Business Tax Deductions
Temporary Loss Carry-Back Extension
On 11 May 2021, as part of the 2021-22 Federal Budget, the Australian Government announced it would extend the loss carry-back measure by one year until 30.6.2023.
Cash or Accrual
Businesses can choose to account for income using the cash method. Under this method, income is not brought to account until it is actually received, and expenses are not deducted until incurred.
Income Received in Advance
If monies are received for services to be rendered in the following financial year, or for goods to be manufactured and delivered after 30 June, this income can be treated as income in advance and not be treated as income in the current financial year.
Providing your accounting records show the advance payment separately and account for them as unearned income, you need not pay tax on this money until it is actually earned.
Valuation of Trading Stock
You can elect to value trading stock at the low of cost, market, or replacement value. You may choose a different method for each item of trading stock, and can change the method from year to year.
Work in Progress
Prepay Interest
Small business tax payers (<)
Interest Deductions
Deductibility of interest depends on the use to which the borrowed funds are put, regardless of what security was provided for the loan.
Always reduce your home loan before reducing any business or deductible borrowings.
You can use the equity in your home as collateral to borrow money for business purposes. This will not affect the deductibility of the business expense.
Where you have redrawn your home loan for business purposes, the deductible portion of the interest is calculated as the percentage of the redrawn amount as a percentage of the total loan balance immediately following the redraw.
Business Finance
As a general rule of thumb, use the equity in your business to fund working capital, and finance assets such as motor vehicles, plant and equipment. Due to the lower risk in lending funds to purchase vehicles and equipment where a chattel mortgage can be secured over the equipment, interest on equipment finance is generally lower than interest paid on working capital loans. In addition, many banks require a general security agreement (GSA) over the business assets when providing a working capital loan. A GSA should never be signed without obtaining professional legal and financial advice on the implications.
Sale-Back Finance
Where assets have been purchased outright using business working capital, which is impacting availability of working capital for growth, consider sale-back finance. Sale-back finance is where a loan is provided and secured over existing assets the borrower already owns. This can be a win-win for businesses who need an injection of cash, but still require the use of the equipment in their business.
Gift Cards
You are now able to purchase common gift cards such as Woolworths and Coles online for $299 per card to confirm you remain below the $300 benefit limit.
Research & Development Incentive
The R&D tax incentive is a government incentive programme to encourage organisations to conduct research and development that they may not have otherwise pursued.
It is a portion of your eligible expenditure on research and development that will either be paid out as a cash benefit or alternatively be offset from your tax burden.
Consider the following case of a company (<$20m turnover) that had $100,000 of income, $50,000 of R&D expenditure incurred, and $50,000 of other deductible expenses:
Without claiming the R&D Tax Incentive
Turnover: $100,000
Overhead Expenses – Non-R&D $50,000
Overhead Expenses – R&D $50,000
Net Profit - $0
Tax Payable at 25% - $0
Claiming the R&D Tax Incentive
Turnover: $100,000
Overhead Expenses – Non-R&D $50,000
Overhead Expenses – R&D $50,000 (non-deductible)
Net Profit - $50,000
Tax Payable at 25% - $12,500
R&D tax incentive at 33.5% of $50,000: $16,750
Tax Refund - $4,250
Less R&D Consultant Fees - $3,000
Net Benefit $1,250
Please Note:
- When claiming the R&D Tax Incentive, your R&D expenditure is not deductible, which accounts for 25-30% of the tax incentive payment.
- For start-up entities, the receipt of a R&D tax incentive may result in a negative franking account balance. A franked dividend cannot be paid to shareholders until 100% of the tax refund received has been repaid to the ATO via income tax in the current or future tax years.
- For profitable companies, the R&D tax incentive is a cash flow timing benefit only by way of providing future tax deductions up front. It is not the same as a government grant which can be a physical payment unrelated to tax.
Employing your Family
If you operate your own business, consider employing your spouse or older children within the business. Wages paid should not exceed market rates and must be appropriate considering the work performed. Regular employment records should be kept.
