, you should write off in your data file to claim the deduction and the corresponding GST, if any.
12. Interest on business loans
Interest accrued on business loans may also be eligible for tax deductions in certain circumstances.
What deductions can’t be claimed?
You typically cannot claim a deduction for the cost of assets under the capital gains tax rules, such as the land your business premises are on. Some exceptions apply for capital works, plant and certain expenditure of primary producers on improvements to land.
How to keep records for tax deduction claims
It’s imperative that business owners maintain records for all possible deductions, such as sales receipts, invoices, bank statements, employee records and debtor lists. In certain instances, such as travel expenses, there may be a requirement for a separate travel log or spreadsheet with additional details.
Assessing which deductions apply to your business and determining the necessary records can be complicated. If you’re interested in getting the most out of your tax lodgements, discuss your options with one of our accountants today.
For more information on how Optima Partners’ services can help your business, contact the team at info@optimapartners.com.au or click here.
