As tax time fast approaches, make sure you understand the small business tax breaks 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.
Claiming New Capital Assets
If your business has recently invested in or plans to invest in new capital assets, there are tax breaks 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; an office or shop fit-out; 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 $60,733 for the 2021–22 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 make life easier if the ATO has questions.
Who Can Claim
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.
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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. More information about the simplified depreciation rules can be found on the ATO website at simpler depreciation for small business.
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. An eligible corporate entity (company, corporate limited partnership or public trading trust) would be able to carry this loss back against profits paid in an earlier year (under loss carry back rules for eligible corporate entities) and get a refund of that tax. You can check your eligibility by using the ATO’s loss carry back tax offset tool. Sole traders aren’t eligible for the loss carry back offset and their only option is to carry the loss forward and use it when they next make a profit, explains Chapman. In addition, this sole trader would lose access to the $18,200 tax-free threshold for the relevant tax year.
Another example might be a business carried out through a trust. The trustees might want to keep enough taxable profits to make distributions to beneficiaries, so they can use them up to their own tax-free thresholds ($18,200). However, if the trust has purchased a big capital item during the year it has no choice but to write it off in full, meaning the trust reduces its profits to $0 (or even makes a loss) and there would be nothing left to distribute to beneficiaries.
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Businesses can claim all the usual running expenses, including motor vehicle expenses, travel expenses, workers’ wages and superannuation contributions, and other operating expenses.
Home-based businesses can claim running costs using the:
- actual cost method
- 52 cents an hour fixed-rate method (which covers heating, cooling, lighting, cleaning and the decline in value of furniture and furnishings)
- temporary 80 cents an hour shortcut method (which you can apply until 30 June 2022 and is an all-inclusive rate so you can’t claim any other expenses for working from home).
Additionally, sole traders and partnerships who have an area in their home specifically set aside for business, such as a dedicated room or home addition, can claim a portion of occupancy costs, such as mortgage or rent. (Note: you cannot claim occupancy costs if you just have a desk set up in your living room.) This occupancy costs claim is usually based on the proportion of the floor area of your home that is a place of business as well as the proportion of the year it has been used for business. According to the ATO, trusts and companies should have a genuine, market-rates rental contract with the owner of the property to claim occupancy costs.
HOT TIP: If you do claim occupancy expenses, or receive rental income in relation to a home you own, there may be capital gains tax implications when you later sell your home.
Many additional costs a business has had due to COVID-19 will be deductible to the extent they relate specifically to the business, says Chapman. “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.”
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 adds. The types of businesses this may apply to include hospitality, medical, health, beauty, retail and public transport.
Other Rule Changes to Note
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.
Top Tax Break Tips for Small Businesses
- Prepay expenses There are special rules about the timing of deductions for prepaid expenses. But for expenses 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 and a tax deduction claimed. This could be especially beneficial to retailers who have substantial surplus summer and autumn stock from last year that cannot be sold.
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.