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Tax accounting firm H&R Block has released tips for small businesses in the lead-up to the end of the financial year.
The group said there are many factors that small businesses need to be aware of in order to minimise the chances of having the Australian Tax Office challenge deductions, as 30 June draws closer.
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The first thing to remember, according to the group, is that the ATO will expect to see evidence of business productivity.
“This might seem obvious but you actually have to be in business to be a small business,” the report said.
“At the very least, the ATO will expect to see evidence of real business activities and they will no doubt be looking very closely at post-Budget night applications for ABNs, particularly where registration is then matched with subsequent asset purchases.”
The group said it’s also vital for small businesses to understand what the tax break is and what is isn’t.
“It isn’t a cash handout. If you go out and buy an asset for, say, $10,000 the ATO won’t give you $10,000 in cash to reimburse you,” the report said.
“They’ll allow you to deduct $10,000 from your profits for the year which – assuming a tax rate of 30 per cent – means that your overall tax liability will fall by $3,000.”
The report noted that the amount small businesses can claim is GST exclusive.
“This is relevant if your business is registered for GST and can claim an input tax credit on the purchase. The amount you can claim is the GST exclusive price – that means that if a retailer is quoting GST inclusive prices, you can purchase assets up to $22,000 in price ($20,000 excluding GST),” the report said.
The report also touched on assets and noted how they must be installed and ready for use in the business before the deduction can be claimed. Secondhand assets can also be claimed, according to the report.
In terms of claiming private use assets, H&R Block urges small businesses to be cautious.
“To claim the full deduction, the asset has to be used in the business. If there’s an element of personal use, you can still claim the deduction but it needs to be pro-rated to reflect the element of personal use.”
H&R Block also highlighted the need for small businesses to understand the facts around splitting invoices.
“Most suppliers will baulk at such an arrangement, [but] the ATO will be keeping a close look out for transactions like this and you can expect to have your claim disallowed if you try it. They’ll charge penalties and interest too,” the report concluded.
