A small business is basically one that has a turnover of less than $10 million per annum.
According to research by accounting software giant Xero, 40 per cent of Australian small business owners are unclear about what expenses they can claim as deductions to minimize their tax.
To make matters worse, the eligible deductions and tax laws change every year, and also vary according to each individual business structure.
This can make it very difficult for small business owners to know how to minimise their tax bill.
To help business owners better understand how to pay less tax, here are five handy tips:
1. Get your business ownership structure right
The type of ownership you use to run your business has an enormous impact on both your tax rate, and the type of tax deductions and benefits you can claim. For example, if you use a family trust to stream income to family members on a lower tax bracket, you might only pay 27.5 percent tax. However, as a sole trader, you are required to pay tax on your marginal rates as an individual (up to 46 percentage. Getting your business ownership structure right can save you a lot of tax, so speak to your business tax adviser today
2. $30,000 instant asset write off
When an asset of up to $30,000 is purchased by a small business, it immediately becomes tax deductible in the year of purchase. This means you get the full tax benefit in the first year – rather than having that benefit staggered over many years as depreciation. This concession only applies for individual assets. You can have more than one asset and still claim the benefit, as long the total value of each asset does not exceed $30,000.
For example, if you bought a car for $25,000, along with other assets
such as machinery, for $30,000, and you are a company on the 27.5
percent tax bracket, you could write off $55,000 in the year of
purchase: saving up to $15,125 in tax.
N.B. This limit has been temporarily increased to $150,000 until June 30, 2020 to help small businesses cope with the COVID 19 economic downturn.
3. Take advantage of simplified depreciation
The simplified depreciation rules allow small businesses to pool assets costing more than $20,000 and claim a flat 15 percent deduction in the first year, plus a 30 percent deduction each year after that. This is regardless of when the assets were purchased or acquired. Also, when the pooled balance (before applying any other depreciation deduction), falls below $20,000, you can write-off the entire amount for tax purposes. This helps to reduce your capital expenditure faster, while providing significant tax and administrative savings
4. Simplified trading stock rules
As a small business owner, stocktakes are not required if the change in the estimated value of closing stock does not exceed $5000. This means you can estimate your closing stock value to be the same as your opening stock value, saving you time and hassle. Of course, your estimate must be reasonable. If the difference is more than $5000, you need to use the general trading stock rules, conduct a stocktake, and take into account any changes in the value of your trading stock at the end of the financial year
5. Using Immediate deductions for prepaid expenses
As a small business owner, you can claim an immediate deduction for prepaid expenses if the payment covers a period of 12 months or less and ends in the next financial year. For example, if you pay your insurance premium in June for the next twelve months, you can claim it as an immediate deduction. This also helps bring forward your expenses for next year, and to write them off a year earlier to save on the tax bill.
How can Tax Return Perth Help?
Our team of CPA qualified accountants specialises in small business tax issues. We understand businesses and can help our clients by giving advice on business structures, tax planning and business tax returns for small businesses. Call us today for a free consult and to discuss how we can help.