We try very hard to make tax as complicated as possible but it’s actually simpler than you might think. If you’re in business, you earn income selling whatever goods or services you’re in business to produce. In doing so, you incur certain costs in running the business. So, you take the latter figure (your costs) away from the former figure (your income) and – assuming the resulting number is positive – you pay tax on the difference. What could be simpler?
In reality of course, there’s more to it. Take those costs for instance. The tax law says that some of them are deductible from your income straight away, some aren’t deductible at all and some can only be deducted over a period of several years. Of course, you probably employ an accountant to deal with all that stuff but nevertheless, a little knowledge of exactly which business costs you can claim a tax deduction for can only be helpful, not least because many businesses trip up by inflating their deductions or claiming for something they shouldn’t. Equally, a surprising number miss out on deductions they could have claimed.
The basic rule of course, to avoid getting into hot water with the Tax Office, is that you need to show you are actually ‘out-of-pocket’, and that the expense has been incurred to run your business. Here then are some tax deductions you may be able to claim:
Advertising and sponsorship
Costs to market your brand and garner publicity for your business are deductible and can be claimed, as can advertising or sponsorship to sell ‘trading stock’ and to hire staff. Take care to ensure that the costs incurred do not fall within the definition of ‘entertainment’, which is not usually deductible.
A debt that is unpaid and deemed to be a ‘bad’ debt is an allowable deduction as long as it was included as assessable income in the present or even a previous income year, and that it is written off as bad (uncollectable) in the same year that a deduction is claimed.
Expenses incurred in order to borrow funds can be claimed as a deduction, the proviso being that the money must be used to produce assessable income. These expenses can include legal costs, registration fees, valuation costs, fees to guarantee an overdraft and any commissions paid. But you may have to spread the deductions over more than one year, depending on the extent of the expenses, to cover for example the period of the loan. These deductions are quite separate from the interest actually incurred on the borrowed funds, which is also deductible if the borrowed money is used to produce income.
You need to record and document all particulars, but travel for business purposes can usually be claimed. So keep all receipts and your itinerary or diary, and of course airline tickets. Note the nature of the travel, its purpose, and where, when and for how long (and look out for any personal activities that are mixed in as these expenses are non-deductible).
Car expense deductions
You can claim a full deduction for any expenses your company incurs while running a vehicle, either leased or owned, provided the vehicle is used only for business purposes. If your business operates as a sole trader or partnership, you can claim certain proportions of deductions for vehicle expenses, but they are subject to substantiation rules.
You can generally claim a deduction for any costs involved with providing a fringe benefit to an employee.
Home work claims
If your work is done from home, or partly home-based, you can usually claim deductions for a portion of expenses such as mortgage interest, telephone and insurance, as well as day to day expenses like heating, lighting or cleaning.
Workers compensation insurance premiums are deductible, as are insurance costs for fire, business-use cars, public liability, theft and loss of profits.
Plant and equipment (depreciating assets)
Larger items like cars or even buildings can be claimed over time as depreciating assets. And you may also be able to claim (over a five year period) certain capital costs in setting up or ceasing a business, as long as an outright deduction is not able to be claimed for that expenditure.
Repairs, replacement, maintenance
A deduction is available for the upkeep of machinery, tools or premises used to produce assessable income (provided they are not ‘capital’ costs). These deductions include things like painting, plumbing and electrical maintenance, upkeep to windows and fences, guttering and machinery maintenance. Generally it means fixing defects, not totally replacing an item, and does not include improvements or work done immediately after acquiring an asset.
You can claim a deduction for a contribution made to your own super fund if self-employed, although care must be exercised if you also have some earnings from employment upon which super contributions have been paid by the employer. Contributions to an employee’s fund should also be deductible. Employers legally have to contribute to employees’ super anyway under the superannuation guarantee laws.
Salary and wages
Operating as a trust or a company means you can claim a deduction for salary paid to employees or to yourself provided the salary is in respect of duties connected with the business. Partnerships can’t claim for salary paid to a partner, but a deduction is available for salary paid to other employees. Sole traders can’t claim for salary paid to themselves (and you can’t claim for amounts taken from the business for private purposes).
Tax management expenses
Managing your business tax affairs can cost, and you can claim these as deductions. This includes paying a bookkeeper, having a tax agent prepare and lodge tax returns and activity statements, paying a subscription to an organisation like Taxpayers Australia, attending to a tax audit or the costs of appealing or objecting to an assessment.
For a telephone you use for business only, you can claim for calls and rental, but not installation. If the phone is used for both business and private calls, you’re able to claim all business calls and a proportional part of the rental. An itemised phone account will guide this, but you can also base the claim on using a representative four-week period to get an average rate for the whole year.
Losses incurred by theft or stealing by an employee may be allowable deductions.
Of course, this checklist only scratches the surface of what a typical business can claim. For further information, talk to your accountant or obtain a copy of our Tax Summary 2014-15 from www.taxpayer.com.au (the full chapter on business deductions is available as a free preview on the website).