As a small business owner, you’re likely familiarizing yourself with the preparations needed for tax season. Knowing which records to keep and what documents you need to submit to the Australian Tax Office (ATO) can feel like a never-ending learning curve. Before you finalize your paperwork this year, it’s worth investigating three tax deductions you might be missing out on.
ATO deductions worth claiming for your business
Let’s explore three often-overlooked small business deductions in more detail.
1. Website creation and maintenance
Temporary full expensing allows Australian small businesses to make an immediate tax deduction for the full cost of eligible assets. These are normally depreciated in the first year they’re held or used and installed (ready for use).
Businesses with an aggregated turnover of less than $5 billion will be eligible to claim the cost of assets in their 2020-21, 2021-22 and 2022-23 income tax returns.
For example, in January 2022 Sarah buys a $2,000 website hosting package for her small business. She pays $50 a month in service fees, and $50 per year for her domain name. Sarah can claim an ATO deduction for:
- $2,000 for the website hosting package in her 2021-22 tax return under temporary full expensing
- The monthly and yearly fees in the year she incurred these expenses as running costs for her business
Sarah added more money to her pocket, simply by being aware of her options.
Most side-hustlers and small business owners need a website to trade and promote their businesses. It’s a great way to grow an audience, sell your products, and advertise your business – especially as Australians’ online shopping habits grow at an increasing rate.
Websites can become quite complex the more your business grows and the more you adapt to online behaviour. Of course, building and developing a good-quality website costs money.
However, the way in which you claim these costs can become quite complex – let’s take a look.
Capital and running costs
To understand what and how website expenses are claimed at tax time, it’s important to understand the nature of the expense. There are two ways the ATO classifies website costs: capital costs and running expenses.
The initial expenses you incur while building your website, such as developing or acquiring a website, are capital in nature. Capital expenses are the physical assets of a business. This could include:
- Technology and equipment
Capital expenses add value to the business with the aim of receiving those benefits for longer than a tax year. They are an investment in the business and are depreciated over time. A website is considered a business asset.
Pro tax tip: If you choose to allocate and set up expenses to the software development pool, your website will be depreciated over a period of five years.
Capital website costs that will need to be depreciated include:
- Changes made to a website that improve the business’ ability to make a profit
- Migrating costs from an old to a new website
- Premium WordPress theme
- The cost of securing the exclusive right to use a domain name as a web address
Consider noting all your capital costs when preparing your small business ATO deductions.
Running costs or operating expenses are incurred as a part of the day-to-day running of the business.
These expenses include:
- Administrative expenses
- Your domain name
- Registration fees
- Hosting costs
All of these examples can be claimed in the same tax year as they’ve been incurred. Other running costs to claim immediately can include:
- Upgrading your website to appear correctly on all devices
- Optimizing your website with new articles, graphics or advertising
- Internet fees
Keep track of your running costs to get the most out of your ATO deductions.
2. Off-the-shelf software
Commercial off-the-shelf software can be deducted in the year in which it was purchased. But this is only if the software package has an effective life of one year or less, or if you’re eligible to claim the immediate ATO deduction using a tax depreciation incentive.
If the software will be used beyond one year, it will need to be depreciated over its effective life.
3. Computers and office equipment
Of course, you’ll need equipment to run your website. Any tools and equipment you’ve purchased for your work are claimable ATO deductions. Technology you might have had to purchase include:
- Mobile phones
- Computer consumables
- Telephone and internet costs
- Cleaning, maintenance and repair
- Hiring and/or lease of computer equipment
Pro tax tip: If your purchase includes both business and private use, you’ll need to apportion your expenses accordingly and only claim the business portion.
How do you claim a tax deduction?
You’ll need proof, for starters. Keep any form of paperwork to back up your claims. Some examples might include:
- Tax invoices
- Bank statements
You can only claim the business portion of your expenses and can only claim money you’ve already spent.
A good accounting software package will help you keep track of costs. With MYOB, you can upload your bills, easily categorise expenses and make tax time a breeze. MYOB Business is easy online accounting that has everything you need to take care of business, including being ATO compliant.
Pro tax tip: You can keep electronic copies of your receipts, as long as they’re a clear and true representation of the original. All records must be kept for five years.
For the proof to stack up during potential audits, you’ll need the following information:
- Date of purchase
- Name of the supplier
- Cost of goods
- Description of the goods you bought
Don’t miss out on these small business tax deductions
Your website is one of your most effective marketing tools for your business. It makes good business sense to recoup any business expense you can. And when it comes to tax, there are many ways to get some money back.
Don’t let tax time slide past you without taking advantage of overlooked ATO deductions you’re eligible for.
And if you don’t know all of your eligible deductions, a tax professional will ensure nothing is left under the carpet.
This content is for educational purposes and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.