6th July, 2021
Here’s everything you need to know about how small businesses can keep ahead of the game this tax time.
There have been changes to the landscape for small business over the last few years, some of it because of the pandemic.
Many small businesses and sole traders, for instance, will have reverted to working from home during the lockdowns. This has opened up a range of new potential deductions. The Federal Government has also moved to soften the regulatory and tax burden for small businesses with a number of measures, some of them outlined in the Federal Budget in May 2021.
All of this means there are potential deductions – and savings – to be gained for small business owners, startups, sole traders and partnerships.
In recent years, the Federal Government has introduced a set of tax regulations specific for small business startups in a bid to foster entrepreneurship and, more particularly, a vibrant technology sector.
For example, there are deductions available at the point a new company is created, including professional, legal and accounting advice and government fees and charges. The threshold for this is less than $50 million annual turnover – a figure most startup businesses are unlikely to achieve in their early stages.
There are also regulatory concessions, which are more of a cost saving than a tax rebate. If a small business wants to change its legal structure and needs to transfer assets between one entity and another, it can do so without incurring a tax liability.
Other incentives are targeted directly at the science and technology sector, as part of the National Innovation and Science Agenda. These are designed to make it more attractive for investors to put money into startups, but as many startups are also funded by their founders, these rules can also apply to the business owners.
If a startup qualifies as an “early-stage innovation company”, then eligible investors can receive a 20 percent non-refundable carry-forward tax offset for their investment, capped at $200,000 per investor per year. There is also a 10-year exemption on capital gains tax for investments held as shares in an ESIC for at least 12 months, provided that the shares are no more than a 30 percent stake in the company.
Other more recent changes are designed to help startup businesses attract and retain talent through offering equity, and there were further changes to this in the 2021 Budget.
Employers may be eligible for a tax deduction of up to $1,000 for each employee who participates in an employee share scheme. Employees of startup companies who have part of their remuneration in options and shares will not be required to pay tax on shares after they leave the business. Eligible startups can also offer shares and options at a small discount of less than 15 percent and defer tax on this until the business is sold.
For unlisted companies, the Budget also increased the cap on the value of shares sold or lent to employees from $5,000 to $30,000.
The sole trading and partnership arrangements are the simplest business structures. Once you register a business name and are allocated an ABN you can start trading, and if revenues are under $75,000 each year, then it isn’t necessary to register for GST.
The most significant deductions for these businesses are in occupancy and operational expenses, including motor vehicle expenses. If the business operates in the owner’s home, either rented, owned or with a mortgage, then a share of those expenses can be claimed. To make this claim, a business must pass an “interest deductibility test”, which means the area set aside in the premises must “have the character of a place of business”. It helps if there is a sign at the front of the house identifying the business – the old-fashioned “hanging out of the shingle”.
A common method of working out how much to claim is to base it on the percentage of the home the business uses. If it uses 10 percent of the floor space, then 10 percent of the mortgage, council rates and insurance can be claimed. A percentage of other expenses can also be claimed, spanning power, landline phones, furniture and also cleaning.
The ATO also offers a formula for these expenses, which is a deduction of 52 cents per hour based on either actual hourly use or what it calls an “established pattern” of hourly use. Assets such as computers, furniture and motor vehicles can be accounted for through depreciation – a principle that acknowledges the value of these assets will decline over time as they are used.
The alternative to this is the more recent Instant Asset Write Off, where the full value of an asset valued up to $150,000 can be written off upon purchase.
There are more than two million small businesses in Australia with less than 20 employees, accounting for 97 percent of Australian employees. These businesses have a lower survival rate than larger businesses, with only a 60 percent success rate compared with 75 percent for businesses employing between 20 and 199 people.
These smaller businesses can use the range of ATO deductions, from the Instant Asset Write Off – now for assets up to $150,000 – partial rent or mortgage on their homes if they are based there, and operational expenses such as motor vehicles and phones. Regulations for depreciation now allow claims for intangible assets, with the government responding to changes long called for by small-and-medium businesses.
Businesses with strong cash flows can offset their tax through the pre-payment of expenses for upcoming financial years, including interest on loans and expenses such as professional subscriptions.
The Budget removed the current exclusion applying to the first $250 spent on education courses, giving business owners a greater incentive to learn new skills.
In addition to deductions, recent Budgets have responded to the pandemic with incentives for small business around hiring apprentices and taking on new employees. These are designed to boost employment but can also help small businesses grow.
For struggling businesses, relief comes through the ATO’s loss carry back tax offset, which gives eligible companies an offset by choosing to carry back losses to earlier years in which tax was liable. This can result in a cash refund, a reduced tax liability or reduction in debt to the ATO.
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This information is general in nature and does not constitute professional advice. For guidance specific to your situation, MYOB suggests engaging a specialist advisor near you ASAP.