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Thousands of Australians run a small business as well as holding down a salaried job. While this can be a challenging balance, it can also be a great way to get an online business off the ground while still generating a regular income. In part one of our end-of-financial-year focus, Simone Gielis, General Manager of online tax agent service Etax Accountants, which runs the Etax.com.au online tax return service, explains what part-time small business owners need to understand about deductions.
In part two, Gielis will look at easy steps you can take to plan for tax time when you start a home business while working in a salaried job.
This is a bit of a tricky question with no straightforward answer. It can be tax efficient as you are not paying rent to a third party, claiming depreciation, rent or mortgage interest. The flip side is that if you own your own premises and use any part of it to earn income, such as running your business, then you will most likely be liable for capital gains tax (CGT) when you sell the property.
People often think this is much more complicated than it really is. If you work as an employee and also run a business from home, you can claim any expense you incurred to earn either income stream. If you used the same expense for both employment and your own business, you just need to determine the percentage of the expense that was used for each income earning activity and for personal use.
1. Thinking that each deduction will reduce tax payable $1 for $1. This is a myth because the deduction is subtracted from the taxable income before the tax payable is calculated. For example, if you are taxed at a rate of 30 per cent and claimed a $100 expense, it would reduce your tax payable by $30, not $100.
2. Thinking you can make deductions without receipts. We see too many people lose out on valuable deductions because they did not keep receipts. A huge portion of Australians’ claimable expenses may simply go forgotten and unclaimed. Saving business receipts is an important habit and it should be simple and easy to keep up with – just one big folder for each year’s receipts should work fine for most people. Fortunately, it is not often people pay for their business expenses with cash anymore. If you hold a bank statement or credit card statement (or can get it from the bank) that shows the transaction details, you can make a claim on the tax return. Be careful though – making claims on expenses with no receipts or records is a risky business. The Australian Taxation Office (ATO) has a sixth sense for catching out ineligible claims, and it collects more data about taxpayers than most of us realise. Best to go by the book and take your tax agent’s advice on how to minimise taxes without taking risks.
3. Small business owners often think that any payments they make to their super funds are tax deductible. This is only true if income from employment is 10 per cent or less of their total taxable income. In addition, you must have advised your super fund in writing that you intend to claim a deduction for your payment.
It’s important to keep it simple. Depreciation is an area where the law has changed over the past three years. For small businesses, the easiest things to remember are:
1. Estimating the floor space used for business purposes. Some home office entrepreneurs think they can claim shared spaces such as bathrooms, hallways or kitchens, which can add up to half of their home, but this is not true. You can only claim the areas that are used exclusively for business purposes. If you claim a huge area but an ATO investigator finds you really just use a computer in the corner, you might soon be repaying that tax benefit to the ATO. The ATO is not silly and they know that most online businesses have small space requirements and operating expenses.
2. Not claiming expenses because businesses think they shouldn’t. Many clients need encouragement to claim what they are rightfully entitled to. If you use an expense or an asset for business and personal use, you can apportion the expense between your personal use and the business use. This is legitimate and should be used.
With the low fees charged by most agents, and the fact that this fee is tax-deductible, getting deductions advice from a tax agent is a no-brainer and gives you the confidence that your tax return was done correctly.
An online tax service is a great choice for businesspeople who are registered as sole traders. This gives them the help and confidence of using a tax agent, but with the convenience of being online. The online tax return at Etax.com.au is perfect for many start-ups and home-office businesses, as well as tradies and contractors. They can simply enter their details and attach their receipts online but still get the comfort of knowing their return is checked by qualified accountants (at least twice) before it is lodged correctly at the ATO. For people who operate a registered company or need more complex business tax services, our parent practice, Griffin Group Accountants, has served Australian small business for over 35 years.
If you work a salaried job and also have a small online business on the side, be sure to read part two, where Gielis tells you how to work out how much tax you are likely to owe to the ATO in your first year of trading – and how to make a provision for this.
Brush up on your tax-time language ahead of financial year-end.
What are occupancy expenses?
These are expenses incurred to occupy and maintain the physical space that a business inhabits – the “roof over your head” while you work. The most common claims are rent (or mortgage interest), council and water rates and home insurance.
What are running expenses?
These are the expenses incurred to operate your business from home, aside from the basic occupancy expenses. These generally include computer, phones and other electronic devices, electricity or gas, cleaning costs, depreciation on office furniture and the cost of any repairs to any of these items.
What do business owners need to know about motor vehicle deductions?
Small business owners often ask about the evidence they need to legitimately make a claim. There are four methods to calculate a vehicle claim and business owners are entitled to choose the method that provides them with the biggest tax benefit. However, if you aren’t keeping appropriate records, this limits your options. Generally, business owners who use their car a lot should keep a logbook for a typical 12-week period detailing every trip (not just business related trips). This only needs to be done once every five years as long as the usage doesn’t change. It’s important to note that car claim numbers should not just be “made up” and that claims only apply to legitimate business use; having a business does not mean all your car and travel costs are suddenly deductible, and taxpayers who’ve over-claimed expenses are vulnerable to an ATO audit that could become very uncomfortable.