Business Tax Deductions

Business Tax Deductions
To a large extent, tax deductions are a necessary element in reducing tax outgoings for small businesses.  While there are some tax rebates/incentives available to small businesses (eg. Entrepreneurs Tax Offset; Small Business Tax Break; R & D Concessions; CGT Concessions), many business will not have access to them and must rely on the every day transactions to reduce the tax burden.
For small and medium sized businesses, this can sometimes be a complicated task. Under Australia’s taxation laws, for a business to claim a deduction it must be incurred in the conduct of the business and not capital in nature.
Every business is different, so an exhaustive list of what is tax deductible will vary. But here are some pointers outside the normal deductions that will apply as to what is deductible.

Depreciation

Deductions for the decline in value of depreciating assets are available under the “uniform capital allowance system.”
Depreciation rules can be complex and can involve:
  •  Various depreciation rates
  •   “Pools” for different classes of assets
  •  Balancing charges
  •  Anti-avoidance provisions
Since the introduction of the uniform capital allowance system in 2001 there has been 28 technical amendments to the law According, professional advice may be necessary for SME’s with large investments in plant and equipment.

Research and development

If you are a small or medium sized business than R & D concessions and rebates can apply if:
  • you created a new product, process or service? or
  • you modified an existing product?
These are government incentives targeted at new and emerging technology based small businesses. Specific rules and regulations apply in assessing, maintaining and claiming such concessions for which professional advice should be sought.

Repairs

Expenditure incurred by an SME for repairs to its premises, part of premises or a depreciating asset (including plant) held or used solely for the purpose of producing assessable income is deductible.
Some care is needed however, because the word "repair" is not defined in the tax law and therefore takes its ordinary meaning of restoration by renewal or replacement of subsidiary parts of a whole.
So, the essential question is whether the particular work is the renewal or replacement of defective parts or the renewal or replacement of substantially the whole of the asset.
Where the asset repaired is only partly used for income-producing purposes, the cost of any repairs has to be apportioned between the income-producing and non-income-producing uses of the asset.
Initial repairs to a newly acquired asset, the replacement of the entire item and improvements are not deductible, but may qualify for a periodic write-off under the capital allowance provisions.

Trading stock

The valuation of trading stock is an important tax planning issue. This is particularly relevant if you are trading as a sole proprietor, partnership, or trust. If the value of closing trading stock on hand at the end of the year exceeds opening stock, the excess amount will be included in the assessable income of the business. Therefore, a reduction of closing stock on hand will reduce assessable income.
There are several methods for valuing trading stock – at cost, market selling value or replacement value – although there is no requirement to adopt permanently any of the three valuation methods.

Bad debts

A debt that is written off as "bad" in an income year is an allowable deduction, provided:
  • The amount was either previously brought to account as assessable income in the current or a former income year.
  • There must be a debt in existence at the time of writing off.
  • The debt must be bad.
  • The debt must in fact be written off as bad during the income year in which the deduction is claimed.
SMEs should review their debtors before the year-end and assess which debts may be written off as bad debts.

Borrowing expenses

The tax law allows a deduction for expenditure incurred by an SME in borrowing money to the extent that the borrowed money is used for the purpose of producing assessable income.
Note that this is a year-by-year test, allowing for changes in the use of the borrowed funds, rather than a test applied only at the time of borrowing. Borrowing expenses can include legal costs, search, valuation, survey and registration fees, fees paid for guaranteeing an overdraft, and commission paid to brokers.

Borrowing expenses can be written off over 5 years or the term of the loan (whichever is shorter). If major refinancing occurred during the financial year, a review of unclaimed/outstanding borrowing expenses will need to be performed.
The interest on loans used for income-producing purposes is also generally deductible – a “purpose test” applied to deductibility of interest.

