Australian Small Business Tax Guide

The small business sector has been described as the engine room of the economy, as well as the biggest employer in the country – and it's not hard to see why. Recent research undertaken by the Council of Small Business Organisations of Australia (COSBOA) showed that small businesses were responsible for generating 5.1 million jobs, or around half of private sector employment. The Australian Tax Office (ATO) says that there are about three million small businesses in Australia, including primary production concerns, which represents around 96% of all business.

WHAT IS A SMALL BUSINESS?

From a tax perspective, a small business is usually defined as one with an annual turnover of less than $10 million, except in relation to the small business CGT concessions, where the turnover threshold is just $2 million. However, some of the concessions are also available to businesses with higher turnover.

To stop businesses splitting activities so they can slip under the threshold and gain access to the various tax concessions, the law stipulates that turnover needs to be calculated from the 'aggregated' amounts, which basically means annual turnover (gross income, excluding GST) of every 'connected' or 'affiliated' business.

SMALL BUSINESS AND TAX

The importance of small business is demonstrated by the fact the government gives the small business sector a break on a range of tax matters.

SIMPLIFIED DEPRECIATION RULES

Small businesses have the option of using simplified depreciation rules when claiming a deduction for capital items, such as:

• Fixtures and fittings (such as shop or café fit-outs
• Technology, such as laptops, computers, EFTPOS systems and security equipment
• Office furniture
• Motor vehicles such as utes, delivery vans and most cars (subject to the depreciation limit of $68,108 for the 2024 year) and $69,674 for the 2025 year).

Using the simplified depreciation rules, small businesses can claim a deduction in full for assets that cost less than the relevant threshold. For the 2024 and the 2025 years, this threshold is $20,000. After the 2025 year the threshold will reduce to $1,000.

Assets that cost the same or more than the relevant threshold can be included in a small business pool, which allows for a simplified calculations to work out the depreciation deduction.

TRADING STOCK

The Tax Act provides a set of simplified trading stock rules whereby if your trading stock did not change in value over the tax year by more than $5,000, you can include the same stock value at year-end as at the start of the year.

PRE-PAID EXPENSES

A small business can also get an immediate tax deduction for certain pre-paid business expenses made before the end of the financial year. If a payment covered an expense that has gone into the new financial year (such as insurance premiums, rent or membership of a trade or professional body) you can claim that deduction in the last financial year. Check your payments for the period before 30 June to see if anything qualifies.

GST

Taking care of your GST obligations can also be simplified, as eligible businesses are only required to account for GST once payment is received. You can also pay GST in installments, and the ATO will work out for you how much the installments are. A small business can also, if using some items privately, choose to claim the full GST credits and make one single adjustment for the percentage of private use at the end of the tax year.

Another concession available to small businesses are pay-as-you-go tax instalments, where you can pay a quarterly instalment calculated based on your most recently assessed tax return. The income recorded is adjusted to align with the latest increase in gross domestic product, and will save you the time and the effort of 'long form' calculations.  

Read our GST tax guide  for more information.

HELP FOR CAPITAL GAINS TAX (CGT)

The special small business CGT concessions are in addition to the 50% general CGT discount applying to individuals, trusts and super funds (but not companies).

There are four CGT concessions that may be available to eliminate or reduce capital gains made by a small business or its owners where it disposes of "active" assets, like a trade or business premises but do not extend to passive assets such as an investment portfolio.

The reliefs are available to businesses, which are small business entities (ie, they carry on a business and satisfy the $2m turnover test) or where the net CGT assets of the taxpayer (plus its connected entities and affiliates) do not exceed $6m:

• The 15-year exemption

Available where a taxpayer who is at least 55 years of age and is retiring disposes of a CGT asset that has been owned for a minimum of 15 years.

• The retirement exemption

A taxpayer may apply capital proceeds from the disposal of a CGT asset to the retirement exemption, up to a lifetime maximum of $500,000 – as it is not necessary to actually retire, the concession can be utilised more than once.

