Dealing with a year’s worth of expenses, deductions, rebates and super contributions may look like a hassle, but it can easily be turned into a boost for the business, if it’s done right.Glenn Wallace, a practicing accountant and head of Business Advisers, says it is simple practices that can produce the best tax dividends.
Home office deductions
This is one of the more misunderstood areas of income tax and one that affects many self-employed and small business owners – especially contractors. If you can legitimately relate an expense to your income then it’s a tax deduction. Home-based small business owners or professionals with a home office may be entitled to a number of deductions, but there are different methods that apply to the calculations. Most people claim electricity, contents insurance and rates, and if you’re renting your house you can claim rent on a square metre method. So, if the office equates to one-fifth of the house, then the deduction from the rent is in the same proportion, automatically giving you a saving on taxation.
If your business is in your own home, it potentially opens up the home owner to a capital gains tax liability should the property be sold. For example, claiming mortgage interest may affect capital gains tax exemption. If the value of your house escalates, then there’s a risk you will pay more tax in the long run than the short-term deduction.
The more obvious point is that a majority of business owners need more space than the bedroom or the living room. Generally, it is a better look for the Australian Tax Office (ATO) because it appears more professional and organised when you submit that information. However, the minimum requirement is that a specific part of the home is set aside as a business area. The advantage that many small business owners miss out on is that a home office offers the cost benefit of enabling more deductible travel expenses for business-related meetings and errands.
Based on a self-assessment system, the person who decides if an expense is a tax deduction is not your accountant or financial planner – it’s you, though expert advice is always needed.
The self-managed superannuation fund advantage
The operational details of self managed superannuation funds (SMSFs) can be daunting – there’s enough information out there to fill a shelf full of books. Suffice to say most business owners have ample opportunity to return some much needed tax dollars back to themselves. For example, if you are a small business owner, there can be significant advantages to holding your business premises within your own SMSF – as in actually owning it.
To start with, there is little chance of being evicted. Other advantages include rental income which is concessionally taxed. Here your business pays the SMSF market rates of rent which are taxed in the SMSF at a maximum of 15%. Your business generally receives a tax deduction for the rental expense. One of the key benefits is when you sell the business premises, any capital gain is also concessionally taxed at a maximum of 10%.
The business premises are generally classified as ‘business real property’ and can be acquired from the SMSF members or related parties without breaking rules. Things to look out for include capital gains tax that may be payable if you or your business owns the business premises prior to the transfer. If you are contributing the business premises as a superannuation contribution, you need to make sure you do not breach the contribution caps. Like everything concerning taxation though, it should be followed up with your accountant.
Goods and Services Tax (GST) makes the business owner become, in effect, a tax collector for the Australian Tax Office (ATO). That’s a pain for most business owners, but it can also be a bonus in cash flow terms. Consider, for example, a typical billing cycle from a contractor or home business owner who receives payment for his services or his products. If the collection cycle is under 30 days, the GST money is in the bank and is deployed in the funding of the business. That’s a very useful source of cash flow for the business owner in the GST payment cycle, which can, in some cases, be deferred up to 12 months. If you fall into the category of experiencing tight cash flow, this may not work and an alternative strategy should be applied.
A majority of business owners will have their cars leased. This avoids the up-front cost of buying a car, and allows you to pay for it over a longer period.
The tax office refers to an ‘operating costs’ method of calculating car usage deductions. The operating costs method requires working out the total operating costs of the car (fuel, oil, servicing) and reducing that total amount by the portion of private kilometres travelled as compared to the total kilometres. It is most often used where business kilometres travelled are high, but is more complicated. If a car is leased and is claimed against income earned as a tax deduction, a calculation of the deduction is often based on usage and the logbook method. This is the norm as business owners are more concerned about cash flow than tax deductions. The most commonly used method is the statutory formula method because it is much simpler to use. The fringe benefit tax (FBT) is worked out by multiplying the base value of the car by a percentage determined by how many kilometres the car is driven in a year.
The bottom line is, the further the car is driven, the less FBT is payable. Under this method, it doesn’t matter if the car is driven totally for business use, private use, or somewhere in between.If you use the operating cost method for calculating your motor vehicle FBT and you have not completed a log book, now is the time to start. If you complete a logbook within 12 weeks from the end of the FBT year, it can be used for the preceding year. It is also accepted that you may need to complete a new logbook every five years.
It can be a burden but it can also be valuable to run a logbook. It must be maintained for a continuous period of 12 weeks and contain information including the date your journey began and ended, the odometer reading of the car at the start and end of the journey, the number of kilometres travelled by the car and the purpose of the travel.
The big issues
Ben Wise, general manager of Moneytree Partners, recommends that business owners and self-employed people start preparing well before the June 30 deadline, to ensure that they receive all the benefits due to them.
Wise believes that superannuation contributions are an important tax issue for business owners. From the first of July 2009, the annual concessional contributions cap was reduced to $25,000. The annual transitional cap for people aged over 50 has been reduced to $50,000.
“When you are making concessional contributions to a super fund, be aware of the new contribution thresholds,” warns Wise. For example, if you are self-employed and under 50, you can make fully deductible contributions to a superannuation fund of up to $25,000. If you are over 50, you can contribute up to $50,000 to a fund. The amounts contributed are only taxed at 15%.
“The main benefit is the impact it has on assessable income,” says Wise.
In order to deduct personal contributions to super funds, individuals cannot derive more than 10% of their income from employment. Recently, an individual who retired and received a payout of leave entitlements in excess of the 10% threshold was denied a deduction as the entitlements constituted employment income.
Co-contributions are another valuable element. Non-concessional contributions of up to $1,000 are currently matched by the government with a co-contribution of the same amount made for people earning less than $31,920, phasing out when income level hits $61,920. “This is also useful when it comes to ‘spouse contribution’ too. Here, where a spouse is earning less than $11,000 per annum, the other spouse can put in up to $3,000 towards the spouse’s income and not be taxed. The co-contribution can also be paid so that it makes $4,000 of income that can be saved from being counted in the higher earner’s income tax for the year,” recommends Wise. This can amount to thousands of dollars in savings for someone on the highest tax rate.
Where asset sales such as shares or property are affected, a business owner should consider staggering the sale across two financial years if the proceeds are liable for capital gains tax.
“If a business owner or taxpayer has shares and is considering selling them they could, for example, sell 50% of the holding in May or June and the rest in July or August. That way some of the capital gains tax that would be due is paid on the due date and the rest is deferred for 12 months,” adds Wise.
A common phrase to hear from your accountant is that mistakes often cost business owners dearly. Two of the most common errors in tax returns are omitting interest from bank accounts and building societies, as well as overlooking or incorrectly stating capital gains losses and investment returns.
Other commonly overlooked deductions include the medical expenses offset, postage and phone calls relating to investment advice, and travel to separate workplaces.
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