Claiming expenses is one of the best ways small businesses can gain a tax advantage, but unfortunately, many small businesses don’t understand what, or how, they can claim.
The ATO allows businesses to pretty much write off any cost incurred in running a business, (within reason and according to its guidelines), but there’s another equation involved. Many businesses simply don’t put the effort into figuring out what they can claim, or worse still, make mistakes that could put them in the firing line.
It’s important for small businesses to realise that falsely or incorrectly claiming expenses is not something the ATO takes lightly. Indeed, each year the ATO releases a “hit list” of areas in which it will investigate to make sure expenses and other tax matters are being claimed accurately.
Last year, the ATO said it would particularly target those who made mistakes regarding work-related claims, a focus they’re unlikely to let up on.
So if you’re set on claiming expenses, remember you need to do it properly. Our handy infographic will show you how.
You have to spend money to make money. But as many SMEs have found, spending money isn’t always easy.
So many SMEs are used to saving as many funds as possible. With cash flow tight and the constant, pressing need to develop a thorough sales pipeline, it can be difficult for small businesses to acknowledge that a large capital expense can actually yield significant results.
As a result, businesses can face a multitude of problems when it comes to budgeting for CAPEX. Not having enough cash on hand for technology, furniture or any other large, necessary expenditure can have significant, long-term issues.
Chartered accountant and Officeworks EOFY adviser, Melissa Browne, explains that while businesses are often hesitant, preparing for large expenditures is simply a necessary part of doing business.
“What I see works is a combination of budgeting, modelling and understanding whether what you’re going to buy gives you a boost to growth,” says Browne. “And then working out how you’re going to afford that shortfall.”
Browne says too many SMEs don’t actually focus on the numbers when it comes to purchasing equipment, and instead rely on vague mental modelling that doesn’t actually produce results. In reality, she argues, doing some simple maths can provide a solid argument for or against significant expenditures.
“I did this exercise with a client, looking to buy some equipment. They were concerned about spending the money because it would have involved a loan,” she says.
“But we modelled it, and worked out the amount of time that it would save in terms of labour, and manually doing the job. The business owner could significantly increase the capacity of the people he had working for him.”
It can be useful for SMEs to break down cost into more manageable metrics, Browne says, which usually falls into the realm of costing CAPEX according to billable hours or staff costs.
These principles apply even to smaller purchases, such as office furniture, or buying a laptop from Officeworks.
“You need to think about if you buy this equipment, and hired a new staff member, how long could it be until you pay it off, and what does that mean,” she says. “Is it one more job a week? One more hour a week for each staff member?”
“Instead of it being a scary amount, they’re able to understand that three team members need to do an hour each, or you need a new job worth two grand a month.”
“Breaking it down into smaller amounts can help you associate it with an activity.”
By doing this, Browne says, businesses can gain a huge advantage when they inevitably speak with a bank to get a loan.
“It means you have substance,” she says. “You can say, ‘this is what I want to do, this is how much I want to grow, and this is how I figured that out’. It all comes back to the numbers.”
Businesses shouldn’t be afraid to explore other funding options, Browne says.
“If you’re smart about it, you can lease some of these things so you don’t have to outlay it all. Depending on what it is, you may get a significant return back, whether it’s through the $20,000 write-off or R&D expenditure,” she says.
Browne also says businesses should avoid buying cheaper versions of equipment they want, which could end up costing more in the long run. So if you’re buying a piece of technology such as a laptop from Officeworks, for example, it’s a good idea to do your research first, and make an informed decision about which product is going to be the most reliable for your needs.
In the end, she argues, it comes down to the numbers – doing extensive modelling that not only includes the purchase price but maintenance, upkeep and other costs.
But there’s a warning in that, Browne says, in that businesses can become too comfortable with their financial success.
“I was working with a company recently, and they were very focused on the numbers. But they took their eyes off the ball, and it took six to eight months before they realised, ‘what’s going on?’ And I had to redirect them to what they were doing before,” she says.
“If you don’t look at the numbers, you can quickly lose control.”
It’s coming. With just a handful of short weeks to go until the end of the year, time is running out for SMEs to save on their tax bill.
But finding ways to reduce your taxable income isn’t always an easy prospect for small businesses during this time of year. With compliance issues, BAS, GST and updated payroll information to process, trying to find ways to save on tax can be a daunting prospect.
Fortunately, it doesn’t have to be.
H&R Block Director of Tax Communications Mark Chapman says SMEs should start thinking about how they can implement tax-saving strategies now, while at the same time ensuring they fit within the company’s existing strategy.
“If you’re looking to make some capital purchases, you might as well do it now.”
Chapman dug into his extensive history with SMEs and found some methods for businesses to start saving. Without a doubt, there’s something here for every SME to take note of before the calendar hits July 1.
Spend, spend, spend
The key way small businesses have been saving tax over the last year is through the $20,000 instant asset write-off. Now’s the time to take advantage of it.
