Feeling panicked that we’ve just hit June 1? We get it –2020 has been a ride so far!
Now it’s only a month until EOFY, but between bushfires, pandemics, and homeschooling – not to mention the emotional journey Tiger King took us on – you’re scrambling to get on top of your taxes.
But never fear! We’re here.
Table of contents
- Understanding Key Small Business Deductions
- Collate All Your Receipts and Expenses
- Do You Qualify for Instant Asset Write-Offs?
- Use an Online Accounting System – And Use it as a Tax Deduction
- Find a Tax Accountant – You Can Use it as a Deduction Next Year
- Get Your Reports In Order
- Plan for Next Year
Here’s what you need to make tax time your tiger:
1. Understanding Key Small Business Deductions
How and what you pay in tax is related to your business structure – you’re either a sole trader, partnership, company or Trust.
Your deductions have to be directly related to earning your business income. Those deductions reduce your taxable income – you do not “get the money back” – and are generally either operating expenses (like stationery) or capital expenses (like computers).
When in doubt, remember the 3 Golden Tax Rules :
- You can only claim business related expenses – you cannot claim any personal expenses.
- If the expense is both business and personal, you can claim the business-related portion.
- You need proof – you must have records to prove the expenses that you claim as business deductions.
It’s important to remember that working from home and running your business from your home are different – and what you can claim is different.
Working from home: Your ‘official’ workplace or business address is elsewhere, but you work from your home some days. Running your business from home: When there is a dedicated room in your house that operates as a place of business. (It’s worth reading about the deductions you can claim if you run your business from home.)
There are multiple ways that you can claim home office/working from home expenses. A Tax Agent can help you determine which would benefit you the most:
- Claim all your expenses separately – Depending on your situation you may be able to claim your rent, mortgage, utilities, etc as well as all business expenses. However, it is dependent on whether you have a home office or use your dining room table. Keep in mind there may be capital gains tax considerations if you claim on a house you own.
- ‘Short cut’ method – This is a new method available for the last quarter of the financial year due to COVID-19. It allows you to claim a rate of 80 cents an hour for all running expenses for anyone working from home. You don’t need a dedicated workspace to claim this, however it covers all running costs and you cannot make other claims. (Meaning if you had a large cost, such as buying a new computer, this might not be the most beneficial way to claim.) Remember to keep a record of the amount of hours you are working from home!
- The standard fixed rate scheme – Essentially the same as the ‘short cut’ method, you can claim 52 cents in every dollar for each hour working from home. This requires a record, however you can claim other running costs and expenses, including utilities.
Phone & Internet
You cannot claim 100% of your phone or internet if you use it for personal and business purposes – you can only claim the business percentage.
For instance, if your phone is for both personal and business, you’ll need to have a look at your bills and determine how often you used it for work (e.g. if it’s 50%, you can charge 50% off your total phone costs).
2. Collate All Your Receipts and Expenses
Once you have an idea of what you’re claiming, you’ll need to collate all your receipts and expenses.
Remember you must hold all your records for a minimum of 7 years and it’s best to keep both a paper and digital copy of everything.
If you haven’t kept track throughout the year (been there!), here are some of the things you might be able to claim that you’ll need to find records for:
- Website costs, including domain costs
- Business admin costs, such as paid email services, tools, programs etc
- Travel and vehicle expenses (as long as it is not traveling from home to work and vice versa) – the ATO website provides three ways to claim vehicle or travel costs. These methods are only applicable when you use the vehicle or cost of travel from work to work.
- Machinery, equipment and technology
- Training and upskilling, including courses, conferences etc – when it has a direct association with your current work.
Keep in mind, you can’t claim:
- Entertainment expenses
- Private and domestic expenses, like clothes
- Money earned from a hobby
Added bonus, you can claim $300 of stationery expenses without a receipt.
If you’re a sole trader and you’re finding it a nightmare to keep track of all your expenses, try using the ATO’s myDeductions app. It’ll make this time of year a lot easier.
Wondering if you’re keeping the right records? The ATO has a Record Keeping Evaluation tool.
3. Do You Qualify for Instant Asset Write-Offs?
The ATO offers certain initiatives for different businesses – one of which is writing-off certain assets. Due to COVID-19, the government has introduced a new threshold of up to $150,000.
“Under instant asset write-off eligible businesses can:
- immediately write off the cost of each asset that costs less than the threshold
- claim a tax deduction for the business portion of the purchase cost in the year the asset is first used or installed ready for use.”
Keep in mind that the threshold changes, but it’s worth investigating or talking to an expert to find out if you’re eligible as it can be very beneficial to you.
4. Use an Online Accounting System – And Use it as a Tax Deduction
We’re going to give it to you straight: an online accounting system is a lifesaver for small businesses. No matter if you’re a sole trader, small business owner, freelancer, or Instagram influencer, it will save you hours in admin – hours that you can spend earning hard, cold cash (or binging Netflix).
Online accounting systems are automated and keep everything in one place – accounting records, invoices, reconciliations and expenses. They can also manage team members, clients and help with BAS (Business Activity Statements) and GST.
There are multiple options available, but some suggestions:
- Xero – If you have a small business and need accounting services, including payroll, Xero is one of the best on the market. There are different plan options to suit your needs, but the money invested will be saved ten-fold. (Plus it integrates with Vonto!)
- Quickbooks – Similar to Xero but offers different features and options, it’s another great option for small businesses.
- Rounded – Ideal for sole traders and freelancers who need to invoice, track time and track income. It’s Aussie owned, so it operates in AUD and has GST functions.
Plus, an online accounting system is a tax deduction.
5. Find a Tax Accountant – You Can Use it as a Deduction Next Year
Often, the best thing you can do is to pay an expert. A tax accountant sat through all those boring uni classes so that you could benefit.
Keep in mind that with the current economic situation, there are a number of new and time-related tax benefits for small businesses. A professional accountant will know which allowances have been made for FY 2019-20, and will be able to help you get the most out of your return.
If you don’t have a tax accountant, ask other small business owners in the local area for a recommendation. Finding a tax accountant you trust is important – and keep a record so you can claim in the next year.
6. Get Your Reports In Order
It’s best practice to run on a monthly basis and reconcile accordingly. The reports you need, depending on your business and team, could include:
- Summary of all income
- Profit and loss statement – listing sales and expenses
- Summaries of your record of debtors and creditors
- Stocktake – what you have on hand and it’s value. (Note: the ATO requires business owners to do a stocktake if their turnover is $10 million or more, or where their turnover is less than $10 million but the difference between the value of their stock at the beginning and end of that financial year is more than $5,000.)
- Asset purchases or expenditure on improvements (to calculate depreciation claims and for capital gains tax)
- Business Activity Statement (BAS) – if you’re registered for GST
And an annual summary of:
- pay as you go (PAYG) withholding
- fringe benefits tax (FBT)
- goods and services tax (GST)
Check which reports you need first though via the ATO website, so you don’t waste your time on reports you don’t need.
7. Plan for Next Year
Did you forget to keep track of some purchases? Maybe you threw away receipts?
Make a note of all the things you’re saying ‘you wish you had done’ now, and plan to do them next year. Contrary to public belief, tax is not just something you should do each June.
So make a plan. Invest in Xero. Start that spreadsheet. Set up automated reports. Create a folder for all your receipts. Write the list of the expenses you gathered this year, and can do again next year.
You will thank yourself in 12 months time.