Small Business Tax Tips

As a small business owner, every dollar counts. That’s why it’s essential to claim all the tax deductions you’re entitled to, without crossing the line into disallowed territory. The Australian Taxation Office (ATO) allows deductions for most expenses (related to your business), provided they are directly connected to earning assessable income.

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Below, we outline some of the most relevant allowable deductions for small businesses in Australia and things to watch out for during tax time.

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Common Tax Deductions for Small Business

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There are many expenses common to most small businesses, and there are other expenses that are specific to the nature of the goods or services the business provides. Are you claiming all the tax deductions that you are entitled to?

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• Operating expenses: Things like accounting, administration, advertising and marketing, office premises, office running expenses, trading stock, legal fees, insurance and vehicle expenses.
• Employment expenses: Includes salary and wages, fringe benefits, superannuation and training costs.
• Other operating expenses: This may include things specific to your business, for example point of sale systems, freight, professional membership fees, professional education, protective equipment, tools or specialised software.
• Capital expenses: Including machinery and equipment, vehicles, furniture and computers. Depreciation for these assets may also be deductible if the expense was not written off immediately.
• Repairs and maintenance: For things like assets and business premises.

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Expenses must relate to the running of the business and providing the goods or services that your business offers.

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Some common expenses that are not deductible are fines and penalties, provisions for employee leave, donations to entities not registered as deductible gift recipients and entertainment.

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There may be some expenses you want to query with us such as private usage of business vehicles, prepaid expenses, bad debts, loss of stock and borrowing expenses.

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What Expenses are on the ATO Radar?

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• Travel expenses. Travel fares, accommodation, meals. The travel should be directly related to income producing activities.
• Motor vehicle expenses. Keep records for fuel, repairs and servicing, finance arrangements, insurance and registration. Keep a logbook to record private travel.
• Home office expense. If you run your business from home, you may be able to claim occupancy costs involved, running expenses (electricity, internet, phone), depreciation on office furniture and equipment. You must keep a record of expenses or use the fixed rate of 67 cents per hour, which includes energy, internet, and phone.
• Fringe benefits tax. Have you captured all employee benefits provided? Vehicle and entertainment benefits are usually looked at closely.

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Other Strategies to Reduce Your Tax Bill

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Tax planning is a strategic tool to legally reduce your tax bill, optimise cash flow, take advantage of tax concessions, and align your business finances with long-term goals. Below are some strategies that can be considered for taxation planning.

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Claim Asset Purchases Wisely

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If you're planning to invest in new equipment, tools, or other business assets, it’s important to understand how and when you can claim deductions to reduce your taxable income.

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For small businesses with an aggregated turnover of less than $10 million, there are two key options available: the instant asset write-off and the simplified depreciation rules.

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Instant Asset Write-Off (under $20,000)

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Small businesses can claim an immediate tax deduction for the cost of eligible business assets priced under $20,000 (excluding GST, if you're registered for GST), provided the asset is first used or installed and ready for use between 1 July 2023 and 30 June 2025.

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There is no limit to the number of assets you can claim, so long as each individual asset falls under the $20,000 threshold. This can apply to items such as tools, office equipment, computers, and furniture.

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Simplified Depreciation Pool
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For assets costing $20,000 or more, small businesses can use the simplified depreciation rules, which involve adding the asset to a general small business pool. Under this method:

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• You can claim 15% of the asset’s value in the first year, and
• 30% each subsequent year, until the asset is fully depreciated.

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All eligible depreciating assets are pooled together, making the process easier to manage over time.

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Timing is Critical
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To claim a tax deduction in this financial year, the asset must not only be purchased (or the finance settled) before 30 June, but also installed and ready for use. Delays in delivery or installation could shift the deduction into the next financial year. It's important to note that there is currently uncertainty surrounding whether the instant asset write off scheme will be extended past 30 June 2025.

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Plan How You Draw Profits

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If your business has made a solid profit this year, it’s important to plan how you extract those earnings to avoid unnecessary tax and compliance issues. There are several ways business owners can draw profits from their company, each with its own tax treatment and obligations.

