How do minimise your tax bill? That’s the number one question on Australian small business owner’s lips at the end of each financial year. There is often confusion when it comes to understanding the difference between tax deductions, tax write-offs and tax offsets, but understanding these terms might have the greatest impact when it comes to minimising your tax.
Tax Deductions
There is no difference between a tax deduction or a tax write off. They are the same thing. You may have heard someone explain their tax deduction as ‘writing off their tax’, when they mean they are reducing the amount of tax they will need to pay through a tax deduction. A tax deduction or write-off will help you to lower the overall tax you have to pay.
In order to find your tax deductions, your total income is calculated minus any tax deductions you are entitled to claim. Your total taxable income is any income you derive from your wages or salary, tips, gratuities or other payments for your services, allowances, interest on your bank accounts, dividends and other income derived from investments, bonuses, commissions, pensions and rent. If you are paid cash, the ATO will expect you to declare that as a part of your taxable income.
Some government payments and pensions, including the invalidity pension and some education payments are exempt from paying tax. It’s important to note that although it is exempt from tax you still need to include the information in your tax return as this helps the government work out if you’re entitled to extra payments and other entitlements.
Tax deductions are those expenses that you have incurred in the course of earning your income. The ATO allows you to deduct these expenses, which is subtracted from the tax you pay on your total income before tax is calculated.
Knowing your entitled tax deductions can add up to hundreds, if not thousands of dollars. Common work-related expenses include:
- Vehicle and travel expenses
- Clothing, laundry and dry-cleaning expenses
- Home office expenses
- Self-education expenses
- Tools, equipment and other assets
- ATO interest – calculating and reporting
- The cost of managing your tax affairs
- Gifts and donations
- Interest, dividend and other investment income deductions
- Personal super contributions
- Undeducted purchase price of a foreign pension or annuity
To claim a deduction:
- You must have already incurred the expense
- The expense must directly relate to earning your income
- You must be able to prove your claim with a record
Australia has a progressive tax system, which means there is a different percentage of tax to be paid determined by the amount earned.
Resident tax rates 2020-21
| Taxable Income | Tax To Be Paid On This Income |
| 0 – $18,200 | Nil |
| $18,201 – $37,000 | 19c for each $1 over $18,200 |
| $37,001 – $90,000 | $3,572 plus 32.5c for each $1 over $37,000 |
| $90,001 – $180,000 | $20,797 plus 37c for each $1 over $90,000 |
| $180,001 and over | $54,097 plus 45c for each $1 over $180,000 |
The above rates do not include the Medicare levy of 2%
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There are three way to claim your costs as long as you’re reasonable in your estimations, exclude private living costs and can show
Instant Asset Write Off
Eligible businesses can instantly claim a tax deduction for the business portion of a purchased asset. The instant asset write off can be used for multiple assets, as well as new and second hand assets. From March 12, 2020 until December 13, the instant asset write off threshold has been increased from $30,000 to $150,000. The eligibility has been expended to cover businesses with an aggregated turnover of less than $500 million, which has been increased from $50 million.
Your business must meet several criteria to be eligible. From 1 January 2021 the instant asset write-off will only be available for small businesses with an aggregated turnover of less than $10 million and the threshold will be $1,000.
Instant Asset Write Offs Thresholds
| Eligible businesses | Date range for when asset first used or installed ready for use | Threshold |
| Less than $500 million aggregated turnover | 12 March 2020 to 31 December 2020 | $150,000 |
| Less than $50 million aggregated turnover | 7.30pm (AEDT) on 2 April 2019 to 11 March 2020 | $30,000 |
| Less than $10 million aggregated turnover | 29 January 2019 to 7.30pm (AEDT) on 2 April 2019 | $25,000 |
| Less than $10 million aggregated turnover | 1 July 2016 to 28 January 2019 | $20,000 |
| Less than $2 million aggregated turnover | 7.30pm (AEST) on 12 May 2015 to 30 June 2016 | $20,000 |
| Less than $2 million aggregated turnover | 1 January 2014 to prior to 7.30pm (AEST) 12 May 2015 | $1,000 |
| Less than $2 million aggregated turnover | 1 July 2012 to 31 December 2013 | $6,500 |
| Less than $2 million aggregated turnover | 1 July 2011 to 30 June 2012 | $1,000 |
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Temporary Full Expensing
Temporary full expensing allows eligible businesses to claim an immediate deduction for the business portion of the cost of an asset in the year it is first used or installed ready for use for a taxable purpose. In many cases this will be used instead of the instant asset write off as there is no upper limit to what can be claimed.
