As a small business owner in Australia, managing finances and staying on top of tax obligations can be challenging, especially with the numerous regulations and updates from the Australian Tax Office (ATO). To help our clients and readers, SMB Accounting aims to provide valuable, informative, and helpful tips to help small business owners navigate through the complex world of tax deductions and find ways to maximise their savings, increase profits, and grow their businesses.
This article will discuss several tax deductions for small business owners that can make a significant impact on their bottom line.
Understanding Tax Deductions and Your Business
Before we delve into the specific deductions available to you, it’s essential to grasp the basics of tax deductions and their role in your business’s financial landscape. Tax deductions are expenses that the ATO allows you to subtract from your total taxable income, ultimately reducing the amount of tax you need to pay. Claiming tax deductions may potentially save your business thousands of dollars each year, so be proactive in staying informed of available deductions and maintaining proper records to substantiate your claims.
When calculating the amount you can claim for a deduction, always use the portion of the expense that relates specifically to your business. You must also meet the necessary eligibility criteria outlined by the ATO. Now, let’s take a look at some crucial tax deductions for small business owners in Australia.
1. Instant Asset Write-Off: Maximise Equipment and Asset Deductions
The instant asset write-off is an essential tax break designed to help small businesses quickly claim deductions for eligible assets. When you purchase a new or used asset for your business, such as machinery, computers, or office equipment, the instant asset write-off allows you to deduct the full cost of the asset in the year it was purchased and used or installed, instead of depreciating the value over several years.
As of 6 October 2020, the instant asset write-off threshold has increased to allow businesses with an annual turnover of up to $5 billion to claim deductions for assets costing less than $150,000 each. This temporary enhanced threshold is available until 30 June 2023, after which standard thresholds will apply. Be sure to keep records of these purchases and provide evidence of the asset being used or installed during the specified time frame to claim this valuable deduction.
2. Deductions for Operating Expenses: Minimise Business Overheads
Operating expenses are the everyday costs of running your business, and fortunately, you may be eligible to claim deductions for many of them. Examples of operating expenses include rent, utilities, advertising, insurance premiums, employee wages, and office supplies. Professional services, such as hiring accountants or lawyers, and membership fees to industry associations can also qualify as deductible expenses.
Take note that you must only claim the portion of the expense that directly aligns with your business operations. For instance, if you use your home office for both personal and business purposes, calculate the percentage of usage attributed to each and claim accordingly. Maintaining accurate records and receipts of your expenses is vital to substantiate your claims.
3. Capital Expenses and the Small Business Pool: A Long-Term Investment
Capital expenses, or capital works, pertain to costs associated with creating or improving long-term assets of your business, such as major renovations or structural improvements. While most capital expenses cannot be claimed in one financial year, they can be claimed gradually as a capital works deduction over a specified period, typically 25 to 40 years.
Additionally, the small business pool is another way to claim a deduction for the costs of depreciating assets. The pool allows you to combine the value of such assets and claim one deduction, simplifying your claims process. Consider this option if the assets you purchase are not eligible for the instant asset write-off.
4. Motor Vehicle Expenses: Drive Your Business Forward
Many small businesses rely on vehicles for daily operations, whether it’s for delivery, transportation, or simply moving between client meetings. If you use a vehicle primarily for business purposes, you may be eligible to claim motor vehicle expenses, such as fuel, registration, repairs, and insurance.
Two methods are commonly used to claim motor vehicle expenses: the logbook method or the cents per kilometre method. The logbook method requires you to keep a logbook of your business-related vehicle usage, while the cents per kilometre method allows claims for up to 5,000 business-related kilometres per year. Choose the method best suited to your vehicle usage and ensure proper documentation to substantiate your claims.
Unlock the Full Potential of Your Business through Tax Deductions
Running a small business in Australia requires resilience, innovation, and financial mindfulness. By understanding the various tax deductions available to you and effectively claiming them, you can save money and invigorate your business growth.
Taking advantage of these deductions requires meticulous record-keeping and familiarisation with ATO regulations. Consider working with a professional accounting service, like SMB Accounting, to help navigate the complex world of tax deductions and ensure your business thrives for years to come.