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7 top tips business owners should know to reduce your tax bills

Two women looking at their tax bills together

With the cost of living growing higher every day, every business should seek to minimise the amount of tax they pay. Many business expenses can be deducted from your income when calculating your tax bill. In simple terms, the lower your taxable income, the less tax you must pay which leaves more money in your pocket.

1. Don't miss any deadlines - file and pay on time

Filing the right amount at the right time helps to avoid paying interests or penalties. For example, the deadline for filing a tax return is 31 October each year in Australia. However, if you’re registered and linked with an accountant or a tax agent before 31 October, you will be eligible for an extension to file your tax return until 15 May the following year (although this may differ based on circumstance). Make sure you take advantage of the extension of time. 

Tax planning is also important. The best practice is to separate your business and personal bank accounts. In fact, you may need 2 business accounts - one for everyday transactions, the other for taxes.

2. Claim all deductions

Ensuring you can claim all available deductions will mean you don’t pay more tax than you must. You can claim a tax deduction for most expenses from carrying on your business if they are directly related to earning your assessable income.

You might also be eligible to claim home office expenses if you operate a home-based business. 

Common expenses include, but are not limited to:

  • Home office expenses
  • Vehicle expenses (check out Point 3.)
  • Depreciation on assets (check out Point 4.)
  • Travel expenses (domestic and international travel) 
  • Entertainment expenses

To claim these expenses, you’ll need to keep all the records you have such as receipts or bank statements for at least 5 years in case you’re audited by ATO. You should also pay for business-related expenses using your business account so that you have an electronic record. 

There are 3 golden rules for what the ATO accept as a valid business deduction:

  1. The expense must have been for your business, not for private use.
  2. If the expense is for a mix of business and private use, you can only claim the portion that is used for your business.
  3. You must have records to prove it.

3. Vehicle expenses

Vehicle expenses can be tricky based on the type of vehicle and why you are using that vehicle. You can claim a deduction for motor vehicle or car expenses where you use it in performing your work-related duties. You can calculate car expenses using either the cents per kilometre method or the logbook method*. You can't use these methods to claim expenses for other vehicles.

For vehicles that are not cars, you claim the actual costs you incur that relate to your work use of the vehicle.

Whether your vehicle is a car or other vehicle, you generally can’t claim the cost of expenses you incur for travel between your home and your regular place of work.

For companies, if the vehicle belongs to the company and is also used for personal purposes such as dropping off kids and running errands, then the company may be liable for fringe benefit tax and the expenses for private use need to be adjusted accordingly.

Read a more detailed explanation here: What motor vehicle expenses can I claim?

*If you're not sure which method to use, always consult with your accountant. They can help you understand your situation and choose a method that suits.

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4. Depreciation

It’s more likely than not that most businesses require assets or “stuff” to operate their business and they can be a significant cost to the business. Depreciation is a way of claiming back money you spent on the assets purchased (e.g., computer, vehicles, machinery, intangible assets etc.) by allowing you to reduce your taxable income. 

In general, there are two ways to calculate depreciation. You can either choose to use the prime cost method or the diminishing value method.  

  • Prime cost method: it allocates a rate for depreciation on the original cost of the asset. You can find the effective life of the asset on ATO’s website. 
  • Diminishing value method: it uses the cost less accumulated depreciation as the amount of depreciation is calculated. 

You can also choose to use the simplified depreciation rules if you have a small business with an aggregated turnover of less than $10m. This includes instant asset write-offs discussed in point 5. and a general small business pool, which has simplified calculations to work out the depreciation deduction.

Low-Value pool options are also available where you can put together assets with a value of less than $1,000 – to find out more, please have a look here.

For more information about simpler depreciation rules, click here.

5. Instant asset write-offs

If your business has a turnover of less than $10m, the quick asset write-off is one of the most beneficial tax breaks for small businesses. It is a smart way for your company to obtain the much-needed capital assets to develop your business while at the same time reducing the number of taxable profits that your company is subject to.

To make matters even better, it is now possible to quickly write off assets with a cost of up to $150,000 (before, the limit was $30,000 up until March 11, 2020). 

Work out if your business is eligible to use the instant asset write-off to claim a deduction for the cost of an asset here. Your accountant will be able to support you through this process.

6. Charitable donations

Every donation you make to a registered charity (DGR) greater than two dollars is considered tax-deductible. After donating, the organisation should send you a tax-deductible receipt. Make sure you keep this receipt for tax return time, and you can add the amount of charitable donations to your tax return to reduce your taxable income. 

A deductible gift recipient (DGR) is an organisation or fund that registers to receive tax-deductible gifts or donations. Not all charities are DGRs so please check beforehand.

For further reading, check out the ATO's website on gifts and donations.

7. Have an effective business structure

A properly structured business will ensure that you aren't paying more tax than you need to. The common business structures in Australia are sole trader, company, partnership, and trust. The type of business structure will determine the rates you’re taxed at, how you would distribute shares and dividends, how much control you have over your business, and more. 

When choosing the appropriate business structure for your business, consider your long-term goals and your personal circumstances. An accountant can help you determine which business structure is right for you if you're unsure.

Who are Beany?

We’re an online accounting firm that is always right here for you, your accounting pain relief. The most advanced technology lets us work way more closely with you than a normal accountant would. 

We have a dedicated team of remote accountants to take care of your business no matter where you are, so you can focus on growing your business. We take out the ‘fluff’, break down the barriers and get things done. Looking out for you is what we are all about. Get started for free today.

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Tori Ma

Performance marketer

Performance marketer at Beany, and into true crime documentaries.

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