Small Business Tax Deductions

July 07, 2015

What Tax Deductions can Small to Medium size businesses claim?

We have received many enquiries regarding the tax deductions that small to medium size businesses can claim. In the below article, we have focused on the general deductions you can claim as a small business.

So what are Deductions?

Deductions represent most of the expenses that you incur to produce an income as a business. As these expenses help you to produce income, the ATO allows you to claim these as tax deductions. This therefore reduces your assessable income.  It is important to note that there should be a “nexus” with your expenses; in other words, there needs to be a direct relation with your expenses with producing income. [source: www.ato.gov.au]

What are common Deductions/Expenses that a business can claim?

Generally, there are two types of expenses incurred by a business - Capital Expenses and Operational Expenses. Capital expenses are claimed over a period of time and operational expenses are claimed in the year that you incur them. If you claim business expenses then you need to keep actual paper or electronic records for a minimum of five years. Below are some of common expenses that a business can generally claim as a deduction.

• Cost of managing tax affairs -

Managing your tax affairs can incur costs such as accountant fees (e.g. for preparing and lodging your tax returns), bookkeeper fees, and software fees (e.g. cloud based accounting subscriptions).

• Advertising /Marketing/ Sponsorship

It is very common to use advertising, marketing and sponsorships in order to create brand awareness and promote your product or service.  These are all expenses directly related to your business, hence they are tax deductable. Examples include marketing materials, flyers, and advertising on radio/press/Facebook, etc.  It is extremely important that you do not claim expenses that were used for entertainment purposes.

• Interest Expenses

Generally, interest expenses are deductible if the underlying asset was used to produce assessable income and has not paid by the 30^th of June.  This may include overdraft facilities, money borrowed from banks, as well as other finance facilities, business credit cards, etc.

• Motor Vehicle Expenses

The ability to claim motor vehicle expenses depends on your company structure. If you operate under a Company or Trust structure and you use the vehicle for private purposes, then you may need to pay fringe benefit tax.  You can claim deductions for any expenses that your company incurs in running a vehicle provided that the vehicle is used solely for business purposes. If your business operates as a sole trader or partnership you can claim a certain portions or deductions for vehicle expenses and they are subject to substantiation rules. 

• Insurance Cost

In most cases, insurance premium costs such as public liability, workers compensation, fire damage, theft, are tax deductible.  B Professional indemnity insurance premiums can also be tax deductible in some instances.

• Superannuation Contributions

Employers are legally required to make contributions to their employees nominated superannuation fund.  As such, this is an expense to the business and hence tax deductible.

• Salary and wages

If you are operating under a trust or a company structure, then salaries paid to employees are generally tax deductible. Under a partnership structure you cannot claim a deduction on a salary paid to a partner, but can claim salaries paid to employees. Sole traders cannot claim salary as a deduction.

• Internet and Telephone

In today’s world, most small businesses rely on technology to operate efficiently and smoothly. Internet and Telecommunication are extremely important tools for every business as most people now rely on both forms of communication. These expenses are generally tax deductable providing that they are used for business purposes.

Other sources: www.business.gov.au, www.cch.com.au, www.moneysmart.gov.au

Dinath Abeysinghe