Are You A Home-Based Business? Here’s How To Maximise Your Tax Deductions.

Small business owners may be able to claim deductions for the costs of using their home as a principal place of business when filing their income tax returns.

A home-based business is one where an area of your home is set aside and used exclusively as a place of business. If you do not have an area set aside and used exclusively as a place of business, but you do some work from home, you may still be able to claim a deduction for some of your expenses relating to the area you use.

Tax deductions may be claimed for the business portion of household expenses; however, ensuring you are claiming expenses you are entitled to can be challenging. How you operate the business out of your home will determine the expenses that may be claimed. Your business structure will also affect your entitlements and obligations when claiming deductions on home-based business expenses.

Generally, three types of expenses can be claimed: running expenses, occupancy expenses, and in some cases, the cost of motor vehicle trips between your home and other locations (if the travel is for business purposes). You can claim occupancy and running expenses if you have an area of your home set aside as a ‘place of business’.

Running expenses refer to the increased costs of using your home’s facilities for the running of your business, including:

  • Repairs to your business equipment.
  • Heating, cooling and lighting a room.
  • Cleaning.
  • Phone and internet.
  • Depreciation of business furniture and equipment.

To calculate the running expenses of your home-based business, you must ensure that you exclude your private living costs and that you have records to show how you calculated the expense.

Occupancy expenses are those that you pay to own or rent your home, including:

  • Mortgage interest or rent.
  • Land taxes.
  • Council rates.
  • Insurance premiums.

Occupancy expenses are calculated based on the floor area of your home that is used for the business and the portion of the year that it was used.

Small business owners should note that capital gains tax (CGT) payments may be required when your home was used for business. However, CGT won’t apply if you operate your business from a rented home, didn’t have an area expressly set aside for your business activities or the business was run through a company or trust.

Records that need to be kept include written evidence, tax invoices and receipts, and should substantiate your claims for all home-based business expenses. This needs to be kept for at least 5 years to substantiate your claims.

Your business structure can affect the method you can use and the expenses you can claim, especially if your business is a company or trust. If you are a sole trader, a partnership or a company or trust, there are specific rules that may apply to you. Speaking with a trusted tax adviser is the best way to ensure you comply with those guidelines – why not start a chat with us today?

WFH, Mobiles, Meals & Motor Vehicles – Who’s In The Firing Line With The ATO?

It’s that time of the year again!

At the end of the financial year, the ATO announces a range of tax hotspots they’ll be paying careful attention to in individual income tax returns lodged.

This year, be wary of making mistakes while claiming the following:

  • Working From Home Deductions: 
  • Particularly in light of the new rules introduced this year for claims using the ATO’s new 67 cents per hour fixed rate, which will see many taxpayers caught out for failing to have proper substantiation to back up their claim.
  • Mobile phone & Internet Costs
  • A particular focus will be on people who are claiming the whole (or a substantial part) of the bill for their personal mobile as work-related
  • New for this year is the cross-over with home working claims as the new fixed rate per hour includes an element for mobile phone and internet use – the ATO will be on the lookout for double dipping!
  • Laundry Allowance & Uniforms
  • Claims for work-related clothing, dry cleaning and laundry expenses, especially when the amount of working from home could be expected to have led to a reduction in these claims.
  • Motor vehicle claims 
  • Where taxpayers take advantage of the 78 cent per kilometre flat rate available for journeys up to 5,000kms (the ATO is concerned that too many taxpayers are automatically claiming the 5,000km limit regardless of the actual amount of travel)
  • $300 Or Less Rule
  • Incorrectly claiming deductions under the rule that allows taxpayers who have incurred work-related expenses of $300 or less in total to make a claim without receipts (the ATO believes that some taxpayers are claiming this – or an amount just less than $300 – without actually incurring the expenses at all).
  • Overtime Meal Claims
  • Union Fees and Subscriptions

If you want to make sure that you understand precisely what you need to do to lodge your tax return, keep this in mind:

  • If you earned money, you need to report it.
  • If you can’t prove an expense, you can’t claim it.
  • If you want to make extra sure that you’ve got it right, see a tax agent

For assistance during the lodgement of your tax return, you can seek advice from us. We’re here to help ensure you meet your tax obligations by reporting your income correctly for this financial year.

Cars, Phones, Laundry: What Can Tradies Claim In 2023?

Are you involved in a trade, or do you know someone who is involved in one?

It’s vital that these individuals understand what they can claim work-wise on their tax returns this year (and that they should be preparing for it sooner rather than later).

