Small business tax deductions


22nd June, 2021

EOFY 2021: Small business tax deductions by industry

Small business owners may not be aware of some of the tax deductions they can claim. Here’s a rundown on what you need to know.

Small business owners and staff are often so busy working while fulfilling multiple roles — from HR manager and chief information officer to chief executive — they find it hard to focus on the business’s tax.

Many approach the end of the financial year with feelings of dread, because it means taking time out from generating revenue to fossicking through old receipts and trying to remember what they were for.

The reality, of course, is that time spent structuring and preparing for the end of the financial year can reap significant benefits, maximising the reward for effort during the previous year and setting the business up for the year to come.

Melbourne-based CPA Haydn Growden deals with many small business owners and sole traders, and urges his clients to consider and itemise all the expenses they have incurred in the running of their business.

“It’s difficult enough making a profit in small business, you don’t want to be leaking money through not claiming what is legitimate,” said Growden.

The big news for small business has been Temporary Full Expensing (TFE) replacing the Federal Government’s Instant Asset Write-off, which expired at the end of 2020. Under TFE, businesses with turnover of less than $5 billion can immediately deduct the business portion of the cost of eligible new depreciating assets. These assets must be held, used or installed by the end of June 2022.

For many businesses this is an attractive incentive, because even if they don’t have the cash to make the purchase, they can finance the asset – at historically low interest rates – and write it off straight away. In many cases, such as automobile use, they will also need to understand the proportion of business to private use, and make sure they claim accordingly.

Industry-specific deductions and WFH

Growden says that, while TFE is an incentive to buy vehicles and equipment because it can be accounted for in full immediately, small businesses shouldn’t lose sight of the other opportunities to claim deductions.

Here are some tax deductions that apply in specific industry sectors:

Retail: It depends what kind of retail you are in, but if you have a shop selling sporting equipment then you can probably claim tickets to sporting events, such as a football game. If you have a fashion outlet, then a trip to a fashion show is relevant and likely tax deductible.

Publishing and communications: If you have a publishing business covering the arts, tickets to theatrical and musical performances will be tax deductible. If you have a public relations business covering the same sector, the same applies. In a similar vein, you might publish a website that reviews restaurants. In this rare case, restaurant meals will be tax deductible, although you should check with your accountant.

Restaurants and hospitality: Usually, work attire is not tax deductible. But if your job requires you to wear anything that could be called a uniform, you could claim a deduction for the clothes plus laundry or dry-cleaning services. Up to $150 can be claimed for this without supplying receipts. Spending on publications, such as anything regarding food safety or even restaurant trends, is also tax deductible. There is also an argument for kitchen appliances. You might use them in your own home, but that portion used for researching and testing new recipes can be claimed as a business expense.

Tradespeople: Tradies need to carry an array of tools to get their jobs done, but they might not always be able to store them securely. They can claim the cost of using their own vehicles to travel between work and home if they have to transport bulky tools that can’t be stored securely on site. Tradies also often require specific safety equipment, such as steel-capped boots or safety glasses – even sunglasses, sunscreen and hats for those who work outside. These are also tax deductible. Uniforms with the company logo can also be claimed.

Professional services: Businesses in areas such as financial services, consulting and the law can claim expenses around training and education, staff and personal development, publications, and memberships of professional organisations.

READ: Dodgy tax claims and how to avoid them

Other deductions apply more generally for small businesses. In the aftermath of the pandemic, many businesses will be doing things differently and some of these changes will have tax implications.

More businesses, for example, will now be working from home offices. In this case, they should have a rental agreement in place with the owner of the premises, even if it is themselves as a private individual. Rental expenses are fully tax deductible for a business, and for those working in their own homes this is a good way to minimise taxable income.

In addition to rent, a portion of utilities such as power and gas can be claimed in the annual tax return, as can any items such as office furniture and even specific office improvements such as carpeting and painting.

Many people will be calculating the benefits of claiming business expenses when working from home. The downside to claiming business expenses on your own home is that there can be Capital Gains Tax (CGT) implications when the property is ultimately sold, in the same way capital gains apply to investment properties. The amount of CGT varies significantly, and these implications should be talked through with an accountant.

Your personal tax audit

Beyond that, Growden advocates a process of “doing a complete 360” on all business expenses, from advertising and bad debts to repairs, bank charges and interest paid.

“Think about subscriptions to magazines and memberships of professional associations, and any education and training, because all this can legitimately be claimed,” he said.

“Then there is the issue of clothing. Not all clothing is tax deductible, but some is, and people should be aware of that.

“If you really want to claim a deduction for what you wear, put your business logo on it.”

Even during the pandemic, businesspeople have continued to travel for work, albeit domestically. Assuming the business owner is also an employee of the business and is drawing a wage, they can claim a per diem amount to cover food, taxis and other incidentals.

On the countdown to 30 June, many small business owners would be looking at whatever cash is left in their business account and wondering what to do with it. Taking advantage of TFE is one tactic, as is stocking up the stationery cupboard, but there is also the option of pre-paying expenses, interest charges and even tax.

Businesses with a turnover of less than $10 million can claim an immediate deduction for prepaid expenses for up to 12 months, while prepayment for longer periods will be deducted over the number of years. This means that if you lease a vehicle, for example, if you pay next year’s payments now you can claim those payments in this financial year.

As mentioned, one area to be careful of is staff and client entertainment. Having a restaurant meal for clients or staff in the expectation of making a deduction is not that simple. While sandwiches and soft drink in the office during working hours is tax deductible, taking staff or clients to lunch and drinking wine is considered entertainment, which is not.

“It’s something of a blurred line on entertainment,” said Growden. “If you want to wine and dine clients, the best you can hope for is a renewed work contract, and not a tax deduction. But I can’t recommend people miss out on some great entertainment just to save a bit of tax.”

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This information is general in nature and does not constitute professional advice. For guidance specific to your situation, MYOB suggests engaging a specialist advisor near you ASAP.