What if there’s a way to reduce the amount of taxes you’re paying? In this article, we’ll explore the different types of tax deductions you can claim and the requirements you’ll need to qualify for these deductions.
General Rules in Claiming Tax Deductible Expenses
Before heading on to the list of expenses and deductions you can claim, let’s review first the general rules you should follow:
- You can only claim business-related expenses.
- If it’s for business and personal use, you can only claim the portion of the expense used for your business activities.
- Keep your valid records for five years to substantiate your claims.
There are certain expenses you can’t deduct. Here are some examples:
- The non-taxable income of your staff
- Parking fines
- Private expenses
- GST credit, if it’s listed on your business activity statement
- Any expenses that aren’t directly related to your assessable income
- Entertainment expenses
By knowing the basic rules in claiming your deductible expenses, as well as the expenses you can’t claim, you can budget your finances properly.
List of Tax Deductions for Small Businesses
Figuring out all available tax deductions helps you lower your business expenses. While it’s just a small step, it can still create a positive impact on your financial health. See the list below to know the common areas where you could work out your taxes.
- Operating expenses
- Travel expenses
- Home office expenses
- Motor vehicle expenses
- Capital expenses
- Small business tax concessions
- Tax offsets
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Operating expenses (also known as working or revenue expenses) are the costs you incur from your daily business activities. It is divided into five categories:
- General business operating expenses refer to common business expenses like bank fees, insurance premiums, and website maintenance and updates.
- Business premises operating expenses are the costs you incur from maintaining your office operations such as electricity, water, rent, and internet service fees.
- Employee-related operating expenses are the expenses you incur from having employees. It includes salary and wages, super contributions, allowances, reimbursements, and clothing expenses. Learn more about it here.
- Expenses similar to deductions claimed by employees like clothing expenses, education, and training sessions taken for business purposes, and subscription costs for journals, newspapers, magazines, and information services.
- Tax-related operating expenses - are fees you incur from preparing and lodging your taxes from beginning to end. It covers the payment made for getting a tax accounting service, asking for tax advice, and even attending an ATO audit.
Traveling for business entitles you to claim deductions for your expenses such as:
- Transport costs
- Accommodation fee
- Meal expenses
However, if you travel for both business and personal reasons, you can only deduct all expenses made for business purposes. Personal activities such as sightseeing, buying souvenirs and gifts, and visiting family or friends are non-deductible.
Moreover, any travel expenses you have before the actual start of your business, even if it’s made for business purposes, can’t be deducted.
For employees who travel to represent your business, you must shoulder their travel expenses so you can claim them as deductions. You can either pay directly for their expenses using your business’ account, allocating a travel allowance, or reimbursing the employee for all business-related expenses made.
You should also keep essential records like official receipts, boarding passes, tickets, tax invoices, and travel diaries. Keeping a travel diary is crucial to justify your claims, especially when separating expenses made for business and leisure activities.
Home office expenses
Operating some or all of your business operations from home qualifies you to claim tax deductions.
- Occupancy expenses - the cost of space you’re using for your business activities. It covers the following:
- Mortgage interest
- House insurance
- Council rates
- Land taxes
- Running expenses - these are the bills you need to pay to keep your business going such as:
- Phone bills
- Lighting and cleaning expenses
- Depreciation of furniture and office equipment
This home office expenses calculator will help you compute your allowable deductions. You can also ask for the assistance of your accountant to make the calculations easier and more accurate.
Note: The Australian government allows the use of a temporary shortcut method for claiming home office expenses deductions until 30 June 2021. Using this method, you can claim a rate of 80 cents per hour for all your running expenses instead of calculating the actual costs.
Motor vehicle expenses
If you use motor vehicles to carry out your business activities, you should also keep good records of all expenses you’ve incurred to claim your tax deductions. Here are some examples:
- Fuel and oil
- Motor vehicle insurance cover premiums
- A decline in value of your motor vehicle
- For home businesses: cost of official business trips from your home to another location and vice versa.
Check this page to find out which calculation method applies to your business structure.
There are expenses you can’t claim right away as tax deductions. It can be classified as:
- Depreciating asset expenses - these assets are vital to your daily business operations. Examples are computers and computer accessories, furniture, mobile phones, machinery, and equipment
- Other capital expenses - investments made to improve your overall business operations. Examples are start-up expenses, construction expenses, and website expenses, and software expenses.
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Small businesses tax concessions
Tax concessions are the tax reliefs granted by the Australian government to eligible small businesses to reduce the amount they’re supposed to pay. Each type of tax has an available concession specifically for small businesses.
If you’re a small business owner, being aware of these concessions can boost your cash flow and enable you to make better asset investments and financial decisions.
Like concessions, tax offsets (or rebates) also reduce the cost of your taxable income. It has four main types:
- Small business income tax offset - enables you to get up to $1,000 tax reduction each year. To qualify, your aggregated turnover should be less than five million for the income year 2020-2021 and onwards.
- Foreign income tax offset - saves you from double taxation. This applies to you if your business pays foreign tax in a different country. See this guide for more details.
- Research and development tax incentive - an incentive for businesses with research and development (R&D) initiatives that benefit the country. Find out if your business is eligible here.
Loss carry-back tax offset - available for businesses that claimed a tax loss in past years.
The process from tax preparation to lodging takes a lot of time, effort, and patience. You have to make sure you aren’t missing any important details, like these seven tax deductions, to ensure you’re paying the right amount.
Instead of doing the taxes by yourself, get some help from a certified tax accountant. You’ll not only remove this burden off your shoulders but you can also have the confidence that all essential tax information about your business is carefully accounted for. Plus, the service of an accountant is tax-deductible — letting you achieve the best of both worlds.