Car Expenses

You can claim a deduction for the cost of travel while performing your duties. This includes travel between different work locations, including for different employers. Normal trips between home and work are private in nature and can’t be claimed. This applies even if you:

  •  live a long way from your usual workplace, or
  • have to work outside normal business hours (e.g. weekend shifts).

In limited circumstances, you can claim the cost of trips between home and work, where:

  • you had shifting places of employment (that is, you regularly worked at more than one site each day before returning home)
  • you were required to carry bulky tools or equipment for work and all of the following conditions were met

> The tools or equipment were essential for you to perform your employment duties and you didn’t carry them merely as a matter of choice.

> The tools or equipment were bulky – meaning that because of their size and weight they were awkward to transport and could only be transported conveniently by the use of a motor vehicle.

> There was no secure storage for the items at the workplace.

If you claim car expenses, you must:

  • keep a logbook of your work trips, or
  • be able to show us your claim is reasonable if you use the cents per kilometre method (for claims up to 5,000 km only).

An important note to make is that your vehicle is not considered to be a car if it is a vehicle with a carrying capacity of:

  • one tonne or more, such as a ute or panel van
  • nine passengers or more, such as a minivan. In these circumstances (eg if you use a ute), you can claim the proportion of your vehicle expenses that relate to work – such as fuel, oil, insurance, repairs and servicing, car loan interest, registration and depreciation.

You also will need to keep receipts of your actual expenses.

You cannot use the cents per kilometre method for these vehicles. While keeping a logbook is not required, it is the easiest way to show how you have calculated your work-related use of the car.

Self-education Expenses

You can claim a deduction for self-education expenses if your course relates directly to your current job – for example, your apprenticeship course. You can also claim a deduction for the cost of travel from your home to your place of education and back, or your workplace to your place of education and back. You must keep records of your travel expenses to claim a deduction.

You can’t claim a deduction if your:

  • study is only related in a general way or is designed to help you get a new job. For example, if you’re an apprentice carpenter you can’t claim the cost of study to enable you to become a builder.
  • Your employer pays your apprenticeship course fees outright or reimburses you upon course completion.

Tools & Equipment Expenses 

You can claim a deduction for tools or equipment you must buy for your job. If you also use the tools or equipment for private purposes, you can’t claim a deduction for that use.

For example, if you have a toolset that you use for private purposes half the time, you can only deduct 50% of the cost. If your employer or another person supplies the tools or equipment, you can’t claim a deduction.

If a tool or item of work equipment you only used for work:

  • cost more than $300 – you can claim a deduction for the cost over a number of years (depreciation)
  • cost $300 or less – you can claim an immediate deduction for the whole cost.

Clothing Expenses

You can claim a deduction for:

  • the cost of buying, mending and cleaning uniforms that are unique and distinctive to your job – eg a uniform your employer requires you to wear.
  • protective clothing your employer requires you to wear – eg hi-vis vests, steel-capped boots and safety glasses.

You can’t claim a deduction for plain clothing worn at work, even if your employer tells you to wear it or you only wear it for work (eg workwear or tradie wear that is not designed to provide you with sufficient protection from the risk of injury at your worksite)

You may be able to claim other work-related deductions:

  • protective equipment such as sunscreen, sunhats and sunglasses
  • union and professional association fees
  • phone expenses if you have to make calls or texts for work.

Remember that you can only claim part of the work-related expense in this instance and may require records (such as receipts) to prove this.

If you have any concerns or questions about your upcoming tax return, you can consult us – we’re equipped to assist you in all tax-related matters.

Tax Planning Tax Tips For Business Owners

As the financial year comes to a close, now is the time to visit your accountant or tax advisor to discuss tax planning for your business in 2023.

At the end of every financial year, business owners should be reviewing and measuring their performance in comparison to the previous year.

By regularly reviewing this information, a greater understanding of the basis for tax planning and budgeting can be determined more accurately. While tax planning is a process that should be continuously managed over the year for better and more adaptive results, it’s never too late to start.

This is especially relevant now as business owners need to understand the business’s current ability to move forward in the current economic circumstances and plan for the future. Otherwise, past mistakes could be repeated in the future.

Here are some general tax tips that business owners can take with them into the 2023-2024 financial year.

Timing Of Expenses

An expense is an allowable deduction that is necessarily incurred in carrying on a business or for the purpose of gaining or producing assessable income. Expenses should be recognised in the same period as the revenues to which they relate when it comes to lodging your tax.

Most prepayments that are made now are not deductible until the period to which they relate (though some exceptions may apply). Small businesses and individuals may be able to deduct 12 months of prepayments in the year paid, as an expense.

Payments to Workers

Deductions on payments to workers (whether they are employees, contractors, directors, etc.) can only be claimed when the business has complied with its PAYG withholding and reporting obligations.

