Tax Deduction Tips for Small Business

A range of tax concessions for small business have been designed to help cash flow. The latest concessions include a lower company

Tax time can strike fear into the heart of small to medium business owners throughout Australia, but instead of recoiling from the thought of slogging through all your receipts and thinking of it as a chore – a simple change of perspective will turn the EOFY into a key opportunity to reclaim some costs and whip your finances into top shape.

Tax time can save you hundreds, if not thousands of dollars.

Yes, that’s right. Knowing what you can and can’t claim as a tax deduction is the first step into reclaiming those costs you’ve paid throughout the year and directly improve your profit margin. It’s important to be well informed and to speak with your tax accountant who knows the intricacies of the tax system in order to make all your eligible claims.

A quick rule of thumb check is to make sure that the cost directly relates to your income, that the expense must have been made for your business and not for private use and that you have the records to prove your claim. If your expenses are a mix of business and personal use, you’ll have to apportion out the personal use so you claim only the business costs.

Items such as entertainment, traffic fines, childcare fees, clothing for the family and hobby expenses are not able to be claimed. If your business is registered to collect and pay the GST, your GST credits can be claimed on your BAS.

What Are The Different Types of Deductions?

The type of expense – running or capital expenses – shapes what and how you can claim. Generally operating expenses are things such as heating, cooling, electricity, phone, internet expenses and professional business costs. Capital expenses are items such as machinery or equipment that are claimed using the instant asset write off, or depreciated over a period of several years.

The ATO determines the depreciating assets effective life over which it is deemed fit to be used for an entity to produce income. The determining factors for depreciating assets is how it is subject to a reasonable rate of wear and tear, how it is maintained in good order and condition and the period after which it is deemed likely to be scrapped or abandoned.

Can I Claim Some Capital Expenses Straight Away?

Your Tax Accountant can use a simplified depreciation rule in some cases so you can claim an immediate deduction for each asset under the following thresholds:

  • $150,000, from 12 March 2020 to 30 June 2020
  • $30,000, from 7.30pm (AEDT) on 2 April 2019 until 11 March 2020
  • $25,000, from 29 January 2019 to 7.30pm (AEDT) on 2 April 2019
  • $20,000, before 29 January 2019.

You can choose to use the simplified depreciation rules if you have a small to medium sized business with an aggravated turnover of less than:

  • $10 million from 1 July 2016 onwards
  • $2 million for previous income years

Your business might be able to write assets off under the instant asset write off. Using this method, you can immediately write off the cost of each asset that cost less than the instant asset write off threshold amount and claim a tax deduction for the business portion of the purchase cost of the asset in the year in which it was first used or installed.


What Is The Small Business Pool?

Using the small business pool, assets can be grouped together in order to maximise deductions. A 15% deduction can be made in the year you start to use them or have them installed read for use. This percentage may be increased to 57.5% for assets eligible for the backing business incentive accelerated depreciation. A 30% deduction can be claimed each year after the first year. The balance is deducted from the small business pool at the end of the income year it the balance at that time before applying the depreciation deductions is less than the instant asset write off. If you are registered for GST, and can claim the full GST credits if applicable for your business, you’ll need to exclude the GST amount you paid on the asset when calculating the depreciation amounts. If your business is not registered for GST, you’ll need to include the GST amount you paid on the asset in your depreciating calculations. The GST credits you can claim reduces the portion of the costs you can claim.

What About My Business Structure?

You claim tax deductions based on your business structure. It’s important to review your business structure as your business grows and changes because there might be valuable ways you can reduce your tax and expenses that are available under some business structures and not under others.

  • Sole Trader – claim your tax deductions in your individual tax return
  • Partnership – claim the deductions in your partnership tax return
  • Trust – claim your tax deductions in your trust tax return
  • Company – claim your deductions in your company tax return.

What Are Running Expenses You Can Claim?

Running expenses are those expenses that are incurred to keep a business operating, such as staff wages, office supplies and utility costs. Operating expenses do not include the cost of goods sold (i.e. materials, labour, manufacturing overheads) or capital expenses.

