Two-thirds of Australian small business leaders don’t fully understand a business tax return, according to new data from Xero, prompting a push towards expert advice.
Only 34% of the 500 small businesses surveyed in the Xero Small Business Insights report understand all parts of a business tax return, with 52% not knowing what deductions they are eligible to claim.
Positively, the research also found that the majority engaged with an accountant or advisor during tax time, highlighting the pivotal role they play in keeping businesses tax compliant.
“For many small business owners, tax time can be stressful and it’s often a struggle when the end of financial year approaches,” says Sid Cachuela, COO and co-founder of SME tax accountant firm POP Business.
“Knowing what a small business can claim on tax each year can be challenging if you don’t have the right support.”
Sid Cachuela, COO and co-founder of POP Business
Knowing the basics
Understanding the basics as a small business owner will get you through a lot when it comes to tax. But as the data shows, many small business owners would rather be stuck in traffic than focus on their EOFY obligations.
“Not everyone is going to know the basics of their tax return. You probably didn’t start your business with a red-hot passion for business administration,” says Cachuela. “But skirting your responsibility could not only cost you money that could be reinvested back into your business, but it could land you in trouble with the ATO.”
So here is a short explanation of the basics.
You can claim a deduction for most costs incurred in running your business via your annual business tax return. Deductions are amounts you can claim for expenses involved in running your business.
The amount of tax your business must pay depends on your business’s taxable income. The Australian Taxation Office (ATO) calculates your taxable income using this formula:
Assessable income – tax deductions = taxable income.
Assessable income is generally income your business earns. It includes income you get before tax from your every day business pursuits as well as other income that is not part of your day-to-day activities, such as capital gains.
You must also lodge an income tax return for any year you run your business. You need to do this even when you don’t expect you’ll owe tax.
What expenses can and can’t you claim?
Now that you know the basics, it’s time to get down to the juicy stuff – what deductions are available to you?
But before going into all the small business expenses you can claim, let’s take a quick look at some of the expenses that are not deductible. These include:
- Entertainment expenses
- Traffic fines
- Private or domestic expenses, such as childcare fees or clothes for your family
- Expenses relating to earning income that is not assessable, such as money you earn from a hobby
- The GST component of a purchase if you can claim it as a GST credit on your business activity statement.
“The general rule of thumb is the deduction must relate directly to earning your income and the expense must have been for your small business rather than for private use,” says Cachuela. “If the expense is a mixture of business and private, you can only claim the portion that is used for your business.”
Types of claimable expenses
Broadly speaking small business expenses fall into the following core categories – general business operating expenses, business travel expenses, and home-based business expenses.
“Basically, general business operating expenses – the first and most common category – includes expenses for your small business to generate income,” says Cachuela. “There’s a fair chance you can claim a deduction for these expenses.”
Typical small business operating expenses that can be claimed include tangible things like repair and maintenance costs, office space rent, printing expenses and laundry charges.
It also includes more intangible costs such as subscriptions, employee benefit programs, and advertising and marketing fees.
In addition, other expenses that have more to do with the general operation of the business are included in this category, such as accounting and legal fees, membership dues, training, and insurance expenses.
“One tip for general expenses is to fill in an expense log with the time, date, and reason for purchase. This is a fantastic way to prove costs were business-related,” says Cachuela.
Business travel expenses
If you’ve travelled to attend a business conference or taken an international business trip to meet a customer, the good news is that you should be able to claim those travel expenses as a deduction on your tax return.
Typical business travel expenses include:
- Transport costs, including train, bus, taxi (including Uber and other rideshare services) and airfares
- Accommodation and meal expenses for overnight business travel, and
- Certain motor vehicle expenses.
“There are however some specific rules that apply to different travel categories, which you could ask your tax agent about,” Cachuela warns.
If you operate a small business (including an online business) from home, you may be able to claim tax deductions for some of the costs relating to the areas of your home (such as a home office or study) that you use for business purposes.
Home-bases business expenses are often categorised as follows:
- Occupancy expenses – including mortgage interest or rent, council rates and home insurance premiums, and
- Running expenses – similar to operating expenses, running costs relate to costs such as gas and electricity, repairs to furniture and furnishings, phone, and internet among other things.
“What you can claim will be dependent on your personal circumstances and how you operate your business from home,” Cachuela says. “It’s worth noting that small business owners running a business from home may also have to pay capital gains tax when the home is sold.”
While the previous extensive lists of deductibles are by no means exhaustive, none of it is worth anything without proof.
“We say this a lot to all our clients, but we can’t stress enough the importance of keeping records,” says Cachuela. “From plane tickets, business credit card statements to business car leasing statements and business bank account fees, you need records to back up any claim you make in your business tax return.”
According to the ATO, small businesses need to keep records to substantiate what they claim.
Under tax law, your records must explain all transactions and be:
- In writing, either on paper or electronically.
- In English, or in a form that we can readily access and convert into English.
- Kept for five years (although some records need to be kept longer).
Another reason to keep your records is in case you get audited by the ATO. Tax audits can come out of nowhere and be expensive, and you will have to deal with the interruption involved in responding.
“This is where Tax Audit insurance can come in handy, as it covers a business for costs if it is selected by the ATO for auditing,” says Cachuela. “The policy covers the costs of accountants and other professional fees incurred in the course of an audit.”
“Our partners at BizCover can handle any of your Tax Audit insurance needs.”
The bottom line
Many small businesses dread the end of financial year and consequentially miss out on making the most of their deductions. Others may not fully understand their obligations and run the risk of getting audited.
But it doesn’t have to be that way. Having a base understanding of the risks and benefits of tax is an essential part of running a small business in Australia.
“You put on many hats when running a small business, and it’s now time to put on that tax hat again,” says Cachuela. “Preparation is key when it comes to lodging your tax return and our team at Pop Business are there to help shoulder the load.”
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