What to do at tax time: a guide for your small business in 2021

Given the rollercoaster of a financial year that small businesses have been through, getting your corporate tax return sorted in 2021 could be a trickier process than usual.

CPA Australia’s senior manager of tax policy, Elinor Kasapidis says it’s vital that businesses claim everything they are entitled to, whether this be tax write-offs for assets they’ve purchased, or tax refunds on any losses or bad debts they’ve accumulated as a result of the pandemic. 

“Ninety-five per cent of small businesses seek professional advice with their taxes. This year it’s even more important to ask the right questions and provide relevant information to help your adviser determine if you’re eligible for any COVID-related tax incentives and deductions,” she says.

According to Kasapidis, if your business has faced cashflow difficulties or financial distress over the past year, there are a number of options on the table this tax time.

“Businesses can claim a deduction for bad debts if there is little or no likelihood of the debt being recovered, but proceed with caution. Debts that have been forgiven can’t be claimed,” she says.

“The temporary loss carry-back is also available to companies that made a loss this year. This allows businesses to get a refund for previous years’ tax instead of carrying the loss forward.” 

On the flipside, “if you reduced your tax instalments [during 2020-21] but your business did better than expected, be prepared for a tax bill when you lodge your return,” Kasapidis says.

Businesses should also be mindful if they’ve been on JobKeeper payments.

“Unless there is a specific exception, government payments designed to assist businesses with continuing to operate, such as JobKeeper, need to be included in assessable income,” she says.

What can I claim on tax? 

According to the Australian Taxation Office (ATO), you can claim a tax deduction on most costs you incur in running your business, from staff wages to inventory. The rule of thumb is if the expense plays a part in helping your business earn revenue, then it will be deductible. 

“Depending on what your business does, that could give rise to some tax deductions that most of us can only dream of,” Chapman says.

He says a café owner could claim tax on “items as diverse as magazines and newspaper subscriptions, fresh flowers, works of art and music downloads”, if they were used to make the café appealing to customers. 

The cost of fitting solar panels could also count in your tax deductions, if the purpose of installation was to lower your energy bills.

But a hard line is drawn for entertainment expenses, which are typically non-deductible. 

As Chapman explains, while treating your clients to a nice dinner might benefit your profit margin in the long run, “tax deductions aren’t available for wining and dining, theatre and sporting tickets, holidays or any of the other ways businesses look after customers or suppliers.” 

Can I deduct the cost of some assets straight away? 

The short answer is yes! 

Thanks to the government’s temporary full expensing scheme, businesses could receive immediate tax deductions on ‘big ticket’ purchases that depreciate in value, such as a company car or a piece of equipment. This tax break applies to assets first used or installed between 6 October 2020 until 30 June 2022. 

So, if your business earns under $5 billion a year, then you could be looking at a great opportunity to write off new assets, whether it’s a television for your boardroom or a tractor for your farm. You could also claim an instant deduction on secondhand assets if your business’s aggregated turnover is under $50 million.

But what about any investments you made before October? If your asset was first used or installed between 12 March 2020 until the end of this month, then you may qualify for the government’s instant asset write-off. Similar to temporary full expensing, you’ll be able to write off eligible assets of up to $150,000, given that your business earns less than $500 million a year.

Chapman says that from a tax planning perspective, it’s ideal if your asset purchases are made right before 30 June or the end of the financial year (EOFY).

“With many businesses offering [EOFY] promotions, now is the ideal time of the year for businesses to take advantage [of the instant asset write-off] by acquiring some much needed capital assets to build the business and, at the same time, reduce taxable profits,” he says.

Here’s a quick breakdown of some items you could look to write off: 

• Cash registers and other point-of-sale (POS) devices

• Motor vehicles, such as cars, utes and vans

• Computers, laptops or tablets

• Security systems

• Accounting software

• Office fit-outs

• Tools, plant and equipment 

Just bear in mind that while this tax break is incredibly generous, businesses should only buy assets if they are well-placed to do so. It pays to first make sure you have the cashflow to fund these purchases, or the borrowing capacity to finance them with a business loan. 

The good news is, phrase two of the government’s SME Loan Guarantee Scheme is still in place until 30 June, while phase three (known as the SME Recovery Loan scheme) will run until 31 December. Under both initiatives, small-to-medium enterprises (SMEs) should find extra finance easier and cheaper to access, with the government guaranteeing a portion of the loans issued by eligible lenders.

Other small business tax tips

Besides taking advantage of any relevant government incentives, here are a few other tips worth keeping top of mind when preparing for tax time.

1. Revisit old stock

Has the pandemic left you with an excess of stock? Luckily you can write down or completely write off damaged and obsolete stock by 30 June, and claim a tax deduction on those.

One thing to note is, unsold inventory itself isn’t a tax deduction, but it can affect your taxable income (i.e. the income you pay tax on): 

• If the value of stock is higher at the end of the financial year than at the start, then the increase is factored into your taxable income.

• But if the stock is worth less, then it reduces your taxable income, meaning that you qualify for a deduction.

As for businesses whose stock levels and values have fluctuated significantly due to COVID-19, Kasapidis recommends that they seek expert help. 

“Ask your accountant whether a different trading stock valuation method for tax purposes may be more effective,” she says.

2. Say bye to bad debts

With other businesses and customers also hit hard by COVID-19, the reality is you may have outstanding debts you can’t recover. 

It’s an unfortunate circumstance, but the silver lining is that you can write off these bad debts by 30 June and claim a tax deduction for the amount that’s been written off. So this is a good time to comb through your debtors’ list and assess which ones won’t be able to repay you. 

Remember that deductions only apply to debts that were included as assessable income in the current or previous financial year. 

3. Receipts, receipts, receipts  

Kasapidis notes that the ATO is increasingly cracking down on incorrect expense deductions and unreported cash payments in this year’s tax returns.

Keeping clear and accurate records of all your transactions can save you trouble down the line, should the ATO start asking questions and request a look at proof. Both electronic and paper records are acceptable, but the key is ensure they can be easily retrieved.

“In our experience, businesses often stumble when asked by the Tax Office to verify transactions by providing supporting records, with the consequence that even ‘innocent’ businesses can find themselves stung by the taxman,” Chapman says. 

Tax law requires most records to be kept for five years, and they should include: 

• Sales receipts 

• Expense invoices

• Credit card statements

• Bank statements

• Employee records (wages, super, tax declarations, contracts)

• Vehicle records

• Lists of debtors and creditors

• Asset purchases 

4. Think long-term 

While the temptation might be to worry about tax only when the EOFY comes around, good tax planning involves casting your vision longer-term. 

“Year-end tax planning has its place but if you’re taking important financial decisions in the final days of the financial year, you’re not really planning - you’re simply reacting to opportunity,” Chapman says.

So he recommends kicking off the new financial year with a resolution to sit down with your accountant early on and get your tax affairs for the next financial year sorted.

“Whether that includes growing your business, improving productivity or planning for an exit, you need time and good advice to put the plans in place that enable you to meet your [business and personal financial] goals,” he says.

Want to stay in the loop on all things small business? Head over to our business banking page for more tips and guides.