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23-Nov-2020 By - team

Small business write-off

Are you missing out on your hard-earned money? When you are trying to maximise your tax return, many people fail to take advantage of potential deductions either through not knowing or simply being disorganised. 

With the average tax return in Australia being around $2,574, learning how to increase the amount in your pocket is a great way to make the most of your refund.

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How do you get started, especially if you’re not a tax professional? Getting tax-time ready nowadays is a lot easier than it used to be. By using a few simple apps and getting familiar with the basic deduction rules, you’ll significantly reduce the stress (and time) that goes with getting your financial life together.

 

How Tax Deductions Work

When you do your tax return, you can claim most business expenses as tax deductions to reduce your taxable income.

The Australian Taxation Office (ATO) calculates your taxable income using this formula:

Assessable income – tax deductions = taxable income

Most money you get from running your business is assessable income (income subject to tax).

 

What Do Deduct And Claim On Tax?

The skies are dark, the sales are on, and every ringing phone strikes fear into the hearts of Australia’s accountants.

Yep, it’s that time of year again — tax time.

For the handful of small business owners who are confident across their finances and tax obligations (must be nice), the end of the financial year is probably like any other month. However, for the vast majority of taxpayers, it’s a scramble to gather faded receipts and furiously Google what deductions can be claimed as the dreaded July 1 deadline approaches.

To help take some of the pressure off, we have compiled a list of tax tips to help you get your affairs in order, and your claims perfected before it’s too late.

The small business sector has variously 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 Tax Office says that there are about 3 million small businesses in Australia, including primary production concerns, which represents around 96% of all business.

With all the responsibilities small business owners have, it’s easy to overlook work deductions that could have a huge impact on reducing your taxes.

Research from cloud accounting firm Xero reveals that 40 per cent of Australian small business owners are unclear what expenses qualify for tax breaks. It’s not surprising given that eligible deductions can change from year to year and vary depending on an entity’s structure.

The Australian Tax Office’s small business deductions list is a lengthy one, but even spending a few minutes reviewing it could save you a small fortune at tax time.

 

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.

 

Deductions For Small Business

You can claim a deduction for most costs you incur in running your business, for example, staff wages, marketing, and business finance costs.

Remember – you can’t claim private expenses and make sure you keep records to support your claims.

 

What business travel expenses can I claim?

If you or your employees travel for business, you can claim:

  • airfares, train, tram, bus or taxi fares
  • accommodation costs and meal expenses for overnight business travel – fringe benefits tax may apply for some employee travel expenses.

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Can I deduct the cost of some assets straight away?

If you use the simplified depreciation rules, you claim a deduction immediately for each asset first used or installed ready for use, up to the following thresholds:

  • $30,000, from 7.30pm (AEDT) on 2 April 2019 until 30 June 2020
  • $25,000, from 29 January 2019 to 7.30pm (AEDT) on 2 April 2019
  • $20,000, before January 29 2019.

 

What can I claim if I have a home-based business?

If you run your business at your home, or your business is based from home, you can claim the business portion of some expenses, including mortgage interest and electricity.

If you sell your home, you may have to pay capital gains tax (CGT) on the business portion and declare it in your tax return.

 

Claiming A Tax Deduction For Business Travel Expenses

Your business can claim a deduction for travel expenses related to your business, whether the travel is taken within a day, overnight, or for many nights.

Expenses you can claim include:

  • airfares
  • train, tram, bus, taxi, or ride-sourcing fares
  • car hire fees and the costs you incur (such as fuel, tolls and car parking) when using a hire car for business purposes
  • accommodation
  • meals, if you are away overnight.

To claim expenses for overnight travel, you must have a permanent home elsewhere, and your business must require you to stay away from home overnight.

If you are entitled to goods and services tax (GST) input tax credits, you must claim your deduction in your income tax return at the GST exclusive amount.

 

Expenses you can’t claim in a business travel

You can only claim the business portion of business travel expenses. You must exclude any private expenses, such as:

  • a holiday or visit to family or friends that is combined with the business travel
  • the expenses associated with you or your employee taking a family member on the trip
  • souvenirs and gifts
  • sightseeing and entertainment
  • visas, passports or travel insurance
  • travel expenses that arise because you are relocating or living away from home
  • travel is undertaken before you started running your business.

