This article was originally published 19 April 2021

As tax time fast approaches, make sure you understand the small business tax deductions and temporary full expensing rules for asset write-offs, so you can maximise your tax refund and underpin your future business success. Find out how your business might benefit.

Top Tax Deduction Tips for Small Businesses

  • Practise good record keeping 
    The myDeductions tool, available in the ATO app, makes it easy to organise and keep your records in one place.
  • Prepay expenses
    There are special rules about the timing of deductions for prepaid expenses. But for payments covering no more than 12 months, an immediate deduction is generally available. This may include prepayments for insurance premiums, phone and internet services, subscriptions to trade or professional bodies, and rent on your business premises.
  • Write-off bad debts
    While no business wants to be in a position where they can’t recover a debt, it does happen. If your business has to write-off a debt, a tax deduction may be available for the amount of the debt written off.
  • Pay superannuation
    Ensure all June quarter superannuation contributions are paid by 30 June to accelerate your tax deduction. To meet this requirement, the contributions must be paid, cleared in the business bank account and received by the employee’s super fund before 30 June.
  • Get the right trading stock valuation
    Damaged and obsolete stock can be written down or written off entirely. 

Claiming New Capital Assets

(Relevant till 30 June 2023) 

Take advantage of the small business tax deductions for new capital assets.

If your business has recently invested in or plans to invest in new capital assets, there are tax treatments that could provide a boost – particularly if you’ve had a tough year. Eligible businesses are able to deduct the full cost of eligible assets from their profit for the year, rather than depreciating the full cost over several years.

The Temporary Full Expensing rules, which allow businesses to claim the total cost of new capital assets acquired after 7.30pm on 6 October 2020, will benefit the vast majority of Australian businesses, says Mark Chapman, director of tax communications at H&R Block. “Unlike the old instant asset write-off, which was capped at $150,000 per asset, there is no limit on the cost of assets that can be deducted,” he says.

All businesses with an aggregated annual turnover of less than $5 billion are eligible. The rules apply to new depreciable assets and the cost of improvements to existing eligible assets that are first used or installed by 30 June 2023. It also applies to second-hand assets for businesses with an aggregated annual turnover of less than $50 million. 

Eligible assets include most assets that are used in the running of a business, such as computers and tablets; tools for use on a work site such as drills, ladders and tool boxes; equipment like a fridge or a grill; phones; and point-of-sale systems. It also includes business-use motor vehicles, such as utes and delivery vans – but for passenger cars the claim is capped at $64,741 for the 2022–23 financial year.

HOT TIP: Keep good records – tax law requires you keep records for at least five years. Good record keeping also facilitates efficient business management and will help you substantiate your claims.

Who Can Claim

Temporary full expensing allows small business tax deductions when purchasing capital assets.

Temporary full expensing will be voluntary for businesses that are not using the simplified depreciation rules, says Chapman. “They can opt out, on an asset-by-asset basis, of temporary full expensing,” he explains. If a business opts out, they should consider whether the general depreciation rules will apply. General depreciation rules set out the amounts (capital allowances) that can be claimed based on the asset’s effective life. 

Find out more about economic stimulus measures.

Special Rules for Businesses Using Simplified Depreciation

Businesses with a turnover of less than $10 million can't opt out if they choose to apply the simplified depreciation rules – even if the expensing rules don’t produce the best tax outcome for a business. A small business entity that chooses to apply the simplified depreciation rules must also deduct the balance of their general small business pool for an income year ending between 6 October 2020 and 30 June 2023. Find out more about the simplified depreciation rules for small businesses on the ATO website.

An example of this would be a sole trader with a profit of $50,000 who buys an asset costing $70,000, resulting in a loss of $20,000 after the asset write-off. Sole traders can carry the loss forward and use it when they next make a profit,  explains Chapman. The sole trader should consider the non-commercial loss rules which may only allow the sole trader to offset their costs against related income. 

Another example might be a business carried out through a company. The company may access the loss carry back rules if it is an eligible corporate entity to use this year’s losses against previous year profits. The loss carry back tax offset is available to claim in the company tax return for the 2020-21, 2021-22 and 2022-23 income years.

Find out more about economic stimulus measures.

Baseline Expenses

Businesses can claim a tax deduction for most expenses they’ve incurred from carrying on their business, including motor vehicle expenses, travel expenses, workers’ wages and superannuation contributions, and other expenses.

Find out about what you can and can’t claim, different types of expenses and more on the ATO website.

SEE ALSO: 11 Tax Deductions You Could Be Claiming

Home-Based Business Expenses

If you operate some or all of your business from home, you may be able to claim deductions for the business portion of expenses, including occupancy expenses (such as mortgage interest or rent) and running expenses (such as the usage of electricity and the decline in value of plant and equipment).

You can only claim occupancy expenses if the area of your home set aside for your business has the character of a ‘place of business’. You may have to pay tax on any capital gains you make when you sell your home.

The actual cost method and the revised fixed rate method are two ways to work out running expenses.

For the 2022–23 income year, the revised fixed rate is 67 cents per hour for each hour you work from home during the year. It covers the total of running expenses for usage of electricity, gas, internet, mobile and home telephone, as well as incidentals such as stationery and computer consumables, for the income year. If you choose to use the revised fixed rate method, you need to keep a record of all hours worked from home for the entire income year (such as timesheets, roster or diary).

Trusts and companies should have a genuine, market-rates rental contract with the owner of the property.

Find out more about home-based business expenses, including how you can calculate occupancy and running expenses and the records you need to keep.

HOT TIP: Keep records so you can choose the method that works best for your circumstances. For the 2022–23 income year only, if you don't have a record of all your hours worked from home for the year, the ATO will accept a representative record of your hours from 1 July 2022 to 28 February 2023, but you will still need a record of the total number of actual hours from 1 March 2023 to 30 June 2023.

COVID-19-Related Expenses

Some businesses, particularly those in the healthcare sector, may still have additional costs due to COVID. These will be deductible to the extent they relate specifically to the business, says Chapman. Specific types of businesses that have staff who require personal protective equipment (PPE) to protect them from COVID can claim the cost of supplying such equipment to their staff, he says. 

“[Other] examples could include the cost of print and copy expenses for social distancing signage, and the costs of subscriptions and licences to IT products such as Zoom.” 

Other Rule Changes to Note

In the wake of COVID-19, the Australian government has granted some small business tax breaks

The tax rate for most companies with an aggregate turnover of less than $50 million drops from 26% to 25% from the 2021–22 income year. This is great news for companies that reinvest profits. The tax offset for unincorporated small businesses with a turnover of less than $5 million increased from 13% in 2020–2021 to 16% from 2021–2022. This applies to sole traders or those who have a share of net small business income from a partnership or trust. “Unfortunately, the offset remains capped at a maximum of $1000, so in practice only the smallest businesses will see any benefit,” says Mark.

This is general information only and does not constitute financial or legal advice. Other requirements under the law apply. Seek professional financial and/or legal advice to determine the right outcomes for your business.

SEE ALSO: Useful Online Tools From the ATO