Customer ordering from small food truck in Brisbane
September 28, 2023 By Tony Madden

Navigating Small Business Taxes in Australia and Key Deductions


Small businesses are a cornerstone of the Australian economy, accounting for over 97% of all private sector businesses in the country. Often hailed as the "engine room of the economy," it's easy to see their instrumental role. Being Australia's largest employers in the tax small business sector not only means they drive our economy but weave the social fabric of our communities. And yet, it's been said that smaller businesses often face major challenges when it comes to navigating the complex world of tax.

If you've found yourself wondering what kind of deductions you can claim for your small business tax and considering professional advice, then this article is for you!


Understanding the Definition of a Small Business

When the taxman comes knocking, a small business is usually any entity with an annual turnover of less than $10 million. Although when it comes to the small business Capital Gains Tax (CGT) concessions, the threshold dips to $2 million. And here's a silver lining, some concessions are even available to businesses exceeding this turnover.

The law has craftily prevented businesses from dividing/ splitting their operations to bypass the threshold for these tax benefits. They insist on calculating turnover from 'aggregated' amounts. In other words, this means summing up the annual turnover (gross income, GST not included) of every business activity that's 'connected' or 'affiliated.'

Small Business Taxation: An Overview

Understanding the role and implications of taxes, including how to pay payroll tax, is essential for every small business owner. Simultaneously complex and critical, taxation falls under the careful watch of the Australian Tax Office (ATO). The ATO oversees the bouquet of taxes and ensures businesses understand when they need to lodge returns. Overseeing obligations like income tax, goods and services tax (GST), all the way to payroll tax and fringe benefits tax, to ensure everything runs like a well-oiled machine.

The ATO also plays a pivotal role in executing various initiatives to support smaller businesses, offering guidance on complexities like payroll tax. The government recognises and acknowledges the indispensable contribution of small businesses to our economy, dedicated to creating an environment where your business can thrive.

One significant form of this support manifests as tax concessions, allowing certain amounts to be tax free. Conceived as financial aids, they are intended to lessen the burden of taxation for small businesses. By that measure, tax concessions can provide much-needed space to breathe, foster growth and facilitate expansion. Some instances, when preparing your tax return, also offer a refundable tax offset. A tax offset is different to a tax return. To alleviate overall tax obligations for small business owners, it is a direct reduction from the amount of tax you owe, a further commitment to back the small businesses' journey.

That's all well and good, you might say, but what about cutting me some slack on what I spend to run my business in the face of income tax obligations? Well, that's where tax deductions come into the picture. These allow you to subtract certain business expenses from your total income, factoring in company tax, before calculating what you owe in taxes, keeping in mind the tax free threshold. Things like office supplies, employee wages, and even work-related travel can often be deducted. Think of a tax deduction as the government's way of acknowledging the costs of doing business.

Young woman in wheelchair working from her home office and eating morning tea


Temporary Full Expensing: An Opportunity for Small Businesses

Running a small business, with its company tax obligations and all, can be a roller coaster of emotions, but every now and then, the government throws you a lifeline that makes it all worthwhile. Enter the Temporary Full Expensing (TFE) measure—a game-changer designed to put a smile on the face of every savvy business owner out there.

TFE was a government initiative that empowers businesses to get an immediate tax deduction for the full cost of eligible capital assets acquired between 6 October 2020, until 30 June 2023. It allows you to claim those essential, big-ticket items that keep your business steaming ahead, all in the year they're first used or installed for use.

This TFE measure opened up a wealth of benefits, starting with accelerated tax deduction instead of waiting for them to trickle in over several years.

Of course, there are a few requirements to qualify for the TFE goodness. Your business must have an aggregated turnover of less than $5 billion, and the eligible assets must be new or second-hand, acquired from 6 October 2020, until 30 June 2023.

When it comes to capital eligible assets, we're referring to the major players in your business operations: machinery, vehicles, computer systems, or even sizable upgrades. Essentially, if it's not inventory, land, or buildings, it's likely to qualify.

Moving Forward Post Temporary Full Expensing

So, the Temporary Full Expensing (TFE) chapter in the small business story came to a close with the end of the 2023 Financial Year. While the excitement around TFE may have run its course, let's think of it as the turning of a new page rather than the closing of a book on your business's growth opportunities.

Post-TFE, eligible businesses can still claim a tax deduction for the business portion of the decline in the value of the depreciating asset (try saying that three times fast!). This can be done under either general depreciation rules, or, if you're a small business, simpler depreciation rules. It might seem like a step back, but trust us, these alternatives still offer a solid helping hand for your business's financial needs.