For the 2020–21 and 2021–22 income years, an eligible business can claim in its tax return a deduction for the business portion of the cost of eligible new assets first held, first used or installed ready for use for a business purpose between 6 October 2020 and 30 June 2022.
Also, eligible second-hand assets will be claimable where the business had an aggregated turnover of less than $50 million.
Tax Offsets
Tax Offsets are sometimes known as Tax Rebates and are not the same as Tax Deductions. Tax Offsets directly reduce the amount of tax you pay. Each dollar of tax offset reduced your taxable amount by each dollar, regardless of your taxable income.
Some Australian residents meet the tax offset criteria for the:
- Seniors and pensioners tax offset
- Low income and low and middle income tax offset
- Australian superannuation income stream tax offset
Seniors And Pensioner Tax Offset (SAPTO)
If you have reached the Centrelink or Veteran pension age and have met the eligibility criteria, your tax liability may be reduced by SAPTO. This is a non-refundable tax offset which means if the offset is larger than the tax bill then it will simply reduce the tax bill to zero.
Low Income and Low and Middle Income Tax Offsets (LITMO)
If you are a low to middle income earner, you’ll automatically receive this tax offset. It is added to your tax return and you’ll be able to see the amount on your notice of assessment.
The maximum low income tax offset is $700. If you earn between $37,501 and $66,667, you’ll get some of the low income tax offset. If you earn $37,500 or less, you’ll get the full offset of $700.
| Income | Low Income Tax Offset Amount |
| $37,500 or less | $700 |
| $37,501 – $45,000 | $700 minus ((Taxable Income minus $37,500) x 5%) |
| $45,001 – $66,667 | $325 minus ((Taxable Income minus $45,000) x 1.5%) |
| More than $66,667 | Nil |
The low and middle income tax offset amount is between $255 and $1,080. The full offset is $1,080 per annum but you might not be entitled to the full $1,080. The base amount is $255 per annum and is available for the 2018–19, 2019–20, 2020–21 and 2021–22 income years. If your taxable income is between $37,001 and $126,000, you’ll automatically receive some or all of the LITMO tax offset in addition to the low income tax offset.
Low and Middle Income Tax Offset
| Taxable income | Offset |
| $37,000 or less | $255 |
| Between $37,001 and $48,000 | $255 plus 7.5 cents for every dollar above $37,000, up to a maximum of $1,080 |
| Between $48,001 and $90,000 | $1,080 |
| Between $90,001 and $126,000 | $1,080 minus 3 cents for every dollar of the amount above $90,000 |
Tax Credits
When lodging an income tax return, a tax credit can refer to an amount of credits that go towards your account and towards your tax liability. If you’re an employee, your employer will withhold money from your pay each week, fortnight or month and pay this to the ATO as part of the PAYG withholding system. When you lodge your income tax return, any amounts you’ve had withheld will act as ‘credits’ in your account.
A franking credit, also known as an imputation credit, is a type of tax credit paid by companies to their shareholders along with their dividend payments. Australia allows franking credits as a way to reduce or eliminate double taxation.
Tax credits reduce your overall tax payable by the full amount of the credit. Tax credits can result in a tax refund once your taxable income is reduced to zero.
Knowing which tax deductions, offsets and credits you are eligible for can drastically reduce your payable tax obligations. It’s important that you make sure you meet all of the qualifications so that you are legally eligible to receive them. A qualified Tax Accountant will help you manage and reduce your tax bill and make sure you are fully tax compliant. ITP Accounting Professionals have helped Australian Individual and businesses for 50 years to make the most out of tax time. Speak with an ITP Tax Accountant today and see how they can help your small business.