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Wages
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Paying yourself a wage through payroll is one of the most straightforward methods. This amount is tax-deductible to the business, but you must withhold PAYG tax and make superannuation contributions on your behalf, just as you would for any employee. It's essential to ensure payroll is processed correctly and reported to the ATO through Single Touch Payroll (STP). Wages can help reduce the company's taxable income while providing you with regular, documented income.

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Dividends
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Dividends are payments made to shareholders from post-tax profits. These are not tax-deductible to the business, but they may carry franking credits, which represent tax the company has already paid. If you're a shareholder receiving dividends, you may receive a tax offset for the franking credit, reducing your personal tax payable. However, the final tax impact will depend on your marginal tax rate.

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Director Loans
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If you’ve taken money out of the business without classifying it as wages or dividends, it could be treated as a director loan. The ATO assesses these payments under Division 7A, which is designed to prevent company profits from being distributed tax-free. To avoid unintended tax consequences:

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• You must either repay the loan in full by the company’s tax return due date, or
• Put a formal loan agreement in place.

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Failure to comply means the ATO may deem the loan to be an unfranked dividend, which could increase your personal tax liability significantly.

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Why Planning Matters
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Poorly structured drawings can lead to additional taxation (once in the company and again in your personal tax return) or trigger unexpected ATO scrutiny. By planning ahead and working with your accountant or tax agent, you can choose the most tax-effective way to access your profits while staying compliant.

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Maximise Super Contributions

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Superannuation contributions can be a way to reduce your taxable income while building long-term wealth, but timing is everything.

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Concessional (Pre-Tax) Contributions
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Employer superannuation guarantee payments, salary sacrifice amounts, and personal deductible contributions all count toward your concessional contributions cap, which is $30,000 for the 2024–25 financial year. These contributions are typically taxed at 15% within the fund, which is often lower than your marginal tax rate, making it a tax-effective strategy for many business owners.

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Deadline for Contributions
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To claim a deduction in the current financial year, your super fund must receive the contribution on or before 30 June. Simply transferring the funds isn’t enough, they must clear into your super account. Since processing can take up to 10 business days, it's best not to leave contributions to the last minute.

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Make sure to confirm your available contribution room with your accountant or check with the ATO via MyGov before making extra contributions as exceeding the cap can result in additional tax and penalties.

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Consider Business Restructuring

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As your business grows, your original business structure might not offer the best protection, tax efficiency, or flexibility. Restructuring, such as moving from a sole trader to a company or trust, can provide a range of benefits, but it’s important to plan carefully.

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Why restructure?

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• Asset protection: A company or trust structure can help separate your personal and business assets, offering protection in the event of legal or financial issues.
• Tax efficiency: Companies are taxed at a flat rate, and trusts allow income to be distributed in a way that may reduce overall tax obligations.
• Scalability: More sophisticated structures are often better suited to growing businesses, especially if you're taking on investors, expanding your workforce, or operating across multiple locations.

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Things to consider:

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• Transferring assets (including business names, intellectual property, and equipment) can trigger tax implications such as capital gains tax or stamp duty.
• You may need to update or apply for new ABNs, TFNs, GST registrations, and bank accounts.
• Restructuring can affect your existing contracts, employee arrangements, insurance policies, and compliance requirements.
• If moving to a company structure, be aware of Division 7A rules around director loans and drawings.

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Restructuring is a significant decision that requires legal and accounting input. Done well, it can provide long-term benefits in terms of growth, risk management, and succession planning.

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Good Record Keeping

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Remember, under Australian tax law, you need a valid tax invoice for any expenses over $82.50 (including GST) to prove the business expense.

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• Keep records for all business transactions (income and expenses), business activity statements and financial reports for at least five years.
• Keep all records relating to employees, contractors and payroll for at least seven years.
• If your business is a company, keep all records for at least seven years, including director meeting minutes.

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Maximise Your Business Deductions

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We can check your business's eligibility for concessions, offsets, incentives and rebates and make sure your business is calculating taxable income correctly, so you don't pay more tax than you need to!

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It's important to get tax planning and the allowable tax deductions right for your business and get in early for your tax return.

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How we can help?

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If you need more advice on this issue, please contact our team.

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