Customer ordering at a small food truck business

Exploring Other Tax Deductions for Small Businesses

Tax deductions may seem elusive at times, but armed with the right resources and an open mindset, you can navigate these financial opportunities to your advantage! With a focus on trading stock rules, pre-paid business expenses, GST obligations, and ‘pay as you go’ tax instalments, let's dive further into the tax deduction realm and unlock growth opportunities for your small business.

Trading Stock Rules & Prepaid Expenses

Trading stock rules, applicable to items bought, sold, or produced for manufacturing or business exchange, can have a substantial impact on your tax result. By comparing your stock values at the beginning and end of the income year, you can identify any differences, resulting in assessable business income or allowable tax deductions. With the right guidance, these basic principles can become an integral part of your business's financial strategy.

Next, pre-paid expenses represent payments for goods or services used in the coming year, but paid for in the current financial period. These expenses might be eligible for tax deductions, though certain regulations apply. Having an expert by your side can help you navigate these complexities.

How to simplify your GST obligations

Simplifying your GST obligations may seem like a gargantuan task, but innovative and efficient approaches, like accounting for GST on a cash basis, can change the game. It's a simple switch where you account for GST when you're paid, not when you bill. Ultimately, this approach cuts down on paperwork and brings clarity to your GST reporting. And a bonus? This method suits smaller businesses and gives a better snapshot of your cash flow.

let's talk about breaking down that mountain of income tax into manageable molehills with Pay As You Go (PAYG) tax instalments.  Think of it like a lay-by for your tax. You make regular payments, based on your business or investment income, throughout the year. When tax time rolls around, these payments are used as credits, potentially leaving you with little to no tax to pay. It's crucial to note that PAYG instalments and PAYG withholding are different - the latter applies to employers withholding tax from employee salaries.

Capital Gains Tax (CGT) Support for Small Businesses

When it comes to small businesses and Capital Gains Tax (CGT), it might seem like you're stepping into uncharted territory. In essence, CGT applies when you gain profit from the sale of assets associated with your business, including property, vehicles, or even the business itself. You may initially think of this as another formidable element in the complex landscape of small business taxation. However, rest assured, even within tax law, there are friendly companions ready to lend support.

Australia's taxation system presents four unique CGT concessions designed specifically for small business relief. Eligible businesses can access:

The Small Business 15-year Exemption

If your business ownership stretches over 15 years and you're considering retirement, you could be exempt from CGT on your business asset sale under certain conditions, read up more on this criteria on the ATO website.

The Small Business 50% Active Asset Reduction

This concession allows you to reduce the capital gain by 50% on an asset that has been actively contributing to your business for at least half of its tax life or for seven-and-a-half years if owned more than 15 years. There are some specific rules about what qualifies here though.

The Small Business Retirement Exemption

Here, you may disregard capital gains up to a lifetime limit of $500,000. If you're under 55, this gain must be contributed to a superannuation fund instead.Check out how it works and extra conditions to consider on the ATO website.

The Small Business Rollover

If you reinvest the proceeds from your asset sale into new active assets within two years, you can defer your capital gain until further down the track. Learn how to apply and what to consider over on the ATO website.

Feeling a bit more empowered? We sure hope so! But don't forget, every business is unique, and navigating tax concessions can be like trying to unravel a knotted necklace - perplexing and time-consuming. At Trekk Advisory, we're all about untangling the intricacies of your finances. We're here to help you understand these concessions, assess if you're eligible, and ultimately support your business to keep growing and thriving, while minimising your tax naturally.

Retail business owner processing orders

Avoiding Common Tax Pitfalls

Navigating the realm of tax can have its fair share of complexities, especially when you grapple with provisions such as the 'deemed dividend' rules. Let's decode this a bit: If your company provides loans or payments to shareholders and this isn't appropriately managed under the Division 7A rules, the tax law considers these as 'deemed dividends'. This means they are taxable, potentially adding an unanticipated layer to your tax liability.

The key to staying on your tax game is this: separate your company from your personal finances like they're mismatched socks. By maintaining a clear boundary, you'll dodge the pitfalls of 'deemed dividend' rules that could lead to unnecessary tax burdens. No one needs that kind of stress, right?

Record Keeping for Your Tax Return: A Golden Rule for Small Businesses

In a business world full of distinct challenges, let us discuss the superhero that often does not wear a cape — meticulous record-keeping. It's like the ultimate recipe for success in managing small businesses. The intricacy and precision it demands may initially be daunting, yet its power in maintaining transparency, especially for tax purposes, cannot be overstated.