Family businesses or businesses that employ family members should be especially concerned with preparing for this, as they have additional obligations to ensure that they are correctly paying the right amount of tax. If they have received wages or been given allowances below the tax-free threshold, they will need to be registered as a withholder and a PAYG summary provided.

Your business should already be in the position to process payments through Single Touch Payroll, as it was made mandatory for all businesses to use from 1 July 2021.

Bad Debts

Conduct a review of the debts that may be affecting your business. If any of these are unlikely to be recovered, the best course may be to write them off as ‘bad’ prior to the end of the financial year. You can speak with us about this process to ensure that it is performed correctly (and that you are able to do so). Writing off bad debts can reduce your income tax and generate a GST refund.

Bonuses

Businesses may have provided their staff with bonuses at the end of the calendar year for performance expectations being met or as a retention bonus. It is important to remember that bonuses are only deductible when they are actually incurred.

If you have concerns regarding your tax planning this year, why not speak with one of our trusted advisers? We have the knowledge and experience to assist you with your tax planning needs.

What You Can & Can’t Claim For 2022-23’s Return

The 2022-2023 tax return may look different to your previous returns, but there’s a reason – and it’s probably due to an expiry date. Here are our top reasons that your tax refund this year might not feel as bountiful as the previous year (and a few others to remember when lodging)

Work From Home Deductions Changed

The shortcut method made available during the COVID-19 pandemic and lockdowns is no longer available to claim your running expenses with (at the rate of 80 cents per hour worked). Instead, these expenses can be claimed using the revised fixed rate method (67 cents per hour) or the actual costs method.

LMITO Is No Longer Available

The lower-middle income tax offset expired on 30 June 2022, making the 2021-22 return the final year that it was applicable. You may notice that your tax return looks a little different this year as a result.

Temporary Full Expensing Ceases 30 June 2023

The deadline for the expanded Temporary Full-Expensing measure has not been extended by the Federal Budget 2023-24, meaning that it will cease on 1 July 2023, and the write-off will revert to $1,000 from that date.

Businesses will likely feel a cashflow impact, as they will now need to spread depreciation deductions for assets more than $20,000 out over a number of years rather than claim them back up front.

Small Business Instant Asset Write-Off Returns 

The instant asset write-off will return for the 2022-23 financial year (between 1 July 2023 to 30 June 2024). If you buy an asset to use for business purposes and it costs less than $20,000, you can immediately deduct the business portion of the cost in your tax return. This deduction is available for each asset that costs less than $20,000.

If you have any concerns, questions or confusion around your tax returns this financial year, make sure to speak with your trusted tax adviser. We are in the business of helping – how can we start?

Gift Or Income? Don’t Make A Mistake With Your Assessable Foreign Income…

Businesses and individuals may receive income from various sources; local, national or even international. You may find that part or all of your income comes from overseas (such as through sales, rental income or other sources). However, all income needs to be assessed to determine whether you will need to pay tax on it.

The Australian Taxation Office (ATO) is concerned about taxpayers failing to disclose assessable income (funds received from overseas) that are reported instead as gifts or loans.

This unreported or incorrectly reported accessible income may include:

  • overseas employment or business income
  • interest from foreign financial institutions or loans
  • dividends from foreign companies
  • a capital gain on the disposal of a foreign asset (such as shares in a foreign company)
  • deemed amounts of foreign income concerning interests in foreign companies or trusts.

Sometimes taxpayers and their advisors may try to get creative with avoiding this assessable income being reported correctly. This may involve labelling or reporting it as a gift or a loan, resulting in different taxable consequences.

Accepting an overseas gift or loan isn’t wrong, especially if you report it correctly. Mislabelling foreign income and capital gains as such, however, is a major red flag for the ATO.

This can result in significant penalties, though (of up to 90% of the amount plus shortfall interest), as well as a risk of criminal prosecution and penalties under criminal law for the taxpayer and their advisor.

If you have concerns about compliance regarding foreign income and misclassifying it as a gift, you must speak with a registered tax agent as soon as possible.

You may also wish to conduct an independent review with their assistance to determine what may be a risk to your assessment and how you can mitigate and proceed with tax planning to accommodate them.

Start a conversation with us if you expect to receive foreign income and will need to declare it during this financial year.

The 6 Investment Income Types That Need To Be Declared On Your Income Tax Return

If you’ve made a major investment in the last financial year, any income made from it will need to be included on your tax return.

Any income earned from investments and asses must be declared in your tax return. This may include amounts from interest, dividends, rental income, managed investment trust credits, crypto assets and capital gains. Whether you receive it directly or via distributions for a partnership or a trust, this income needs to be declared.

