With the end of the financial year fast approaching, you’re probably starting to think about your small business tax return. While you still have some time until you have to lodge your return, it’s a good idea to start tax planning as early as possible.
These tips will help you put tax-effective strategies in place so you can keep more of your earnings in your pocket.
How do most Australians do their tax return?
The ATO confirms that most taxpayers prefer to use a tax agent like Etax.com.au to lodge their tax return. Seventy per cent of lodgements are completed with the help of a tax agent.
This has been almost unchanged for years, in spite of ATO marketing and media that tell us we should do it ourselves with ATO MyGov and myTax.
Why doesn’t everyone go it alone with my Tax? Because most people choose to get tax help from someone who’s on their side.
Tax planning tips
The end of the tax year will soon be upon us with June 30 just around the corner. Now’s a good time to take a look at both your expected taxable income (essentially your business’s assessable income, minus any allowable deductions) for the current financial year 2019-20; and your projected/expected taxable income for 2020-21, as they will help guide your tax planning strategy.
Tip: Refer to the Australian Taxation Office’s tax rates (sole trader) or company tax rate to identify your income bracket and the Tax you’re likely to incur.
If you are expecting to have a higher income this financial year, compared to your projections/expectations for the next financial year, you can talk to your accountant to consider:
- You are prepaying some of your 2020-21 expenses (such as your rent, insurance or subscriptions to professional associations) in the 2019-20 financial year. Up to 12 months of the following year’s expenses can be deducted in the current tax year.
- Taking advantage of the instant asset write-off, which enables you to immediately deduct assets you purchase for your business costing less than the associated threshold (whether the asset is purchased new or second-hand). Thresholds have changed over the past few years and will reduce to $1000 from July 1 2020, so check the ATO website for full details.
- You are reviewing and postponing some of your invoice for the current tax year, if appropriate.
- I am topping up your voluntary superannuation contributions.
- Reviewing your debtors and writing off any unrecoverable debts.
- If applicable, deducting any start-up expenses – such as obtaining legal or accounting advice on your business structure, and fees in relation to establishing the structure (e.g. ASIC company registration fee).
If you are expecting to have a higher income next financial year (2020-21), you can talk with your accountant to consider:
- If it’s appropriate to do so, bringing forward any invoicing into the current financial year for scheduled work that will be carried out in the next financial year.
- Paying your expenses as they are due, rather than prepaying them in advance during the current tax year.
- Purchasing any required equipment or business assets this year. If you decide to purchase business assets, you should base this decision on the needs of your business. For example, you might need to purchase a vehicle for deliveries to help expand your business operations to achieve business goals, or because it is in line with your business plan.
Tip: Avoid spending on business assets for the sake of claiming tax deductions, In most cases, you’ll find yourself paying $1 to save 30 cents* in Tax (*based on the most common business tax rate).
Do I need an accountant to do my tax return?
Depending on whether your finances are straightforward or more complex, you may choose to do your tax return yourself or engage a professional.
If you have multiple sources of income, various investments, possibly your own business or have lots of deductible work-related expenses, using an accountant (who’ll need to be a registered tax agent1) to prepare and lodge your tax return may be useful.
However, if the only income you earn is from your employer and you don’t have many deductions to claim or investments you’re making money on, you might choose to lodge your tax return online yourself via my Tax, which is accessible through the Australian Government’s myGov website.
If you’re not sure which way to go, here are a few pointers that might help you with your decision.
Lodging Your Tax Return Yourself
If your finances are relatively simple, you might consider lodging your tax return (which you’ll need to do by October 31, for the previous financial year), while saving money on what a registered tax agent might charge you.
According to the Australian Taxation Office (ATO), the benefits of lodging your tax return online via the myTax system is it’s safe, secure and most of the information from your employer, bank and Government agencies will be pre-filled for you by around late August 2.
Meanwhile, even if your situation is a little more complex, you can still use myTax if you have investments, rental properties, capital gains or are a sole trader.
On top of that, the service is available all day, every day so you can lodge your return at any time and you’ll generally get your refund within two weeks, which may be faster than doing it another way.
Engaging a Registered Tax Agent
If you do want to use a registered tax agent to prepare and lodge your tax return, it’s important to note you will pay a fee for their service, but it’ll typically be deductible in next financial year.
Note, tax agents must be registered with the Tax Practitioners Board (TPB), and you can find a registered tax agent or check whether a person is registered by visiting the TPB website5.
If your finances are more complex, going down this path may provide you with peace of mind, as it could save you time, highlight deductible work-related expenses you didn’t know about while ensuring all your claims are legitimate.
On top of that, most registered tax agents have a special lodgement program, which means they can usually lodge returns for their clients after the usual October 31 deadline. Still, you’ll need to contact them beforehand to ensure that’s something you can take advantage of it you want to.
What can Real Estate Agents Claim For?
Being a real estate agent means long hours, loads of travel and having to deal with indecisive buyers and slow-acting sellers. It’s great when things are going well, but it can also be the most frustrating career ever – sometimes all in the same week. Here are our top tax tips for real estate agents.
As a real estate agent, you use your vehicle more often than most other people. Travelling to and from open homes, meeting with buyers and sellers and numerous other requirements will take their toll on your vehicle. You may wish to consider whether keeping a logbook or a percentage arrangement would be more beneficial. Speak to your tax advisor about what’s best for you. Also, a tax advisor should be POP.
Your mobile phone, laptop and tablet are all used for communications and marketing. These are mandatory tools of the trade, but what else do you use to maintain contact between yourself, the office and your clients? As a real estate agent, you are required to be in touch 24/7, and while this can be a significant disadvantage in day-to-day life, it also has the potential to be a powerful tax tool.
