As a business owner in Australia, understanding tax deductions is crucial in reducing your taxable income and therefore your tax liability. Tax deductions allow you to claim expenses incurred in the course of running your business.
The number 1 cost, by a long shot, in any business is taxes. It is important to really understand this area of your business and how to minimise it. It is a more certain way of growing your cash flow than marketing. So we wanted to show you what you need to know about taxes in Australia.
Here is a guide to tax deductions for businesses in Australia:
WHAT DOES THE AVERAGE BUSINESS OWNER NEED TO KNOW ABOUT TAX DEDUCTIONS
Tax deductions are like coupons for your taxes. Just like how coupons can help you save money on your grocery bill, tax deductions can help you save money on your tax bill. But, just like how you can’t use a coupon for something you didn’t buy, you can only claim tax deductions for expenses that are related to earning income or running a business. It’s important to keep track of your expenses throughout the year and make sure you have the necessary documentation to back up your claims. By doing so, you can maximise your tax savings and keep more money in your pocket.
Here are a few things you should know about tax deductions:
- Tax deductions are expenses that reduce your taxable income: When you file your tax return, the income you earned over the year is taxed. However, certain expenses can reduce your taxable income, which in turn reduces the amount of tax you owe.
- Not all expenses are tax-deductible: While it may be tempting to claim every expense as a tax deduction, not all expenses are eligible. The expenses must be related to earning income or running a business.
- Keep accurate records: To claim a tax deduction, you need to have accurate records of the expenses you are claiming. This includes receipts, invoices, bank statements, and other documents that substantiate the expense. The ATO may ask you to provide evidence of your expenses, so it’s essential to keep records.
- Seek professional advice: Tax laws can be complicated, and it’s easy to make mistakes. Seeking professional advice from an accountant or tax agent can help you understand what you can and cannot claim as a tax deduction. They can also help you identify deductions you may not have known about.
- Claim what you are entitled to: While it’s essential not to claim expenses that are not eligible, it’s equally important to claim everything you are entitled to. Failing to claim all your eligible deductions means you could be paying more tax than necessary.
Tax deductions can be complex, but it’s important to understand what you can and cannot claim to ensure you are not paying more tax than necessary. Keeping accurate records and seeking professional advice can help you make the most of your tax deductions.
WHAT’S A TAX DEDUCTION VS. CREDIT?
A tax deduction and a tax credit are two different mechanisms that taxpayers can use to reduce their tax liability, but they work in different ways.
A tax deduction reduces your taxable income, which in turn reduces the amount of tax you owe. The deduction amount is subtracted from your income, and you only pay tax on the remaining amount. For example, if you earned $50,000 and claimed $5,000 in tax deductions, your taxable income would be reduced to $45,000.
On the other hand, a tax credit is a dollar-for-dollar reduction in your tax liability. For example, if you have a tax liability of $10,000 and claim a tax credit of $2,000, your tax liability would be reduced to $8,000.
The main difference between a tax deduction and a tax credit is the way they reduce your tax liability. Deductions reduce your taxable income, while credits reduce the actual amount of tax you owe. As a result, tax credits tend to be more valuable than tax deductions.
For example, if two taxpayers both have a tax liability of $10,000 and one claims a $2,000 deduction while the other claims a $2,000 tax credit, the taxpayer with the tax credit would owe less tax.
It’s important to note that not all deductions and credits are created equal. Some deductions and credits may be limited or subject to certain eligibility criteria. It’s always a good idea to consult with a tax professional or refer to the relevant tax authority’s guidelines to determine which deductions or credits you may be eligible for and how to claim them.
OVERVIEW OF TAX DEDUCTIONS
- Types of tax deductions:
- Capital expenses: These are expenses related to acquiring or improving a long-term asset. Capital expenses are generally not deductible in the year they are incurred but are depreciated over the life of the asset. Examples of capital expenses include purchasing a building, equipment, machinery, or land. Depreciation is the reduction in value of an asset over time, and the Australian Taxation Office (ATO) has guidelines on how to calculate the depreciation of different types of assets.
- Revenue expenses: These are expenses incurred in the ordinary course of running your business and are fully deductible in the year they are incurred. Examples of revenue expenses include rent, utilities, wages, advertising, and office supplies.
- Eligibility for tax deductions:
- Incurred in the course of running your business: The expense must be directly related to your business activities. If an expense has both business and personal elements, you can only claim the business portion.
- Directly related to earning assessable income: The expense must be incurred to generate income that is subject to tax. If an expense is incurred to earn income that is exempt from tax, such as income from a hobby, it is not deductible.
- Supported by appropriate documentation: To claim a tax deduction, you must have proper records of the expense. This includes receipts, invoices, bank statements, and other documents that substantiate the expense.
- Not a private or domestic expense: Expenses that are of a personal nature are not deductible. For example, the cost of personal clothing or a family holiday cannot be claimed as a tax deduction.
- Deductible expenses:
- Advertising and marketing expenses: This includes the cost of creating and placing advertisements in newspapers, magazines, online, or on billboards. Marketing expenses such as website design and SEO (search engine optimization) can also be claimed.
- Bank fees and charges: This includes the cost of account keeping fees, transaction fees, and other charges associated with maintaining a bank account.
- Business travel expenses: This includes expenses such as airfares, accommodation, meals, and car hire incurred while traveling for business purposes.
- Depreciation on capital assets: This is the reduction in value of a capital asset over its useful life, and is generally calculated as a tax deduction.
- Education and training expenses: This includes the cost of courses, seminars, and training programs that are directly related to your business.
- Insurance premiums: This includes the cost of insuring your business against risks such as fire, theft, or liability.
- Interest on loans and overdrafts: This includes the interest paid on business loans and overdrafts.
- Rent or lease payments: This includes the cost of renting or leasing a business premises or equipment.
- Repairs and maintenance expenses: This includes the cost of maintaining and repairing business premises, equipment, and vehicles.
- Superannuation contributions: This includes the amount of superannuation paid to employees.
- Telephone and internet expenses: This includes the cost of phone and internet services used for business purposes.
- Utilities expenses: This includes the cost of utilities such as electricity, gas, and water used in the business premises.
- Non-deductible expenses:
- Fines and penalties: These are generally not deductible as they are a result of a breach of the law.
- Private or domestic expenses: Expenses incurred for personal purposes or not related to the business are not deductible.
- Expenses related to earning exempt income: Expenses incurred to earn income that is exempt from tax cannot be claimed as a tax deduction.
- Capital expenses that are not depreciated: Capital expenses that are not depreciated over their useful life are not deductible.
- Entertainment expenses that are not wholly for business purposes: The cost of entertainment expenses that are not directly related to the business or not wholly for
RECENT CHANGES
In the 2019-2020 budget, the government announced several changes to tax deductions. The instant asset write-off threshold for small businesses was increased from $25,000 to $30,000, and the eligibility criteria were expanded to include businesses with a turnover of up to $50 million. Additionally, taxpayers who claim deductions for work-related expenses must now have records to prove that they incurred the expenses.
It’s important to note that tax laws and policies can change frequently, and it’s crucial to stay up-to-date with any changes that may affect your tax deductions. Seeking advice from a tax professional can also help you understand the implications of any changes and make informed decisions about your tax strategy.
The Evolve Team
