Given the whirlwind of events that have swept through Australia over the past few months, chances are tax time will look very different for small businesses this year.
H&R Block’s director of tax communications, Mark Chapman says enterprises doing their 2020 taxes should pay attention to how their cashflow has changed in light of those disruptions.
“For sole traders in particular, business turnover could be dramatically down, meaning that they may have overpaid tax through instalments paid pre-COVID. A bigger refund could therefore be on the cards,” he says.
“Sole traders also need to note if they have been receiving JobKeeper payments. Those amounts are taxable income and need to be included in their tax returns as business income.”
Meanwhile on the costs front, businesses may find their claims this year are far more heavily skewed towards home office expenses, while fewer claims may be related to travel or car use.
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 expanded instant asset write-off scheme, businesses can potentially receive immediate tax deductions on ‘big ticket’ purchases of up to $150,000. This tax break applies to assets bought or installed from 12 March 2020 onwards (before that, the limit was $30,000).
So, if your business earns under $500 million a year and has an urgent need to invest in new equipment, then you could be looking at a great opportunity to write off multiple assets, whether it’s a television for your boardroom or a tractor for your farm.
The government has also extended the $150,000 instant asset write-off by six months, so the scheme’s cut-off date is now 31 December, 2020 (instead of 30 June). From 1 January, 2021, the write-off threshold drops down to $1,000.
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, the government’s SME Loan Guarantee Scheme is still in place until 30 September. Under this scheme, small-to-medium enterprises (SMEs) should find extra finance easier to access, as the government is guaranteeing 50% of unsecured business loans of up to $250,000 issued by eligible lenders.
Other small business tax tips
Besides taking advantage of the instant asset write-off, here are a few other tips worth keeping top of mind when preparing for tax time.
1. Revisit old stock
Has COVID-19 or the summer bushfires 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.
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
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 2020/2021 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.
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