If you, for example, hold the assets that earn the investment income jointly (with another person), it is assumed that the asset’s income is divided equally between you, unless it can be proven that the asset is held in unequal proportions.

Six items must be declared in your tax return as income this financial year, including the following:

Interest Income

Interest income includes:

  • interest you earn from financial institution accounts and term deposits
  • interest you earn from any other source, including penalty interest you receive on an investment
  • interest you earn from children’s savings accounts if you
    • open or operate an account for a child and the funds in the account belong to you
    • spent or use the funds in the account
  • interest we pay or credit to you – for example, interest on early payments, interest on overpayments and delayed refunds
  • ife insurance bonuses (you may be entitled to a tax offset equal to 30% of any bonus amounts you include in your income)
  • interest from foreign sources (you can claim a foreign income tax offset for any tax paid on this income).

Dividends

Dividend income may come from a:

  • listed investment company,
  • public trading trust,
  • corporate unit trust, or a
  • corporate limited partnership (in the form of a distribution).

Some dividends may have imputations or franking credits attached. The franked amount and the franking credit must be declared if you receive franking credits on your dividends. If a company pays or credits you with dividends that have been franked, you’ll generally claim a franking tax offset.

Rental Property Income

You must declare the full (gross) amount of any rent and rent-related payments you receive. This includes amounts you receive from overseas properties. You must work out and declare the monetary value if you receive goods and services instead of rent.

It’s best to consult with a tax adviser to avoid making mistakes involving rental property. This is usually a major red flag area for the ATO, so don’t hesitate to ask for help to avoid compliance issues or declaring for things you shouldn’t.

Managed Investment Trusts

You must show any income or credits you receive from any trust investment product in your tax return. This includes income or credits from a:

  • cash management trust
  • money market trust
  • mortgage trust
  • unit trust
  • managed fund – such as a property trust, share trust, equity trust, growth trust, imputation trust or balanced trust.

Crypto Asset Income

You must declare rewards received for staking crypto assets (often in the form of additional tokens from holding the original tokens. The money value of the additional tokens needs to be calculated and then converted into Australian dollars at the time they were received. These are reported in ‘other income’ in the tax return.

If you receive crypto via airdrop, this is income when you receive them based on the money value of the already established tokens. Occasionally, some crypto projects ‘airdrop’ new tokens to existing holders to increase the supply. Whatever amount is received needs to be converted into Australian dollars and declared as other income.

Capital Gains

Any capital gains that are made when you sell or dispose of capital assets must be declared. This may include investment property, shares or crypto assets. The capital gain is the difference between:

  • Your asset’s cost base (what you paid for it)
  • Your capital proceeds (the amount you receive for it)

Report capital gains and capital losses in your tax return. You can offset any allowable capital losses against your capital gains to work out your net capital gain or loss. You pay tax on a net capital gain. If you have a net capital loss, you can retain the loss to offset capital gains in future years.

To avoid any issues with your tax return this financial year, especially involving investment-related income, start your tax journey with us today. We can help uncomplicate the process for you.

Is Your Business’s Income Prepaid?

If your business receives income before a service is rendered to a client, when is the income recognised? Is it when the income is received or after the service rendered?

That was what the Arthur Murray case in tax law argued, creating a landmark decision regarding tax precedent that affected how pre-paid income derived from a contract is taxed when straddling several tax years.

In Sydney, the Arthur Murray Dance School provided lessons to its clientele after being paid for the service (payment up-front). This is not an uncommon practice in many membership/pre-paid subscription-based services.

If the school were to take income for a year’s worth of lessons up-front in June, which are to commence in July of the following financial year, when is the income to be declared? Is it in June when the money was received, or is it in the following year when he provides the dance lessons?

The Australian Tax Office believed the income should be declared when the money was initially paid.

However, Mr Murray challenged the decision in court, arguing that if the lessons weren’t provided, the money would need to be returned; thus, he was only holding it in trust until he provided the lessons.

In deciding Arthur Murray, the Court found that amounts received in advance for dancing lessons were not derived until the lessons were actually given. The payments were only considered assessable income after they had been earned by giving the lesson.

This has become known as the Arthur Murray Principle and can sometimes be applied to other types of pre-paid income that are to be provided over the following 12-month period, such as

  • Pre-paid advertising,
  • Prepaid web service fees,
  • Prepaid gym memberships, and
  • Construction contracts.

However, some rules need to be followed if you wish to follow this principle. The money must still be at risk to you – you can’t tell someone they can’t receive a refund on a full-year gym membership and then expect to defer the tax on that income. There are also instances where you will be taxed on the money when it is received. The main types of income this generally applies to are wages, interest and rents received.

