As 30 June approaches, attention turns to tax and how to make sure you get all the deductions you are entitled to. By TERRY HAYES of Thomson Legal & Regulatory. By Terry Hayes
For SMEs, the 30 June deadline and tax time can turn into a complicated task. Getting all the deductions you are entitled to is paramount, so here are some pointers as to what is deductible.
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The tax law allows a deduction for expenditure incurred by an SME in borrowing money to the extent that the borrowed money is used for the purpose of producing assessable income.
Note that this is a year-by-year test, allowing for changes in the use of the borrowed funds, rather than a test applied only at the time of borrowing. Borrowing expenses can include legal costs, search, valuation, survey and registration fees, fees paid for guaranteeing an overdraft, and commission paid to brokers.
The interest on loans used for income-producing purposes is also generally deductible.
Expenditure incurred by an SME for repairs to its premises, part of premises or a depreciating asset (including plant) held or used solely for the purpose of producing assessable income is deductible.
Some care is needed however, because the word “repair” is not defined in the tax law and therefore takes its ordinary meaning of restoration by renewal or replacement of subsidiary parts of a whole.
So, the essential question is whether the particular work is the renewal or replacement of defective parts or the renewal or replacement of substantially the whole of the asset.
Where the asset repaired is only partly used for income-producing purposes, the cost of any repairs has to be apportioned between income-producing and non-income-producing use of the asset.
There is no “one size fits all” rule as to what legal expenses are deductible. So advice should be taken when considering this. As noted above, legal expenses connected with borrowing money to use to derive assessable income are deductible.
Legal expenses incurred by an SME in defending its business practices are generally deductible. Over the years, case law has also held certain legal expenses to be deductible (although each case must be considered on its merits), for example a nursery business opposing an application by a neighbour to begin quarrying activities, obtaining a renewal of planning permission to carry on quarrying activities, and opposing a rezoning application by a neighbour of a business.
Employers are entitled to a tax deduction for costs associated with seeking to obtain employees, for example advertising and agency fees.
Premiums paid by a business for workers compensation insurance are deductible. Insurance paid for fire, theft, public liability, loss of profits and motor vehicle insurance (for cars used in the business) are also deductible.
In general terms, a deduction is allowable under the tax law for a debt (or part of a debt) that is written off as a bad debt in the income year, provided the amount owed was included as assessable income of the business in the current or a former income year.
Note that the debt must actually be bad and must be written off as bad during the income year in which the deduction is claimed.
Some taxes are deductible
Taxes other than income tax are generally deductible provided there is a sufficient connection to the SME’s income-producing activities and provided they are not of a capital or private nature. Taxes that are deductible include pay-roll tax, land tax and debits tax.
A wide range of deductions for tax advice and tax compliance costs is available under the tax law, including the costs of preparing income tax returns, preparing objections to tax office assessments or answering tax office queries, obtaining valuations required under tax laws, creating and maintaining records as required under tax laws, and tax planning advice.
An amount paid in respect of work-in-progress is deductible under the tax law. Conversely, the receipt of a work-in-progress payment is assessable income.
The range of expenses incurred by SMEs can be large, so determining their tax deductibility will often require professional advice.
In addition to claiming a straight-out tax deduction, reducing taxable income can also be achieved by taking advantage of the various concessions in the tax law, most notably, the capital gains tax small business concessions ie:
The 15-year exemption – an individual small business taxpayer is entitled to a full exemption from CGT re, for example, the sale of an asset that is subject to CGT where the asset has been continuously held for 15 years, the taxpayer is at least 55 years old, and the sale of the asset occurs in connection with the retirement of the taxpayer. The 15-year exemption has priority over the other small business CGT concessions.
50% concession – a capital gain can be reduced by 50% if conditions are met.
Retirement exemption – basically, a taxpayer can elect to disregard a capital gain up to a lifetime limit of $500,000 if the proceeds from the sale of an asset, for example, are used to pay an eligible termination payment. This exemption cannot be used if the 15-year exemption applies.
Rollover for replacement assets – in essence, where assets are sold and replaced by new assets, any capital gain on the sale of the old assets can be ignored up to the value of the replacement asset.
These capital gains concessions can be quite generous, but difficult to calculate and apply in practice. Again, professional advice should be sought.
Terry Hayes is the senior tax writer at Thomson Legal & Regulatory , a leading Australian provider of tax, accounting and legal information solutions.
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