Operating expenses include:

  • Payroll, such as salaries, wages, bonuses, allowances and super contributions for staff
  • Insurance premiums
  • License fees
  • Rent
  • Professional fees, such as accounting, marketing, advertising, lawyers, registered tax accountant
  • Commercial web site expenses
  • Advertising, marketing and exhibitions
  • Legal fees
  • Losses from the previous year
  • Building maintenance and repairs
  • Office supplies
  • Property taxes on real estate
  • Business vehicle expenses, which include petrol, parking, vehicle maintenance, repairs and cleaning
  • Business Travel expenses
  • Bank fees
  • Work clothing and protective gear
  • Utility costs, such as heating, cooling, electricity
  • Phone and internet costs
  • Fringe benefits
  • Salaries, wages, bonuses and allowances
  • Transport and freight
  • Union fees
  • Land tax, rates and water usage
  • Rent or lease expenses
  • Self-education
  • Cleaning and repairs
  • Tax related costs

Increased operating expenses directly impact profits made by your business. By lowering your operating costs, you may be able to increase your profits. This is done through reducing costs where you can, as well as lowering your tax bill by claiming all your eligible tax deductions.

Industry Related Tax Deductions

There are also tax deductions that are specifically related to your industry or occupation.

If you’re in the military, you’ll be able to deduct full medical treatment under the Australian Defence Force Program. If you reside for more than 183 days in a specifically identified remote area of Australia, you may be eligible to receive a tax benefit known as a Zone Offset. 

Those in the medical profession can claim the cost of overtime meals if paid an overtime meal allowance, as well as the cost of a uniform that is specific to your profession. Safety gear such as non-slip shoes, vests, safety goggles, aprons and lab coats are on the list of claimable items.

Lawyers can claim the costs of wigs for court, as well as self-education expenses that allow them to keep on top of changes in the law system, as well as licensing fees in order to perform their job.

How To Claim Vehicle And Travel Tax Deductions

When you travel in the course of undertaking your business, there are vehicle and travel expenses that can be claimed. If you’ve mixed business with personal travel, only the business portion can be claimed. The ATO regards the trip from home to work as a personal expense, and as such, cannot normally be claimed except under special circumstances.

When claiming travel, you’ll need to state whether your travel was domestic or international, the length of stay away from home and meals you purchased whilst away. Your travel diary should show the dates of travel, places, times, duration and reason for your travel. You should have incurred the expense yourself and not have been reimbursed by your employer.

When claiming car expenses there are two methods available:

  • Cents per kilometre method
  • Logbook method

If you’re claiming car expenses for more than one car, you can use different methods and should also keep a separate log book for each car.

Under the cents per kilometre method a single rate is used. From July 2020, you’ll be able to claim 72 cents per business kilometre (68 cents per business kilometre from 1 July 2018 and 66 cents per business kilometre for the 2017-18 income year). A maximum of 5,000 kilometres can be claimed.

When using the log book method, your claim is based on the percentage of business use of your car. Expenses include running costs and decline in value of the purchase price of the car. You’ll need to keep a log book which includes the odometer reading, date, time and reason for travel for a continuous 12-week period that is then averaged out throughout the year. The fuel and oil costs can be claimed using receipts or estimates based on the odometer reading of your car. You’ll need receipts to back up all your claims.

What Expenses Do My Records Need To Show?

Not all evidence for proving your tax deductions is regarded equal in the eyes of the ATO. If the correct record can’t be shown to back up your claim, then you’ll miss out on making that valuable deduction.

A receipt must show:

  • The name of the supplier
  • The amount of the expense
  • The nature of the goods or service
  • The date the expense was paid
  • The date of the document

Other evidence the ATO might ask for includes:

  • Income statements, including employer and income from Services Australia
  • Bank statements and other financial institutions showing interest earned
  • Dividend statements
  • Summaries from managed investment funds
  • Receipts or invoice for claims and repairs
  • Contracts
  • Tenant and rental records

Running a small business is challenging and expensive work. It takes constant vigilance to minimise your costs to improve your profits. Although paying tax cannot be avoided, it can be minimised by using a professional who knows the tax system inside and out. Not only will a good tax accountant minimise your expenses, but their fees are 100% tax deductible.

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.