Superannuation

For 2007-08 and later income years, superannuation contributions are subject to annual limits. Contributions above the annual contributions caps are subject to excess contributions tax levied on the individual who can, and in some cases must, withdraw from their superannuation fund an amount to meet the excess contributions tax liability.
Therefore, it is vital to check an individual's level of concessional contributions and non-concessional contributions for the financial year to ensure that any last-minute additional contributions will not exceed the individual's annual "caps".
The tax treatment and annual contribution limits for 2009-10 (that is, the year ending 30 June 2010) are summarised in a table below.
Type of contribution Annual contribution cap - per person ($) Excess contributions tax (%)
Concessional - under age 50 25,000 31.5
Concessional - age 50-74 50,000 31.5
Non-concessional 150,000 (or 450,000 over 3 years for under 65s) 46.5
(Note: the annual caps will increase over the next couple of years.)

Concessional contributions are essentially tax deductible contributions, which are included in the assessable income of the receiving superannuation fund. For example, employer contributions for superannuation guarantee purposes, salary sacrifice contributions and personal contributions for which the eligible person (that is, a self employed person) intends to claim a tax deduction.
Non-concessional contributions include contributions that are not included in the assessable income of the receiving superannuation fund, such as non-deductible personal contributions made from the fund member's after-tax income.
While superannuation has been “simplified”, there are still many traps to be wary of, and it is important SMEs consult their accountant and/or financial adviser.

Legal expenses

As noted above, legal expenses connected with borrowing money to use to derive assessable income are deductible. Legal expenses incurred by an SME in relation to the lease of business premises or defending its business practices are generally deductible.
Over the years, case law has also held certain legal expenses to be deductible (although each case must be considered on its merits) for example, a nursery business opposing an application by a neighbour to begin quarrying activities, obtaining a renewal of planning permission to carry on quarrying activities, and opposing a rezoning application by a neighbour of a business.

FBT issues

A change announced in the 2008-09 federal budget could also affect tax deductions concerning work-related items like laptop computers in the year to end on 30 June 2008 and subsequent years. The Government announced that the FBT exemption for eligible work-related items such as laptop computers and mobile phones would be limited.

Recruitment costs

Employers are entitled to a tax deduction for costs associated with seeking to obtain employees, such as advertising costs and agency fees.

Insurance

Premiums paid by a business for workers compensation insurance are deductible. Insurance paid for fire, theft, public/product liability, loss of profits and motor vehicle insurance (for cars used in the business) are also deductible. Keyman insurance is also deductibile.

Some taxes are deductible

Taxes other than income tax are generally deductible provided there is a sufficient connection to the SME’s income-producing activities and provided they are not of a capital or private nature. Taxes that are deductible include payroll tax, land tax and debits tax.

Tax advice costs

A wide range of deductions for tax advice and tax compliance costs is available under the tax law, including the costs of preparing income tax returns, preparing objections to tax office assessments or answering tax office queries, obtaining valuations required under tax laws, creating and maintaining records as required under tax laws, and tax planning advice.

Work-in-progress payments

An amount paid in respect of work-in-progress is deductible under the tax law. Conversely, the receipt of a work-in-progress payment is assessable income. Businesses need to be aware of ATO approved methods of valuing stock/work in progress (eg. FIFO method).

Small Business Tax Break

The small business tax break incentive during the financial crisis had a significant impact on small consumption during the 08/09 and 09/10 financial years.
This is not the first of such incentives offered by governments. Some years ago the “Investment Allowance” operated in much the same way.

Other expenses

The range of expenses incurred by SMEs can be large, so determining their tax deductibility will often require professional advice. In addition to claiming a straight-out tax deduction, reducing taxable income can also be achieved by taking advantage of the various concessions in the tax law, most notably the capital gains tax (CGT) small business concessions.
Note that the rules to access these concessions have changed since last year. There is now a standard eligibility criterion that applies across the small business tax concessions. In essence, entities that satisfy an aggregated turnover test of $2 million a year are able to access those concessions.

CGT Small business concessions

The CGT small business concessions have been tweaked several times in recent years. The Government said that, with effect from the 2007-08 income year (from 1 July 2007), it will increase access to the concessions via the $2 million aggregated turnover test for taxpayers owning a CGT asset used in a business by a related entity, and for partners owning a CGT asset used in the partnership business.

Copyright 2014. My Tax Zone.