Small businesses and sole traders: act now before tax deadline hits

June 30 is approaching fast and requires fresh thinking by sole traders and other small businesses that make up the majority of our economy. But their effort may pay off handsomely.

Small business owners shouldn’t forget about end-of-financial-year tax strategies.

Small business owners will soon finish a financial year unlike any experienced before, and are being urged not to forget the tax moves that can deliver them a handy cash windfall.

Many of the nation’s 2.2 million small businesses have suffered badly during the coronavirus pandemic, being forced to close temporarily or experiencing big revenue reductions.

About one-third of small and medium enterprises (SMEs) are receiving the government’s $1500 fortnightly JobKeeper payments for employees and sole traders, and more than half a million have received thousands of dollars tax-free through the cash flow boost program.

Business owners should draw tax time plans now. Illustration: John Tiedemann

But not all business owners are struggling, and can help themselves and their employees by taking advantage of government stimulus and end-of-financial-year tax tactics.

Financial services firm William Buck’s business advisory principal, Shane Taylor, said some industries and sectors “continue to do quite well” and could consider ways to minimise tax debts for 2019-20.

“It’s been portrayed that almost every business has had a downturn but that’s not necessarily the case,” he said.

INSTANT ASSET WRITE-OFF

One of the COVID-19 stimulus measures introduced by the Federal Government dramatically expands the instant asset write-off for purchases of business assets from March 12 to December 31.

Most businesses can now book an instant full tax deduction for buying individual assets costing up to $150,000 each, rather than the previous $30,000 cap.

The Australian Taxation Office said it applied to both new and second-hand assets, and could be used for multiple assets, but warned there were separate rules for non-commercial vehicles.

It said for cars the limit was $57,581 and the write-off was limited to the proportion of business use: “for example, if you use your vehicle for 75 per cent business use, the total you can claim under the instant asset write-off is 75 per cent of $57,581, which equals $43,186”.

Mr Taylor said “a lot of vehicles and trailers” were being bought this month.

“If it’s a car it’s subject to the $57,581 limit but commercial vehicles, utes and trucks are not subject to it,” he said.

The write-off applies to all business assets including machinery, tools and equipment, but Mr Taylor said business owners should only spend what they needed to.

“Expenditure should be a business decision, not a tax decision,” he said.

HOME FRONT

Business owners and employees have been spending much more time working from home, and this creates a wide range of extra deductions for costs such as gas and electricity, internet and depreciation of home office furniture and other equipment.

Home-based business owners can also claim deductions for interest expenses on their mortgage or rental payments, but check with an accountant because there may be capital gains tax or other issues.

“You need a dedicated home office area and apportion all your expenses across that,” Mr Taylor said.

For example, if an office is 15 per cent of your home’s floorspace, interest deductions could generally total 15 per cent of total interest paid. These occupancy expenses are only available to business owners where their home is their base, and are not claimable for employees.

Brett Kelly from Kelly+Partners

William Buck’s Shane Taylor

KNOW YOUR SITUATION

Planning for tax time by sole traders and other business owners should already have started but if not, there’s no time to waste.

“Estimate your tax liability to begin with,” Mr Taylor said.

“Estimate your profit for the year – look at your expenses and what June looks like.

“If you’re due for a refund, plan to lodge early – you could probably do with the cash flow.”

The CEO of accounting firm Kelly+Partners, Brett Kelly, said year-end tax planning should start early “to maximise opportunities”.

“If done correctly, and without falling into one of the many tax avoidance provisions, tax planning can provide significant savings,” he said.

Business owners who provided professional services could consider sending out accounts after June 30 to defer income, Mr Kelly said.

BAD DEBTS AND STOCK

COVID collapses have led to a rise in bad debts, and a pile of stock that’s worthless or obsolete.

Business owners can write off these losses and claim a tax deduction.

“A bad debts deduction is only available if you have done everything in your power to seek repayment of the debt,” Mr Kelly said.

“Review all outstanding debts before year-end to identify any debtors who may be unable to pay their bills and consider writing off the balance as a bad debt.”

Business owners should make detailed notes about all write-offs.

SUPER STRATEGIES

Many business owners see their business as their nest egg and ignore superannuation to some degree, but it’s a good idea to consider super strategies this month.

“Self-employed and other eligible people are entitled to a tax deduction for personal superannuation contributions, subject to meeting conditions,” Mr Kelly said.

The limit for these deductible contributions is $25,000 a year, but people can now carry forward unused contributions from 2018-19 and add them to their 2019-20 cap if their total super balance is below $500,000.

Super can also be a saviour for small business owners struggling financially. The government’s COVID-19 early release scheme allows a $10,000 tax-free withdrawal from super before June 30 – and another $10,000 after July 1 – for people suffering hardship, business suspension or turnover reductions of 20 per cent or more.

@keanemoney

Originally published as Small businesses and sole traders: act now before tax deadline hits