 

How to claim employee travel expenses

If your employees travel for your business, the business must pay for the travel expense to be able to claim it as a deduction. The business can pay for the expense by:

  • Paying directly for the expense from the business account
  • Paying a travel allowance to the employee
  • Reimbursing the employee for their expenses

Fringe benefits tax (FBT) may apply if your business pays for or reimburses your employees for their travel expenses. Certain exemptions and concessions may apply to reduce your FBT liability. For example, your business may not have an FBT liability if it reimburses an employee for their travel expenses to attend a work conference, which the employee would have been able to claim as an income tax deduction if you hadn’t reimbursed them.

You will be liable for FBT if your employee extended their travel for private purposes and you reimburse the employee for these private costs. If your business provides benefits to your employees, you may need to obtain some records from the employee.

If you are the director of a company, and the business pays for private portions of your travel expenses, there may also be Division 7A implications.

If you pay your employees a travel allowance or a living-away-from-home allowance, there are different considerations.

 

Claiming Tax Deductions for Work Clothing

Do you need to wear a suit to work? Or perhaps you need to wear a uniform emblazoned with your company’s logo? Perhaps you work in a clothes shop and have to come to work wearing clothes bought in that store? It’s essential to clarify your employer’s dress code policy so you can confirm how to claim clothes come tax time. 

To help you make the most of your work-related clothing deductions, but also stay on the right side of the rules and avoid any issues with the ATO, we’ve put together a comprehensive guide outlining what you can and can’t claim:

 

WHAT WORK RELATED CLOTHING EXPENSES CAN I CLAIM?

When it comes to what you wear to work, there are some clothes-related deductions you can claim, including the cost of buying and cleaning occupation-specific clothing such as:

  • Protective and unique clothing (i.e. not everyday wear)
  • Clothing that easily identifies your occupation, like checkered chef trousers
  • Distinctive uniforms

Clothing and footwear that you wear to protect yourself from the risk of illness or injury posed by your job or the environment in which you do your job. To be considered protective, the items must provide a sufficient degree of protection against that risk, and might include:

  • Fire-resistant and sun-protection clothing (including sunglasses)
  • Hi-vis vests
  • Non-slip nurse’s shoes
  • Rubber boots for concreters
  • Steel-capped boots, gloves, overalls, and heavy-duty shirts and trousers
  • Overalls, smocks and aprons you wear to avoid damage or soiling to your ordinary clothes whilst at work.

 

WHAT CLOTHING DEDUCTIONS ARE NOT CLAIMABLE?

Only items that are specific to a particular occupation – and cannot be worn outside of that workplace – can be claimed as work clothing. This means: 

You can’t claim the cost of purchasing or cleaning any kind of office attire or business suits, but also clothing such as a bartender’s black trousers and white shirt.

If you work in a clothing store, you also can’t claim the cost of the clothing you purchased in that store, even if you’re required to wear it to work, as those items of clothing are not specific to your occupation (you could also wear them outside work).

Ordinary clothes (such as jeans, shirts, shorts, trousers, socks, closed shoes) are not regarded as ‘protective clothing’ if they lack protective qualities designed for the risks of your work. For example, it could be argued that closed-toe shoes provide a level of protection for your feet from workplace hazards. Still, unless that protection is something specific, over-and-above a general level of foot protection, you’re unable to claim a deduction.

 

CLAIMING THE COST OF WORK UNIFORMS

Compulsory work uniform

This is defined as a uniform that identifies you as an employee of an organisation. The uniform must be compulsory to wear while you’re at work with a strictly enforced policy, ensuring its enforcement. If this is true of your uniform, the cost is deductible. Typical occupations where a compulsory uniform is required include police officers, nurses, military personnel, airline staff and supermarket staff.

Shoes, socks and stockings might also be claimed as a deduction if they are an essential part of a distinctive compulsory uniform. Their colour, style and type must be specified in your employer’s uniform policy, as is sometimes the case with flight attendants and nurses. It might also be possible to claim for a single item of distinctive clothing, such as a jumper if it’s compulsory to wear to work.

Non-compulsory work uniform

In some instances, you can claim a non-compulsory uniform if it is unique and distinctive to your organisation. Clothing is considered unique if it has been designed and made solely for your employer. Distinctive clothing must have your employer’s logo permanently attached and not be available for public purchase.

You can’t claim the cost of purchasing or cleaning a plain, logo-free uniform, such as the generic white shirts or black trousers worn by the wait staff. Non-compulsory work uniforms are usually required to have a design registered with AusIndustry in order to be tax-deductible. Shoes, socks and stockings aren’t considered part of a non-compulsory work uniform, and neither is a single item such as a jumper.

