In small business you’re managing a lot! Trying to keep sales up, keep expenses down, maximise profit, not pay too much tax, get as much life out of your assets as possible and pay your small business loans. If that’s not enough there are employees to manage, business activity statements to lodge, then more tax to pay in instalments. In this guide, we break down the key topics to help make life a bit easier.
Sales & Revenue
Sales in a small business refer to the revenue generated from the sale of goods or services to customers. This can include a wide range of products and services depending on the nature of the business. For example, a retail store might generate sales from the sale of merchandise, while a consulting firm might generate sales from the provision of professional services. Sales are generally recorded as they occur, or at the end of each accounting period. Sales figures are commonly used by small business owners to track the performance of their business, set prices, and make decisions about inventory and production. They are also used for tax reporting and for making forecasts. Sales income, or revenue, does not include the GST that you collect.
These are expenses incurred in running your business. Mostly these will be tax deductible, but there are a few items that are not.
For any item to be tax deductible:
- The expense must have been for your business, not for private use.
- If the expense is for a mix of business and private use, you can only claim the portion that is used for your business.
- You must have records to prove you incurred the expense.
An example of an asset that may be part personal and part business use might be your car, or your laptop. If you only use your laptop half for work and half for personal use, then you can only claim 50% of the cost.
It’s easier to look at those expenses that are not tax deductible rather than list the million that are tax deductible, so what expenses are not tax deductible?
- Traffic fines, late lodgement fines and pretty much all government related fines,
- Personal expenses, such as childcare fees or food for your family,
- Expenses relating to a hobby that you do not declare income for,
- Any payments on your Business Activity Statement (BAS) relating to GST.
- Prepaid expenses greater than $1,000 are not immediately tax deductible and are dealt with below.
When to claim a tax deduction
Generally most expenses are claimed as a tax deduction in the year of the expenditure. However, the type of expense; operating expense or capital expense will determine exactly when you can claim your deduction.
As a general rule:
- Operating Expenses are able to be claimed in the year you incur them. These are general expenses in running a business such as rent, power, stationery, internet etc. You incur this expense when you have a legal obligation to for the goods or service.
- Capital Expenses are tax deductible over their effective life. This can be 2 years in the case of a laptop or 4 years in the case of a concrete mixer.
Claiming depreciation of your assets
As noted above, capital expenses are tax deductible over their effective life. A capital expense is generally the purchase of a business asset. There are two ways to claim a tax deduction for business asset:
- Apportion the cost of the asset over its useful life and claim an annual tax deduction for a portion of the costs until you have claimed a tax deduction for the total cost of the asset.
- Use the temporary instant asset write off rules to claim a tax deduction for the total amount spent on an asset up to $150,000.
Note that not every asset purchase will qualify for the instant write off rules. As an example cars have different rules which you can view via this link.
Claiming a deduction for a prepaid expense
Expenses you pay in advance have slightly different rules than a standard operating expense. This occurs when the prepaid expense is over $1,000. A prepaid expense could be a license, a membership, Insurances, borrowing costs and similar expenses that may span more than one financial year.
A Prepaid Expense is an expense you incur now for a good or a service that you will receive the benefit for in whole or in part in a later income year.
Where the prepaid expense is $1,000 or more you need to deduct this expense across the whole supply or service period.
For example, if you paid for a 12 month professional membership which cost $2,000 on the 1st of April, you could deduct $500 in the current financial year and $1,500 in the following financial year.
Claiming a tax deduction for cars
Cars are defined by the ATO as “motor vehicles (excluding motorcycles and similar vehicles) that carry loads less than one tonne and less than nine passengers”. Many four-wheel drive vehicles are included in this definition.
If you use your car in your business, or the business owns your car, there are different methods for claiming tax deductions. These are:
- Cents per kilometre method
In Australia, one of the methods for claiming car expenses for a small business is the cents-per-kilometre method. This method allows small business owners to claim a set amount for each kilometre driven for work-related purposes, without the need to keep detailed records of actual expenses such as fuel and maintenance costs. The amount that can be claimed under this method is determined by the Australian Taxation Office (ATO) each year, and is based on an estimate of the running costs of a car. This method is mainly designed for small business owners and self-employed individuals who use their own cars for work-related travel and want a simple way to claim car expenses as a tax deduction. However, it’s important to note that this method can only be used if the taxpayer hasn’t claimed any other car expenses, or choose to opt out of using logbook or any other records. Also, a maximum of 5,000 km per year is allowed as a claim.