• The 50% active asset reduction

The capital gain arising from the disposal of a CGT asset may be discounted by 50%, but there are specific rules about what qualifies.

• The CGT rollover

A capital gain arising from the disposal of a CGT asset may be deferred provided a replacement asset is acquired within a two-year period – the gain is deferred until disposal of the replacement asset.

Read our CGT guide for more information.

DON'T BLUR THE LINES BETWEEN THE COMPANY'S MONEY AND YOUR OWN

Many small businesses get caught out by the so-called 'deemed dividend' rules.  Under tax law, loans and advances to private company shareholders or their associates are deemed to be taxable unfranked dividends for the shareholders. The intention of these rules is to stop the profits of private companies being distributed to shareholders as tax-free "loans".  

So, if you find yourself borrowing money from a company of which you're a shareholder, try to ensure those borrowings are repaid by the time the company's tax return for the year is due. If that isn't possible, declare a dividend and treat the amount as income, in which case, the dividend would be franked if applicable.

Alternatively, enter into a complying loan agreement, complete with commercial interest and capital payments and a defined loan period.

Consider the tax consequences of the private use of company assets for less than market value, because this can also be caught by the deemed dividend rules. The amount of the deemed dividend is equivalent to the arm's length price that would have been paid for the use of the assets, less any amount actually paid for the use.

It's also worth considering transferring the asset to the shareholder in lieu of a cash dividend, a so-called "in-specie " dividend. Whether that's cost-effective will depend on the market value of the asset. Alternatively, if the shareholder has previously lent money to the company, the asset could be transferred to the shareholder as a repayment of that loan, subject to valuation.

THE GOLDEN RULE - KEEP RECORDS

Tax law requires that records 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

Records can be kept on paper or electronically, but should be easily retrieved. In our experience, businesses often stumble when asked by the ATO to verify transactions by providing supporting records, with the consequence that even "innocent" businesses can find themselves struggling to unable to provide the requested evidence.

AND WHAT ABOUT YOUR DEDUCTIONS?

We all know you've got to spend money to make money and if you spend it to produce 'assessable' income, then your business will usually be entitled to a tax deduction. Many businesses trip up by inflating their deductions or claiming for something they shouldn't but a surprising number also miss out on deductions they could have claimed.   In reality there are legitimate, not-to-be-forgotten deductions that almost every business can take advantage of.

The basic rule of course, to avoid the attention of the ATO, is that you need to show you are actually 'out-of-pocket', and that the expense has been incurred to run your business.

HERE ARE TAX DEDUCTIONS YOU MAY BE ABLE TO CLAIM:

ADVERTISING AND SPONSORSHIP

Costs to promote your brand and garner publicity for your business are deductible and can be claimed, as can advertising or sponsorship to sell 'trading stock' and to hire staff. Take care to ensure that the costs incurred do not fall within the definition of 'entertainment', which is not usually deductible.

BAD DEBTS

A debt that is unpaid and deemed to be a 'bad' debt is an allowable deduction as long as it was included as assessable income in the present or even a previous income year, and that it is written off as bad (uncollectable) in the same year that a deduction is claimed.

BORROWED MONEY

Expenses incurred in order to get the borrowed funds can be claimed as a deduction, the proviso being that the money must be used to produce assessable income. These expenses can include legal costs, registration fees, valuation costs, fees to guarantee an overdraft and any commissions paid. But you may have to spread the deductions over more than one year, depending on the extent of the expenses, to cover the period of the loan. These deductions are quite separate from the interest actually incurred on the borrowed funds, which is also deductible if the borrowed money is used to produce income.

BUSINESS TRAVEL

Travel for business purposes can usually be claimed. Keep all receipts and your itinerary or diary, and of course airline tickets. Note the nature of the travel, its purpose, and where, when and for how long (and look out for any personal activities that are mixed in, as these expenses are non-deductible).

