Category: "Business Tax Deductions"

Use it before you lose it – small business instant asset write-offs!

November 24th, 2013

 

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Use it before you lose it – small business instant asset write-offs!

“Use it or lose it” is the question we are all asking ourselves at the moment, as we wait in anticipation to see if the current small business instant asset write-offs will be scrapped under the new government.

Currently when a small business purchases an asset below $6,500 it can be written-off in the year of purchase.  If your business is registered for GST the $6,500 is GST exclusive, and if not, then the $6,500 is GST inclusive.

To be able to access this generous write-off, your small business needs to be classed as a business by the Tax Office with an aggregated annual turnover of less than $2 million.

So what is an asset and what does an instant write-off mean?

A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used. Depreciating assets include such items as computers, electric tools, furniture and motor vehicles.

Normally depreciating assets are written-off over their expected life, which for some assets can be as long as 40 years. Therefore, instead of claiming a tax deduction in the year of purchase like you would with a normal business expense, you claim the deduction spread out over the number of years the Tax Office thinks your asset will last.

For example, Sally purchased a new Computer for her online clothing store.   The Computer cost $2,000.  Based on depreciation rates for computers, Sally’s computer has a life expectancy of 4 years.  Therefore, she would claim a tax deduction of $500 over the next 4 years.

However, with the small business instant asset write-off, Sally can claim the whole $2,000 as an outright tax deduction in the year of purchase because it cost less than $6,500.

How is the best way to take advantage of the immediate write-off rules?

If your business is expecting a higher than normal profit in any particular year, purchasing new assets for your business costing less than $6,500 can bring your taxable income down significantly.

Small business owners should, however, act with caution.  Before you run out and empty your bank account, you need to check the cash flow position of your business.  If you don’t have sufficient cash reserves to buy new assets, then you could end up landing yourself in hot water.  Never purchase an asset just to obtain a tax benefit.  Asset purchases are a management decision and should be made taking into account a number of different factors so you can achieve the best possible outcome for all areas of your business.

Lastly, the current government is wanting to scrap the small business instant asset write-off.  This MAY potentially be your last year to take advantage of the concessions.  I suggest keeping in close contact with your accountant over the next 6 months so they can inform you of any new developments as they happen.

 

This information, facts, insights and ideas (“Content”) are for general informational purposes only and nothing contained in it is or is intended to be, construed as advice. It does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon or treated as a substitute for specific or professional advice. You should, before you act or use any of this Content, consider the appropriateness of this information having regard to your own personal objectives, financial situation and needs. It should not be your only source of information but should be treated as a guide only. You should obtain your own independent professional advice before making any decision based on this information.

In no event will we be liable for any loss or damage including and without limitation, indirect or consequential loss or damage, or any loss or damage howsoever arising from, out of, or in connection with the use of this Content.

 

Hobby or Business? How the Australian Taxation Office Treats Bloggers

November 2nd, 2013

 

Hobby or Business

HOBBY OR BUSINESS?  HOW THE AUSTRALIAN TAXATION OFFICE TREATS BLOGGERS

This is a very grey area of tax law, and the information available on the internet for this topic is limited.  If you’re a blogger, or run a small online business for fun, you may be having sleepless nights wondering whether the tax man is going to eventually catch up with you for not declaring income or expenses. 

The tax commissioners view on whether a person is carrying on a business is found in Taxation Ruling TR 97/11.  This ruling contains the following indicators that need to be considered when determining if your blog is classed as the carrying on of a business:

1. Whether the activity has a significant commercial purpose or character – A commercial business is one that is out there working hard trying to make a profit.  They are advertising, selling products, thinking of different ways they can make money, and basically operating on a much larger scale than a small blogger writing a few articles for fun.  If your blog has no commercial elements, then it is less likely to be viewed as a business by the ATO.

2. Whether the blogger has more than just an intention to engage in business – You can’t just be sitting around writing an article here or there, having this big vision in your head of how famous you are going to be, and how much money your website will make once the traffic starts coming.  If you want to be seen as a business by the ATO, you need to be out there DOING!  Taking steps to make things happen!

3. Whether the blogger has a purpose of profit, as well as the prospect of profit from the blog – In other words you need to be able to show that it is possible for a blogger to make a profit, and make a profit running the business exactly how you are NOW.  You must prove to the Tax Office from looking at other successful bloggers who are seen to be running a business, that bloggers can make some serious money once they get their name out there.  