The cents per kilometre rate is as follows:
|Year||Cents per kilometre rate|
|FY21, FY22||72 cents|
|FY20, FY19||68 cents|
|FY16, FY17, FY18||66 cents|
- Logbook method
Using the logbook method you claim the work related portion of your actual expenses for the car. To work out the work related portion of your use, you need to retain a logbook for a minimum continuous period of 12 weeks. All expenses associated with the car are then tax deductible based on the percentage of business use determined in your logbook.
Check out our ebook on Car expense and how to deduct them in your tax return here.
Claiming a deduction for personal super contributions
You’re able to claim a tax deduction for personal super contributions made to an eligible super fund. It is important to remember that the combined total of your;
- superannuation guarantee payments,
- salary sacrificed amounts, and
- other personal tax-deductible contributions
does not exceed $25,000 in a financial year or extra tax will apply.
To make a personal superannuation contribution tax deductible, you need to submit a valid ‘Notice of intent to claim or vary a deduction for personal super contributions’ form to your super fund within the prescribed time limits and receive an acknowledgment back from your superannuation fund in writing. This form is generally found on the website of your superannuation fund and is generally a very basic form that takes 2 minutes to complete.
If you’re aged under 75 (or make the contribution within 28 days of turning 75, you can claim a deduction for contributing to your super fund.
If you’re aged between 67 and 74, you need to meet the work test to contribute, which means you need to be employed for at least 40 hours over 30 consecutive days during the financial year. From 1 July 2019, you may be able to continue making voluntary contributions for a further 12 months from the end of the financial year in which you last met the required work test, due to the work test exemption. To qualify to make contributions under the work test exemption, your total superannuation balance must be less than $300,000. Once you have used the work test exemption for a financial year, it cannot be used again in the future.
How you pay tax depends on your business structure, that is the legal entity you are running your business through. Here’s a rundown on each legal structure and how you pay tax:
Sole Trader means you are trading in your own name. You may own a business name and all income and profit is attributable to you and you alone. You pay tax quarterly on what is called a Pay As You Go Instalment (PAYGI) statement whereby the ATO uses your past profit to predict future profit and tax you as they estimate that you generate your profit. Only an annual tax return is required for sole traders. This will result in either top up tax or a refund depending on how close your profit was compared to the prior year.
A Partnership is whereby two or more legal entities partner up and register a trading name to commence a business. A partnership could be two individuals, two companies, one individual and one company or a number of other different combinations of legal entities listed here. A partnership tax return is required to be lodged annually and the taxable profit is then distributed to the legal entities that form the partnership. The tax is then paid in the legal entities that have received the distribution of profits.
A Company is when a new legal entity is incorporated by shares. You can have up to 50 shareholders whilst retaining a Private Company status. If you have over 50 shareholders, you need to convert to a public company at which point there is a need for an annual audit and your financials are released on ASICs website as a public document. This is also the case if your revenue or sales, is over $20 million per annum.
The tax rate varies for a company depending on the size of the business. If you’re revenue or sales is under $50 million, the tax rates is 25%.
A Family Trust is a legal structure that allows a group of individuals, known as the trustees, to hold assets on behalf of a group of beneficiaries. In Australia, family trusts are commonly used to own and operate a business, as they provide a number of tax and legal benefits. For example, a family trust can be used to limit the liability of the business owners and to distribute income in a tax-efficient manner as the beneficiaries of the income are generally the ones that pay tax at their marginal rate of tax. Trustees of a family trust are allowed to make decisions about the assets of the trust, including the operation of the business, and beneficiaries will be eligible for the benefits derived from the business, such as income and capital gains. Additionally, Family Trust can be established to hold assets such as real estate, shares, and cash. One important thing to keep in mind is that Family trust are taxed differently than companies or individuals, and it is important to consult with a lawyer or accountant to fully understand the tax implications of using a family trust to own and operate a business in Australia.