Keeping detailed financial records, especially for payroll tax, is not just about ticking boxes. It establishes tenantship with the Australian Taxation Office (ATO) and trust us, sailing smoothly with the ATO can certainly bring you peace of mind. Plus, getting your business financials & tax return completed will be much cleaner and, ultimately, cheaper as there is less clean up for your registered tax agent to do.

The types of records you'll need to keep as the captain of your business's financial ship might look something like this:

  1. Income Records: These include invoices, sales receipts, or any documentation relating to business income generation.

  2. Expense Records: Here, we're referring to all the outgoing payments your business makes — supplier invoices, utility bills, and lease expenses, to name a few.

  3. Bank Records: An important step towards financial transparency involves maintaining clean bank statements, loan documents, and cash book records.

  4. PAYG Withholding Records: If you make payments to employees, it's critical to maintain proper PAYG records.

  5. Superannuation Records: Keep track of both the superannuation contributions you make on behalf of your employees and the contributions you make for yourself.

  6. GST Records: The good old Goods and Services Tax. Ensuring accurate recording of GST collected and GST credits is essential.

Maximising Your Small Business Tax Deductions

Now, let's chat about something that might not sound too thrilling but can really give your business an edge - understanding assessable income and how it ties into tax deductions.

In relatable terms, assessable income is the amount you earn running your business, minus the deductions you claim. Imagine it like this - the less assessed income you have, the less tax you may need to pay. Quite the incentive, wouldn't you agree?

Now let's delve into the treasure chest of tax deductions, while also understanding the implications of the tax free threshold! Many costs associated with running your business can be claimed as tax deductions, reducing your taxable income you have to pay tax on. Just think of these expenses as the shredded cheese on your business pizza - they're ordinary, necessary, and they make the whole thing work better.

Some small business tax deductions include:

  1. Operating Expenses: The necessary costs to keep your enterprise up and running, be it rent, utilities or employee wages.

  2. Travel Expenses: Business trips can be costly, so keep in mind, airfares, taxi fares, meals, accommodation and whatnot are tax deductible.

  3. Home Office Costs: If you operate from home, claim a portion of your rental, mortgage, or utility bills.

  4. Marketing and Advertising: The expenses incurred to promote your business, including website costs, are tax deductible.

  5. Professional Services: Need expert advice? Accountant or legal fees can be claimed on your tax return.

We get it, understanding everything about tax deductions can feel like you're climbing Everest in flip flops. But, don't worry! At Trekk Advisory, we're here to guide you every step of the way, from understanding the basics to putting savvy tax strategies in place.

Employee of small hospitality business taking an order on ipad.

Wrapping it up

In conclusion, to successfully manoeuvre through the labyrinth of small business tax in Australia, it's crucial to have sound knowledge about essential deductions, guidelines and available concessions. This mastery enables you not only to decode the intricacies of measures such as Temporary Full Expensing and deemed dividend rules, but also to comprehend aspects like trading stock rules, pre-paid expenses, and the nitty-gritty of GST obligations and PAYG tax instalments. Armed with this understanding, including knowing how much tax to account for, you're well positioned to make a considerable impact on the financial health of your business.

The biggest takeaway in managing income tax? Good record-keeping habits are, simply put, essential. Like trusty navigational tools, these habits help ensure you're on the right track in managing your tax affairs, allowing for a smooth journey whilst minimising your tax obligations. Exploring available deductions is just as vital, enabling a level of robustness and financial stability that can immensely benefit your business in the long run.

However, remember that while this article aims to give a broad brush stroke understanding of the topic, every business is unique and the complexities of tax law can require a more personalised approach. The team at Trekk Advisory is dedicated to providing tailored, professional advice and insights to help further understand how these principles apply to your distinct business scenario. We stand committed to ensuring maximum tax compliance coupled with financial success for your small business. After all, your success is our success. Let's navigate the journey, together.

About Author

Tony Madden

Tony is a director of Trekk and based in our Brisbane office. He works heavily in the advisory space for his clients, focusing on strategic management consulting, mentoring, and resource planning with a driver of making a difference in their businesses and lifestyle. Tony has key strengths in building teams and is an active listener in working to address the pain points in clients' businesses. He had a passion for small business from a young age due to being brought up with a family of business owners. He's worked with larger corporations and not-for-profits, but he's always drawn back to helping and supporting small to medium (SME) businesses. That's why he's a Director of Trekk, because supporting SME is something we are all passionate about here. Outside of work, Tony has an active family with three sons that love sports, music and socialising. He enjoys having a drink and some laughs with mates and working on restoring his old EH Holden. He’s a passionate Eels NRL and Reds Rugby supporter with a love of vintage and muscle cars, 80’s Rock and keen runner (for the mind & body), Tony also has a laugh by 'acting the goat' at any event where he can embarrass his kids.

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