This rule of income extends to businesses where the ATO believes that their income is akin to earning wages, such as accountants, solicitors and other professionals that earn all of their income from their own personal services.

If you’re unsure how these principles may apply to you or your business, do not hesitate to contact us.

Why Does Your Tax Return Look Different This Year?

This year’s income tax return refund might not look as bountiful as it did in the previous year, as some of the offsets and rebates introduced during the pandemic will no longer be available to apply to your return. This includes the Lower-Middle Income Tax Offset.

The LMITO offset will not be available for your 2022-23 tax return, as it was confirmed late last year that the previous financial year would be the last time it would be applied to returns.

The LMITO acted as an offset, meaning it reduced the tax you pay (your tax payable) on your taxable income. Your taxable income is your total deduction minus any deductions you claim.  Offsets are not used to reduce your Medicare levy & Medicare levy surcharge (if there is any). The LMITO did not affect this part of your tax return.

What Does This Mean For My Next Tax Return? 

You may have noticed a slight boost to your tax returns in prior years due to your tax payable being lowered by LMITO. This will no longer be the case as the LMITO is no longer available, and compared to previous years with LMITO in effect, you may notice a greater difference in your tax refund.

However, the Low Income Tax Offset (LITO) may still be available (pending any further rulings or changes). The ATO will automatically apply this after you lodge your tax return this year. The amount of the low-income tax offset (LITO) you receive will depend on your taxable income.

If your taxable income is

  • $37,500 or less, you will get the maximum offset of $700.
  • between $37,501 & $45,000, you will get $700 minus 5 cents for every $1 above $37,500
  • between $45,001 and $66,667, you will get $325 minus 1.5 cents for every $1 above $45,000

Consulting with a tax agent or professional like us can significantly assist with your tax returns and their preparation for the coming year, particularly regarding any offsets or deductions you may be eligible for. Why not start a conversation with us today?

The Return Of The Instant Asset Write-Off & The Expiry Of Temporary Full-Expensing

The Federal Budget has reintroduced the $20,000 Instant Asset Write Off to benefit small businesses amidst the myriad of measures announced by the government. 

The instant asset write-off will return for the 2023-24 financial year (1 July 2023 to 30 June 2024). If you buy an asset to use for business purposes and it costs less than $20,000, you can immediately deduct the business portion of the cost in your tax return. This deduction is available for each asset that costs less than $20,000.

Eligible businesses can claim an immediate deduction for the business portion of the cost of an asset in the year the asset is first used or installed ready for use.

Instant asset write-off can be used for:

  • multiple assets if the cost of each individual asset is less than the relevant threshold
  • new and second-hand assets.

If you are a small business, you must apply the simplified depreciation rules to claim the instant asset write-off. It cannot be used for assets that are excluded from those rules.

The instant asset write-off eligibility criteria and threshold have changed over time. You need to check your business’s eligibility and apply the correct threshold amount depending on when the asset was purchased, first used or installed, ready for use.

Eligibility to use instant asset write-off on an asset generally depends on the following:

  • your aggregated turnover (the total ordinary income of your business and that of any associated businesses)
  • the date you purchased the asset
  • when it was first used or installed ready for use
  • the cost of the asset being less than the threshold.

You are not eligible to use instant asset write-off on an asset if your aggregated turnover is $500 million or more.

The instant asset write-off does not apply for assets you start to hold and first use (or have installed ready for use) for a taxable purpose from 7:30pm (AEDT) on 6 October 2020 to 30 June 2023. You must immediately deduct the business portion of the asset’s cost under temporary full expensing. If temporary full expensing applies to the asset, you do not apply instant asset write-off.

The Temporary Full Expensing Measure Ceases 30 June 2023

Temporary full expensing was introduced to support businesses and encourage investment, as eligible businesses can claim an immediate deduction for the business portion of the cost of an asset in the year it is first used or installed ready for use for a taxable purpose.

The deadline for the expanded Temporary Full-Expensing measure has not been extended by the Federal Budget 2023-24, meaning that it will cease on 1 July 2023, and the write-off will revert to $1,000 from that date.

If you attempt to use the Temporary Full-Expensing measure after 1 July 2023 for an asset over $20,000, you cannot claim anything in the 2023-24 tax return using it.

Businesses will likely feel a cashflow impact, as they will now need to spread depreciation deductions for assets more than $20,000 out over a number of years rather than claim them back up front.

Looking towards the future and want to ensure you’re doing the right thing regarding your tax? Come start a conversation with us so we can assist you with your tax planning needs.