“If you’re moving towards the end of the tax year, you can claim the deduction in the current year,” says Chapman. “So now’s the great time for businesses to go out and invest in pieces of tech, computers, tablets, phones, Wi-Fi networks – anything that costs less than $20,000.
“It’s also great for things like office furniture and potentially a vehicle, if you need one for your business.”
But it isn’t just large items that businesses can take advantage of. Chapman says a spending spree for stationary or other related materials under $20,000 from general suppliers like Officeworks can still be written off.
Every business has bills to pay, but paying them a little earlier? It actually makes sense. As Chapman explains, paying your expenses earlier means you’ll be able to claim the entire cost in the current financial year.
“That includes subscriptions to professional bodies, magazines, insurance bodies which will run through to next year, and so on,” he says.
It’s worth noting that if you have any regular expenses, such as updating software or buying general equipment while you’re stocking up on office consumables, putting in the effort to buy them now is worth the tax savings.
Many SMEs may not think about putting superannuation contributions through until the required date. But Chapman says it’s worth prepaying those contributions before the July deadline, and before June 30, in order to gain the tax deduction.
“Businesses just need to make sure the contribution actually flows through into the super fund before June 30,” says Chapman.
Businesses should also consider deferring income into the next financial year, Chapman says, but SMEs need to be careful – if invoices are deferred for too long, the ATO will keep an eye on you.
However, given the corporate tax rate will be falling to 27.5% in the next financial year, Chapman says this is a particularly pertinent year for SMEs to defer their income.
“But if you hold off on invoicing for too great a period, the ATO may raise their eyebrows,” he says.
“There are catch-all rules around anti-avoidance. If you were looking to defer invoices from January into July, that would look slightly strange.”
Write off bad debts
Still chasing some unpaid invoices that you don’t think will ever be paid? Write ‘em off and get a tax saving in the process, says Chapman.
“Obviously it’s never good if you have bad debtors, but if you have them, get the tax relief as quickly as you can.”
These are just some of the deductions allowed by the ATO – as long as you work in the right industry, of course. It seems strange, but the truth is that for many people working in out-of-the-ordinary occupations, claiming an unusual item or two is actually quite commonplace.
The rules for making a deduction are actually quite simple: you need to have incurred the expense and not be reimbursed by your employer, it must have been related to your job, and you need a written record of the purchase.
Pretty simple. But many people end up losing receipts or not tracking their expenses closely enough, and end up paying more tax than they should.
There are plenty of tools to help you calculate your tax, like this “tax withheld” tool from the ATO. And there are others to even help claim expenses, such as this calculator to help figure out how much you should claim on work-related motor vehicle expenses.
But no tool will help you figure out those quirky, weird little deductions that you may not have realised you can claim.
We’ve put together some examples from a wide range of industries of deductions that, at first, might make you scratch your head. But really – they’re just smart tax strategy.
Not for everyone, of course. But if you’re a real-estate agent, then this one may be in the works for you. The ATO allows deductions for the cost of gifts bought for work purposes, if you’re a salesperson or property manager.
You can also claim other gifts including wine, gift vouchers, or even something simple like the sorts of things you find at Officeworks, such as bound notebooks or an organiser for the new year.
Don’t go out and buy yourself an Apple Watch just yet. But if your profession needs you to use a wristwatch with special characteristics, which can be directly related to income producing activities, then you can claim a deduction for the depreciation.
You can also claim deductions for repairs, batteries and wristbands – but your claim needs to be divided between private and work-related use.
If you have a guard dog, you’re able to deduct the cost of the dog and any costs you have in maintaining it; food, for example. But you can’t just claim any old dog – it needs to be a dog purchased for the purposes of guarding a workplace.
The ATO will take notice if you decide the family pet is suddenly tasked with defending your property as a business expense.
Did you know you can deduct gym fees from your tax?
… That is, if those gym fees are crucial in you performing your day-to-day activities. Like a professional footballer. The ATO says those in professional sport can claim gym fees, and any gym and training equipment that costs under $300 or less.
It doesn’t just have to be footballers. Anyone who’s required to maintain physical fitness in their job – like a personal trainer – can deduct gym fees.
Here’s the catch. You can’t deduct costs for programs designed to manage weight, or any vitamins, minerals or supplements, like protein shakes.
Sunscreen and sunglasses
Work outside? Then you can claim sunscreen and sunglasses, according to the proportion you use them for work. You don’t even need to work outside all day – just for a part of the day. (Smoke breaks don’t count – sorry).
Yep. If you rely on research or being aware of popular culture for your job – say, as a journalist, or someone working in the advertising industry – then you can claim the proportionate cost of a paid television subscription.
Fancy yourself a council member? The ATO allows you to deduct up to $1,000 for any election – including a state or federal election campaign.
If you operate any type of electronic equipment, you can claim batteries that power it – like an accountant and a calculator, for instance.
But, as always – speak to an accountant or financial expert first before you claim anything.