There are four different business structures in Australia – sole trader, partnership, company, and trust. Whatever your business structure be, you have to file the business tax returns on time to avoid unnecessary penalties.
If you are a sole trader, you have to file a sole trader tax return. In short, tax deductions can help you to increase your tax refund. In addition, as the owner of your business, you can claim a tax deduction on a vast number of expenses you sustain in running your business until they are directly linked to your taxable income. Here we discuss how tax deductions work and what fees you can claim as tax deductions.
How Do Tax Deductions Work?
Firstly, you should know that by claiming a tax deduction, you cannot get back the entire expense from the ATO or the Australian Tax Office at the time of lodging the tax return. What tax deduction does is decrease the assessable income. It means you can get only a part of the expense back for deductible items. Usually, you can claim a tax deduction on several costs that we will discuss later. You should note that you can claim those directly related expenses to the business, and you cannot include any private fees.
Here we give two examples by which you can understand how tax deductions work for a small business. The tax deduction rate for a small business is 27.5%. In the first example, we assume there are no deductions. Say a company earns an amount of $120000 and also retains the same amount of profit. Thus, the tax payable will be $33000. If the PAYG (Pay As You Go) income tax is $30000, the final tax payable will be $3000.
If the business earns $120000 and makes a profit of $100000, then the company will get a tax deduction of $20000. However, with the 27.5% tax rate applicable on the profit, the tax payable amount will be $27500. Therefore, taking the PAYG income tax of $30000, the final tax refund will be $2500.
What Are The Tax Deductions You Can Claim?
You can claim tax deductions on these various expenses.
- Sponsorship and advertising: The costs you have sustained for promoting the brand and making publicity are deductible according to the law and can be claimed under ‘trading stock.’ It would help if you made sure that these costs do not fall under ‘entertainment.’
- Bad debts: A debt you have been unable to clear will be classified as a bad debt. It can be a tax deduction until it is included as assessable income in the current financial year or was included in the previous year.
- Borrowed money: Costs incurred to receive the borrowed funds can also be claimed as a tax deduction, provided that the funds should be used to generate assessable income. The different borrowed costs may include registration fees, valuation costs, legal costs, and any paid commissions. Depending on the expenses’ extent, you should spread the deductions over a period or more than one year so that you can cover the loan period.
- Business travel costs: These costs are widespread among deductible taxes. The travel expenses you can include are airline tickets, car fuel prices, toll taxes, accommodation, and food. You must keep all the receipts and notes to confirm that you have gone for business purposes.
- Car expenses: You can claim full deduction on car running costs, on the condition that you have used the vehicle for business purposes only.
- Fringe benefits: If you have any costs involved with giving fringe benefits to any employee, you can claim a deduction for it.
- Insurance: Various insurance expenses for fire, public liability, theft, business-use cars, and loss of profits can be claimed. Above all, the employees’ compensation insurance premiums are deductible.
- Home running expenses: If your work is wholly or partly home-based, deductions can be claimed on costs like telephone, interest, insurance, and electrical expenses.
- Repair and maintenance: Tax deductions are also available for maintenance services of the premises, tools, and machinery. Deductible costs include plumbing, painting, electrical maintenance, windows servicing, guttering, etc. The deduction will be for charges for fixing defects and not a complete replacement.
- Superannuation contributions: If you are self-employed, you can claim a tax deduction for a donation that you have made to your superannuation fund. However, you should check if your employer makes any super contributions. Contributions made to the employee fund.
- Salary and wages: If you operate as a trust or a company, you can claim a deduction for the compensation you pay to your employees or yourself, provided that salary is related to all the business duties. To file the trust tax return, you may hire a tax accountant for help. If you operate as a partnership, you cannot claim the salary you have paid to the partner, but you can claim the deduction for the wages of the other employees. This tax deduction is not applicable for sole trader businesses.
- Tax management expenses: You can claim different costs of tax affairs management. These various expenses include the payment of a bookkeeper or a tax accountant, tax agent preparation costs, tax audit costs, and tax lodgement costs.
- Telephones: Do you have a phone in your office fixed for business purposes only? Then, you can claim for all the calls and rental. But you cannot claim it for its installation. If you use it for business and private purposes, you can claim the deduction for only the business costs.
- Theft: If you have sustained losses by theft or stealing by an employee, you can claim tax deductions.
You have to remember that you only get the tax portion of the cost back and not the entire cost. By maximizing the tax deduction levels, you can reduce your payable tax and increase your tax refund in particular scenarios. For any help, you can contact Palladium.