4. Whether there is repetition and regularity in the blogging – You need to be publishing articles on a regular basis to be seen as a business by the ATO.

5. Whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business – Look at other  bloggers that are making money and probably classed as a business.  Look at their websites, their Facebook page, their newsletters and their marketing strategies.  Are you operating anywhere near this level?  If not, then you need to step up your game plan if you want to be considered a business by the Tax Office.

6. Whether you’re blogging is planned, organised and carried on in a businesslike manner such that it is directed at making a profit – Do you have a business plan, a cash flow forecast and clearly defined goals written on paper?  What is your volume of sales and who are your customers?  The Tax Office doesn’t like people who sell only to relatives and friends.  This is often a good indicator of a hobby type business.

7. The size, scale and permanency of the activity – Small isn’t a determinative test, and a person can certainly carry on a business in a small way.  However, the larger the scale of the blogging, the more likely it will be classed as the carrying on of a business by the ATO

8.  Whether the activity is better described as a hobby or a form of recreation – This last point speaks for itself.  If it feels like a hobby it probably is!

When coming to a decision about whether your blog is a hobby or a business, all of the indicators above need to be considered together, and unfortunately the weighting given to each indicator may vary with each bloggers individual circumstances.

Note, that just because you have an ABN number, registered business name and domain name. It doesn’t necessarily mean you will be considered a business.

My Final Word 

It really isn’t easy to form an opinion on this type of tax law by yourself.  Unfortunately, many bloggers don’t have the funds to go running off to an accountant for specialised advice.  If this is the case, then I suggest lodging a private ruling with the Australian Taxation Office to determine if your blog is classed as a business.  This is a free service.  Its quick, easy, and painless, and you won’t have to pay an accountant.

 

This information, facts, insights and ideas (“Content”) are for general informational purposes only and nothing contained in it is or is intended to be, construed as advice. It does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon or treated as a substitute for specific or professional advice. You should, before you act or use any of this Content, consider the appropriateness of this information having regard to your own personal objectives, financial situation and needs. It should not be your only source of information but should be treated as a guide only. You should obtain your own independent professional advice before making any decision based on this information.

 In no event will we be liable for any loss or damage including and without limitation, indirect or consequential loss or damage, or any loss or damage howsoever arising from, out of, or in connection with the use of this Content.

 

Capital Gains Tax and Running a Business from Home

July 7th, 2013

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Ok, this is a long blog and I apologise in advance, but if you run a business from home then you need to read this!  It seems every tax seminar I attend lately is highlighting the Capital Gains Tax implications on your family home of running a business from home.  This particular topic has come under the radar of the tax office in recent years due to the growing number of small business owners using their home as a base of operation.

There are TWO main ways to claim business expenses relating to your home.

1.  Claiming occupancy and running expenses using the floor area of your home as a guide.

To use this method, you must pass ‘The Interest Deductibility Test’.  This means you have a home office, workshop or other room set aside exclusively to run your business, and it is not shared with other family members such as your husband, wife or children.  Once you have established that you pass this test then you can claim a percentage of the following expenses:

  • Rates and taxes
  • Emergency Services Levy
  • Interest on your mortgage
  • Rent
  • Water
  • Electricity & Gas
  • Land Tax
  • House insurance premiums
  • Repairs and maintenance to your home office

The percentage you claim will be based on the floor area you use for your business as a proportion of the floor area of your whole home.  For example, if the floor area of your home office is 15% of the total area of your home, you can claim 15% of the expenses listed above such as rates, interest on your mortgage and house premiums.  Note that if your electricity from running your business is high due to the use of power tools or running heating and cooling, then you can work out your electricity claim on an actual cost basis rather than the floor area percentage.  In fact, the Tax Office prefers, in most cases, that electricity is calculated on the actual cost basis.

If you decide to use the floor area method then your home WILL BE subject to capital gains tax when you go to sell.  The percentage rate that you use to calculate your home office expenses will be the same rate you use to calculate your capital gains tax.

2.  Claim the actual cost of your running expenses or use the ATO set rate of 34c per hour

This method is used where you don’t have an area set aside exclusively for business, or you do have an area set aside but you share it with other family members.