 

DRY CLEANING OF WORK CLOTHING

It’s possible to claim the costs of washing, drying, ironing and dry-cleaning eligible work clothes. Written evidence for your laundry expenses, such as diary entries and receipts must be kept if both the amount of your claim is greater than $150, and your total claim for work-related expenses exceeds $300. 

Instead, for washing, drying and ironing you do yourself, the ATO allows you to use the following amounts to work out your laundry claim:

  • $1 per load (this includes washing, drying and ironing) if the load is made up only of work-related clothing, and
  • 50 cents per load if other laundry items are included.
  • Learn more about work-related expenses you can claim.

 

CLOTHING DEDUCTIONS FOR NURSES

It’s possible to claim a deduction for the cost of clothing that’s specific to your work as a nurse. Some of the nurse specific deductions you can claim include:

  • Registration fees and memberships
  • Uniforms, laundry and non-slip shoes
  • Conferences and self-education
  • Tools of your trade, including stethoscopes and other medical equipment, reference books, and nursing fobs
  • Mobiles or pagers if you’re on call.

You might be able to claim for the cost of laundering and to dry-clean your eligible work clothes (such as non-slip shoes, socks, stockings or a tie) if they are deemed compulsory and an essential part of your work gear. This includes occupation-specific clothing, which are garments that aren’t every day in nature and would allow the public to recognise you as a nurse easily. 

 

Claiming A Tax Deduction For Motor Vehicle Expenses

As a business owner, you can claim a tax deduction for expenses for motor vehicles – cars and certain other vehicles – used in running your business.

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Types Of Vehicles

Cars (for income tax purposes) are defined as motor vehicles (including four-wheel drives) designed to carry both:

  • a load less than one tonne
  • fewer than nine passengers

 

Other vehicles include:

  • motorcycles
  • vehicles designed to carry either
  • one tonne or more (such as a utility truck or panel van)
  • nine passengers or more (such as a minivan)

The motor vehicle must be owned, leased or under a hire-purchase agreement.

If you operate your business as a company or trust, you can also claim for motor vehicles provided to an employee or their associate as part of their employment.

 

Expenses You Can Claim

You can claim:

  • fuel and oil
  • repairs and servicing
  • interest on a motor vehicle loan
  • lease payments
  • insurance cover premiums
  • registration
  • depreciation (decline in value).

 

Separate Private From Business Use

If a motor vehicle is used for both business and private use, you must be able to correctly identify and justify the percentage that you are claiming as business use. The percentage that is for private use isn’t claimable. This is an area where we often see errors made.

You can use a logbook or diary to record private versus business travel.

Travelling between your home and your place of business is considered private use unless you are a home-based business and your trip was for business purposes.

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 can help with getting your records in order and discovering the right deductions.

The recent changes to the small business CGT concessions represent a whole new ball game when selling shares or units in business entities. They are intended to close off many opportunities that might previously have existed. It is important to understand the impact of the changes, undertake the appropriate planning ahead of a proposed transaction, and identify the best outcome for each of the existing shareholders.

Bearing in mind the associated commercial discussions with the purchaser, if the tax advantages of a share sale are not available to the extent that they may have been previously, and the transaction is driven back towards the sale of business assets out of a business entity. The desire for transferring of funds out to the shareholders, both from the sale proceeds and from retained earnings/reserves, all the way through to the eventual winding up of the business entity, opens up another avenue of careful discussion and planning.

DISCLAIMER
THIS WEBSITE CONTAINS GENERAL ADVICE ONLY AND IS NOT PERSONAL FINANCIAL OR INVESTMENT ADVICE. ALSO, CHANGES IN LEGISLATION MAY OCCUR FREQUENTLY. WE RECOMMEND THAT OUR FORMAL ADVICE BE OBTAINED BEFORE ACTING ON THE BASIS OF THIS INFORMATION. INFORMATION CONTAINED HEREIN HAS BEEN SECURED FROM SOURCES EWM ACCOUNTANTS & BUSINESS ADVISORS BELIEVES ARE RELIABLE, BUT MAKE NO REPRESENTATIONS OR WARRANTIES AS TO THE ACCURACY OF SUCH INFORMATION AND ACCEPT NO LIABILITY. WE SUGGEST THAT YOU CONSULT WITH A TAX ADVISOR, CPA, FINANCIAL ADVISOR, ATTORNEY, ACCOUNTANT, AND ANY OTHER PROFESSIONAL THAT CAN HELP YOU TO UNDERSTAND AND ASSESS THE RISKS ASSOCIATED WITH ANY INVESTMENT.

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