Over the last decade, the equipment used by real estate agents has evolved considerably. Drone and camera equipment, advanced photography gear and many other technologies that would have been considered unthinkable only a few years ago are now standard. This is important not only at tax time but also when you are thinking about purchasing technology that could help make your job easier. Consider the tax implications of making a purchase, as you may want to consider buying things earlier – especially when there are tax advantages.
If you have a uniform with a logo on it, then it is most likely tax-deductible. Additionally, you can claim for washing and laundering, including the usage of your washing machine and a laundry service.
Even if you have an office that you go to, it’s highly likely that you have space put aside at home for taking calls from clients, responding to emails and setting up meetings. This can be claimed as a percentage of your rent or mortgage and presents potentially significant tax advantages.
Marketing equipment depends on whether you are self-employed or an employee of an agency. If you are self-employed, then costs such as signage, and online marketing costs can potentially be deducted. If you work for an agency, then it’s more likely that these costs were absorbed directly by your employer, and so there is no advantage to you. However, if you took it upon yourself to buy stationery or any brochures, then you can certainly claim them.
Six tips to maximise your small business tax return.
Take advantage of the instant asset write-off.
From March 12, 2020, until June 30 2020, the instant asset write-off threshold is $150,000 (up from $30,000) for businesses with an aggregated turnover of less than $500 million. This means you can purchase an asset of up to $150,000 until June 30 and claim a deduction for the full amount on your tax return, rather than partially writing off the asset based on its depreciation rate.
From July 1 2020, the small business tax write-off threshold will drop back down to $1,000 and only apply to businesses with an aggregated turnover of less than $10 million.
Prepay your 2020-21 expenses.
If you’re expecting to have a higher income in 2019-20 than 2020-21, you may want to consider prepaying some of your expenses – such as insurance, subscriptions or memberships – this financial year.
You can deduct up to 12 months of the following year’s expenses in the current tax year.
Make voluntary super contributions.
Pre-tax super contributions, known as concessional super contributions, are taxed at a rate of 15%. This is lower than the lowest income tax rate of 19% and the company tax rate of 27.5%, and you can claim a deduction on contributions.
The concessional super contributions cap is $25,000 for individuals. Suppose you plan to claim a deduction for your concessional contributions. In that case, you’ll need to provide a ‘Notice of intent to claim or vary a deduction for personal super contributions’ form to your super fund.
Depending on your situation, you may be able to defer some income to reduce your taxable income for the 2019-20 financial year.
For example, if you delay sending an invoice until July 1 2020, the invoice amount will count towards your taxable income for the next financial year rather than this year.
Review your debtors.
You can claim a tax deduction on unrecoverable debts regardless of the year in which you invoiced them, as long as you can show that the debt was initially included as income and has been written off by June 30.
Document your decision to write off the debt, as this can be used as evidence that the debt was written off before EOFY.
Write off damaged or obsolete stock.
If your business holds stock, consider reviewing your stock valuation and writing off any stock that’s damaged or obsolete.
Complete a stocktake, and keep in mind that stock can be valued at either cost price or net realisable value (it’s expected selling price), whichever is lower.
Additional tax tips for small business owners:
Below are some additional tax planning strategies to discuss with your accountant.
GST cash accounting
This means accounting for GST on a cash basis rather than accruals, so you pay GST to the ATO when you collect it, not when you issue your invoice. GST cash accounting is also good for improving your cash flow.
Small business restructures rollover.
This tax planning strategy is useful in situations where you may be looking to change from a family partnership to a family trust. Suppose you’re a small business entity (SBE). In that case, you can transfer an active asset of your business (such as goodwill) to another SBE as part of a genuine business restructure, where there is no change in the ownership of the assets. This means no capital gains will be payable. However, state transfer tax might still apply.
Instant asset write-off vs depreciation
You could take advantage of the Government’s instant asset write-off, which affects those with an annual turnover of less than $500 million.
- However, as part of your tax planning, you should compare which is better: instant asset write-off vs depreciation.
In a nutshell; as businesses grow and make more income, there may be a greater benefit in not using the instant asset write-off, as you may lose out on on-going deductions and depreciation.
The ATO provides useful information on Simpler depreciation for small business.
Is your return correct and current?
Having accurate and current information is another important aspect of tax planning that can help you maximise your deduction and allow you and your accountant to make informed tax decisions. This includes:
- Ensuring the logbooks for your business vehicle is up-to-date. You’ll need to start a new logbook if your current one is more than five years old or your vehicle usage has changed significantly. You could also consider investing in one of the many mileage tracking digital apps available.
- If your business carries stock, do your stocktake as of June 30 2019. NB: If your estimated closing stock (and opening stock) is less than $5,000, you do not have to do a stocktake.
- Accounting for the private use of business assets, such as motor vehicles, when claiming GST on expenses. For example, suppose you’re claiming 100 per cent GST on motor vehicle expenses, but 20 per cent of the vehicle’s use was private. In that case, you’ll need to adjust your annual GST private apportionment claim to factor in this personal use.
Been impacted by COVID-19?
If the COVID-19 crisis has negatively impacted your business, the ATO may be able to offer assistance by:
- Giving you extra time to pay your tax bill or lodge tax forms such as activity statements
- Providing tax-free cash flow boosts of between $20,000 and $100,000 to eligible businesses
- Setting up a tax payment plan based on your circumstances, including an interest-free period
- Revoking penalties or interest charged for the period your business has been affected.
Whether you plan to lodge your tax return yourself or use a professional, you can use the deductions tool in the ATO app to save a record of your deductions throughout the financial year, which you can upload at lodgement time.
To ensure you’ve got all the relevant information you need ahead of filing your tax return, check out the ATO’s tax time checklist.