CAR EXPENSE DEDUCTIONS

You can claim a full deduction for any expenses your company incurs while running a vehicle, leased or owned, provided the vehicle is used only for business purposes. If your business operates as a sole trader or partnership, you can claim certain proportions of deductions for vehicle expenses, but they are subject to substantiation rules.

FRINGE BENEFITS

You can generally claim a deduction for any costs involved with providing a fringe benefit to an employee.

HOME WORK CLAIMS

If your work is done from home, or is partly home-based, you can usually claim deductions for expenses such as interest, telephone, insurance and a portion of running expenses like heating, lighting or cleaning.

INSURANCE

Workers compensation insurance premiums are deductible, as are insurance costs for fire, business-use cars, public liability, theft and loss of profits.

PLANT AND EQUIPMENT (DEPRECIATING ASSETS)

Larger items like cars or even buildings can be claimed over time as depreciating assets. And you may also be able to claim (either immediately or over a five year period) certain capital costs in setting up or ceasing a business, as long as an outright deduction can't be claimed for that expenditure.

REPAIRS, REPLACEMENT, MAINTENANCE

A deduction is available for the upkeep of machinery, tools or premises used to produce assessable income (provided they are not 'capital' costs). These deductions include things like painting, plumbing and electrical maintenance, upkeep to windows and fences, guttering and machinery maintenance. Generally it means fixing defects, not totally replacing an item, and does not include improvements or work done immediately after acquiring an asset.

SUPERANNUATION CONTRIBUTIONS

You can claim a deduction for a contribution made to your own super fund, although care must be exercised as there is a limit to the amount of concessionnal contributions you can make to your super fund. Concessional contributions are those for which you have claimed a tax deduction and, if you have earnings from employment, any employer contributions made on your behalf as well as salary sacrificed contributions. Contributions to an employee's fund should also be deductible. Employers legally must contribute to employees' super under the superannuation guarantee laws.

SALARY AND WAGES

Operating as a trust or a company means you can claim a deduction for salary paid to employees or to yourself provided the salary is in respect of duties connected with the business. Partnerships can't claim for salary paid to a partner, but a deduction is available for salary paid to other employees. Sole traders can't claim for salary paid to themselves (and you can't claim for amounts taken from the business for private purposes).

TAX MANAGEMENT EXPENSES

Managing your business tax affairs can cost, and you can claim these as deductions. This includes paying a bookkeeper, having a tax agent prepare and lodge tax returns and activity statements, attending to a tax audit or the costs of appealing or objecting to an assessment.

TELEPHONES

For a telephone you use for business only, you can claim for calls and rental, but not installation. If the phone is used for both business and private calls, you're able to claim all business calls and a proportional part of the rental. An itemised phone account will guide this, but you can also base the claim on using a representative four week period to get an average rate for the whole year.

THEFT

Losses incurred by theft or stealing by an employee may be allowable deductions.

WANT TO KNOW MORE ABOUT TAX DEDUCTIONS?

Read our ultimate guide to tax deductions.

DON'T FORGET TO KEEP RECORDS

When it comes to running a small business, keeping on top of your paperwork may be the last thing on your to-do list. So while you focus on running and growing your business, our team at H&R Block can help with getting your records in order and discovering the right deductions.

To make the most of tax time and get your refund as fast as possible, call 132325 and lock in an appointment at your local H&R Block office today.

NEED HELP?

H&R Block can help you navigate the accounting and tax responsibilities that come with running a business. We can advise you on the  best structure to set up your business. We can also assist you in the setting up of a Company, Partnership, Trust or  Self Managed Super Fund.

Our small business accountants are experienced and qualified accountants dedicated to providing timely and proactive solutions for all your small business tax return needs. In fact our experience covers the whole realm of tax and associated accounting and business advisory, from compliance to growth and tax-effective strategies.  Contact our Tax and Business Services team  for more information.