How to maximise your tax return as a small business

3 ways to keep more money in your pocket

Taking the plunge to start your own business is a big step. Whether you’re a brand-new sole trader, a freelancer on the side, or someone who wants to make money from their hobby, there’s one financial obligation that any self-employed person needs to understand – tax.

I’m talking about not just paying what you owe, but working towards reducing your tax bill.

After all, why pay more than you have to?

Understanding how tax works, what tax you have to pay and how you can claim back tax deductions can help you save hundreds — if not thousands — of dollars.

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1. Claim every allowable business expense

There are three main rules when it comes to claiming your tax deductions:

  • You must have already incurred the expense and can prove it
  • The expense must have been made out of your own pocket
  • The expense must be work-related only. No private expenses can be claimed.

Claimer beware: You cannot claim any personal expenses, even if your expenses are mixed.

Calculator on orange background
Photo: Towfiqu barbhuiya on Unsplash
You can only claim business expenses.

 

This can be a temptation for the self-employed, but you don’t want to be caught out. The Australian Taxation Office (ATO) have been at this for a long time. They know some expenses are business and private in nature. ATO will look to see if you’re claiming the right percentage of your costs for business use.

You could be surprised at how common these types of expenses are.

  • You may have bought or leased a car for your business, but also use it privately on the weekends and to take the kids to school.
  • Perhaps you’ve attended an interstate conference and stayed an extra day at a resort in your personal time.
  • Perhaps you bought a computer for work, but also use it to surf the net and stream movies.

Business and private expenses can be apportioned out by claiming a percentage of the costs relative to your use. Showing how you worked out the percentage use is a must.

The ATO may ask for a logbook to support your vehicle expenses, or a work diary to prove working from home expenses, or a travel diary when claiming travel. They may also request receipts, tax invoices, bank statements or written correspondence. Accounting software like MYOB Business can help you keep track of all the important details and documents.

While the ATO expect a true and fair estimation, it’s best to be prepared in any way you can.

Pro tax tip: Capital expenses can be claimed over time using depreciation methods, while running costs can be claimed in the same year they’ve been incurred.

As a self-employed worker, the types of expenses you can claim include:

  • Vehicle – purchase price or lease costs, fuel, oil, maintenance and repair
  • Travel – plane, train, bus, taxi fares, accommodation and food
  • Working from home – running costs such as electricity, gas, heating and cooling, as well as capital costs such as computer equipment, laptops and office furniture
  • Business expenses – advertising, promotions, printing
  • Professional services – graphic designers, web developers, bookkeeping and accountancy service fees
  • The costs of organizing your tax affairs – software, tax agent or tax accountant fees

Pro tax tip: The ATO deems entertainment costs as a private expense, even if you’ve taken a business associate to dinner. Traffic fines, schooling, childcare and hobbies are also considered private expenses and will be rejected as business deductions.

Related: How to claim your business website as a tax deduction

2. Pre-pay expenses and plan ahead

At tax time, it pays to judge how you’re spending and making money to work out how to reduce your tax.

If you’re expecting a high income for a financial year, but think it will be lower in the next financial year, prepaying some expenses may be the way to go. This will reduce your taxable income, while giving you the benefits in the oncoming year.

Expenses such as these can be pre-paid to reduce your taxable income:

Pro tax tip: Prepaying may also result in a discount from your supplier, so it might be smart to contact them prior to paying.

This can be a bit tricky to work out and might need some time to rganize, so a chat with a tax agent is recommended.

Capital expenses

Capital purchases can be claimed if bought by June 30. For example:

  • Motor vehiclesFrozen yogurt food truck
  • Computer equipment
  • Manufacturing equipment
  • Office and warehouse fittings

As a part of the  , most assets can be claimed at 100% in the year they’re purchased for the 2022 and 2023 financial years. Capital items purchased at other times will need to be depreciated over several years.

If you’re a sole trader, you can receive 50% CGT discount on a capital gain.

You must have owned the asset for 12 months or more to be eligible.

Any capital gains you owe can be reduced by applying capital losses for the income year, as well as net unclaimed capital losses from earlier years.

Related: The small business tax offset

Small business tax concessions

Tax concessions are available to small businesses earning under $10 million in aggregated turnover for all concessions except for Capital Gains Tax (CGT), or $2 million in aggregated turnover for CGT concessions only.

Have a chat with your tax accountant to see if you qualify and apply for these concessions.

Pro tax tip: There are CGT differences between sole trader and company business structures.

Related: How to choose the right business structure

3. Charge your super account

As a self-employed person, you’re in charge of your day-to-day affairs, paying yourself an income and also paying yourself super.

Concessional (before-tax) super payments are a great way to save tax.

 

You can deposit up to $27,500 into your super and claim a tax deduction. The tax rate on super contributions is a flat 15% which may be lower than your current marginal rate.Gold piggy bank

Payments can also be made from your post-tax income. These are called non-concessional payments. It won’t change your tax rate and there are caps. The non-concessional contributions cap for the 2021/22 financial year is:

  • $110,000 a year or
  • $330,000 in a rolling three-year periodunder the ‘bring forward provision’ if you are under age 67

Pro tax tip: If your income is under $56,112 in the 2021/22 financial year and you make a non-concessional payment before 30 June 2022, you may be entitled to receive a Government Co-contribution payment where you’ll receive up to 50 cents per dollar you contribute up to a maximum of $500.

Related: Paying super for freelancers, side hustlers and gig economists

A little time spent now will pay off at EOFY

It’s well worth the time and effort to work out what you can do and how you can implement tax-saving strategies. If you haven’t spoken to an accountant or tax agent, maybe it’s time to make an appointment.

After all, you work hard. You deserve to keep as much of that hard earned profit as you can.

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.

Scott Bailey
Scott Bailey’s core beliefs of honesty, integrity and transparency in business and tax affairs underlines his day-to-day business philosophy as a senior director of ITP Accounting Professionals. As a member of the Tax Practitioners Stewardship Group (TPSG), Scott relays accurate and up to date information to Franchisees, individuals and small business clients to reduce their tax obligations and increase profit. Scott also interprets new and updated tax laws, and regulations to write the ITP tax course to help individuals become a responsible and successful tax professional.