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The small business sector has been described as the engine room of the Australian economy, as well as the biggest employer in the Australia – it is not hard to see why. Recently undertaken research 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 Tax Office says that there are about 3 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 defined as one with an
annual turnover of less than $2 million. Note, there are proposals on
foot to raise this threshold to $10m but they haven’t yet been
legislated so watch this space!
To stop businesses splitting activities so they can slip under the $2
million 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 (which is
gross income, excluding GST) of every 'connected' or 'affiliated'
business.
Small business and tax
Just how important small business is can be demonstrated by the fact
that the government gives the small business sector a break on a range
of tax matters.
Called small business tax concessions, there are several options that
smaller enterprises can take up if they satisfy that $2m turnover test.
Instant asset write-off
Between now and 30 June 2017, small businesses can immediately write off
any asset purchase costing less than $20,000, but caution needs to be
taken when claiming the write-off.
To minimise your chances of having the ATO challenge the deduction, here
are some key tips to be aware of:
1.
Only small businesses qualify. This might seem obvious but you actually
have to be in business to be a small business, not just a holder of an
ABN number.
2.
Understand what the tax break is. It is not a cash hand-out but a
deduction from your taxable profit. If you spend $20,000 from on a
capital purchase, you will receive a 28.5% per cent deduction which
equates to a $5,700 reduction in your tax and means you will still be
out by over $14,000 on the purchase. If it’s something you were going to
purchase anyway, good luck and enjoy the benefit but if you’ve acquired
something, or are planning to acquire something, purely to save tax, you
might want to think again. What you gain in the year of purchase will
gradually be clawed back through reduced deductions in future years.
3.
The amount you can claim is GST exclusive. This is relevant if your
business is registered for GST and can claim an input tax credit on the
purchase. The amount you can claim is the GST exclusive price.
4.
The asset must have been installed and ready for use. This is
particularly important if you purchased the asset just before the end of
the financial year. If you’d purchased it before 30 June but didn’t have
it available for use until July, you can only claim the deduction
against next year’s profit.
5.
Second-hand assets. You can claim a deduction for second hand assets.
6.
Beware private use. To claim the full deduction, the asset has to be
used in the business and if there has been personal use, the deduction
needs to be pro-rated to reflect this.
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. Obviously, if you needed to do one, you’d have done a
stocktake by now but this might be something to be aware of for next
year.
Pre-paid expenses
A small business can also get an immediate tax deduction for certain
pre-paid business expenses that were made before the end of the
financial year. If a payment covered an expense that has gone into the
new financial year (like 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 be made less of a headache as
well, as eligible businesses are only required to account for GST once
payment is received. On top of that, you can also pay GST in
installments, and the Tax Office will work out for you how much the
installments are. A small business can also, if using some items for
private uses, 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 business concerns pay-as-you-go
tax installments, where you can pay a quarterly installment that is worked
out based on your most recently assessed tax return. The income recorded
there is adjusted to align with the latest increase in gross domestic
product, and will save you the time and the effort in having to do the
'long form' calculations.
Contact us 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.
Contact us 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 out of the 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.
Look out too for 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.
To get round the tax problems, it’s 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 what
the market value of the asset actually is. 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
Good record keeping is your best friend for efficient business
management and will also make life easier if the ATO ask you questions.
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
Tax Office to verify transactions by providing supporting records, with
the consequence that even “innocent” businesses can find themselves
stung by the tax man where they are 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 then are some 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 for
example 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
You need to record and document all particulars, but travel for business
purposes can usually be claimed. So 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, either 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 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 (over a five year
period) certain capital costs in setting up or ceasing a business, as
long as an outright deduction is not able to 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
if self-employed, although care must be exercised if you also have some
earnings from employment upon which super contributions have been paid
by the employer. Contributions to an employee's fund should also be
deductible. Employers legally have to contribute to employees' super
anyway 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.
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