Superannuation is not payable for employees under 18 years of age.
Travel Expenses – Accompanying Persons
If travelling overseas for work with your non-employed spouse, you must apportion the travel costs. The cost of transport to the airport by car or taxi is the same for one or two so that expense is deductible in full.
Air fars are deductible as to 50% while hotel accommodation should be apportioned at the cost differential between a double and single room at the hotel.
Overtime Meal Allowances
If you receive an overtime meal allowance in connection with an award or industrial agreement, you can claim up to $... per meal without substantiation. The expense must have been actually incurred to buy food or drink in connection with overtime worked.
Repairs & Replacements
Repairs are generally tax deductible when they relate to property which is used for income producing activities. The replacement of an item of property will be deductible as a repair if the item is not a separate functioning item, or there is not a complete renewal.
Interest Deductions
You can claim deductions on interest paid on monies borrowed to:
- Repay partners capital contributions
- Pay undrawn partner profits
- Repay partners, beneficiaries or shareholders loan accounts (but not if they arise from distribution of unrealised capital gains)
- Pay declared dividends
- Refinance other borrowings currently used to produce assessable income
- Acquire income producing assets or property
- Prepay business borrowings
- Provide working capital and pay business expenses
- Finance debtors, trading stock or similar.
Office Fitouts
Are you planning a new office fitout? If you borrow the necessary funds or pay cash for the fitout your depreciation claim will be quite low.
It may be better to request the landlord to invest in the fitout and increase your deductible lease payments.
Leasing Plant & Equipment
If you are an eligible small business taxpayer, instead of purchasing plant & equipment, consider leasing the equipment and negotiating an advance lease payment for the first 12 months to obtain a substantial tax deduction in the current year.
Family Tax Planning Tips
Where there are large income differences between spouses, or there are children involved, especially adult children who are undertaking tertiary education, significant tax benefits can be obtained by careful tax planning. Children and spouses often perform a multitude of different tasks in any small business. You should keep records of duties performed by each family member and have regard to award rates for work of a similar nature. Keep in mind that in regard to trust distributions to adult beneficiaries, the ATO expects that the person receiving the distribution to receive the …..
Negative Gearing
Negative gearing can be briefly explained as when you incur more interest, depreciation and other outgoings in relation to an investment property than the income you receive from the investment. This income shortfall is wholly tax deductible and can be claimed as a deduction in your individual tax return. Depending on your income level, the ATO will fund up to 47% of the losses. The investment itself should continue to grow in value, and when you eventually sell the investment, you should be entitled to a 50% discount on the capital gain when your investment is sold.
Non Income Earning Property
If you have a property which does not earn income such as vacant land or an unoccupied building, you cannot claim the expenses as a tax deduction unless you are genuinely trying to rent it out. If the property can be made income producing, such as by renting out or agisting stock on it, or renting vacant land out as a parking lot, then it may be possible to claim your interest, rates, tax as a deduction. If you intend to build a rental property on the land in the reasonably near future, you can claim the interest.
Subdividing your Main Residence
When you subdivide your main residence property, sell your existing home, and build a new home on the subdivided vacant lot. The sale of the family home becomes CGT exempt as it is your main residence. When your new home is constructed on the vacant lot, this becomes your next main residence and the subsequent sale of this property would be partially CGT exempt. If you build a house on the vacant lot and sell it, you would not be able to claim the main residence exemption because you never lived in it.
Working Lunches
The provision of tea, coffee, and meals on work premises during a working day to employees are exempt from FBT.
Disclaimer: We believe this information to be correct at the time of publication. It is general in nature, for guidance only and is not intended to be personal advice. It should not be relied upon without obtaining professional advice regarding your direct circumstances. No responsibility can be accepted by any publisher, author, editor, contributor or consultant for loss occasioned directly or indirectly to any person acting or refraining from acting wholly or partly upon or resulting from the material in this publication nor for any error in, broken link or omission from the publication.