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Your home will NOT be subject to capital gains if you fall into this category.

Although you cannot claim home occupancy expenses under this method, you can still claim the following home office expenses:

  • electricity
  • gas
  • depreciation on office furniture

To claim these expenses you can either work out the actual cost of the expense that relates to your business or the ATO has a set rate of 34c per hour to make this calculation easier.

34c per hour: If you decide to use the ATO rate of 34c per hour you will need to keep a diary for 4 weeks to record the hours that you spend working on your business.  Once you work out the average hours you worked over a 4 week period you can use this average as a basis for the entire year.  All you need to do then is multiply the total hours worked for the year by the rate of 34c per hour, and that’s your claim for gas, electricity and office furniture.  Note that you are unable to claim home office expenses using this method if other family members are occupying the room at the same time you are using it to perform business related tasks.

For example, Sally runs a small online business from home.  She has an office that she uses, but her husband also shares this office to work from home on weekends.  Most of Sally’s work is done at the kitchen table or spread out on the lounge room coffee table while no other family member is in the room.  Sally’s diary shows she worked 40 hours in a 4 week period.  This equates to an average of 10 hours per week.  Therefore, Sally’s claim would be 10 hours per week x 52 weeks per year x .34c = $176.80 as a tax deduction for electricity, gas and depreciation on her office furniture.  Note that Sally would need to do a new diary every year showing her usage over a four week period if she continues to use this method.

Actual Cost: If you prefer you can work out the actual hourly cost of your electricity, gas rather than using the ATO set rate of 34 cents per hour.  This can be a little tricky as it will vary depending on what room of the house you were working from at the time and whether you were using heating or cooling. 

So here comes the warning! 

If you pass the ‘Interest Deductibility Test’ in number 1 above, but you choose not to claim home occupancy expenses, it doesn’t exclude your house from capital gains tax.  Many people believe that if they don’t make the claim for occupancy expenses, then they save their house from capital gains tax. Trust me, if you have an office set aside exclusively to run your business and you don’t make one single claim for home office expenses in your tax return, your house may still be liable for some Capital Gains Tax.

 

My suggestions:

1.  Get a valuation on your home as soon as you start using a separate room in your home exclusively to run your business.  Then get another valuation when you stop using that room or you cease business.  If you don’t do this then the ATO will average out your capital gain over the period you owned your home, and this could result in you paying tax on a much larger capital gain.

2.  Talk to your accountant about your home office and make sure you are clear on how your accountant is claiming your home office expenses.  I’m amazed at how many business owners have no idea of the percentages that their accountant is using as a basis for working out their home office claims.  Discuss whether it’s worth subjecting your house to capital gains or whether you may be better off just working from the kitchen table, sharing your home office with family, and claiming 34c per hour as a tax deduction.

3.  Measure your home office accurately.  If using your floor area to claim your expenses, use the floor plan of your house to work out a precise floor area.  Don’t just take a guess, because if the ATO come knocking they will expect to see exact measurements.

 

8198668_sAnd lastly remember this.  It can be hard when you work from home, and you don’t have a home office.  The kids are loud; the house is a mess, and there is nowhere to close the door and retreat.  And who really wants to share their well organised office with their spouse just to avoid capital gains tax?  A separate home office to shut yourself away is imperative for some people and the benefits can clearly outweigh the costs.   Financial decisions can be as much about lifestyle as they are about saving money.  Sometimes we have to take the path that may not be so cost effective to enable us to live and work comfortably.

This information, facts, insights and ideas (“Content”) are for general informational purposes only and nothing contained in it is or is intended to be, construed as advice. It does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon or treated as a substitute for specific or professional advice. You should, before you act or use any of this Content, consider the appropriateness of this information having regard to your own personal objectives, financial situation and needs. It should not be your only source of information but should be treated as a guide only. You should obtain your own independent professional advice before making any decision based on this information.

In no event will we be liable for any loss or damage including and without limitation, indirect or consequential loss or damage, or any loss or damage howsoever arising from, out of, or in connection with the use of this Content.

 

 

Online business – claim your camera as a tax deduction

April 27th, 2013

 

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Online business – claim your camera as a tax deduction

Gone are the days where you copy a photo off the Internet and use it on your blog without the owner knocking on your door asking for compensation.  So the solution?  Take your own photos!

From 1 July 2012 eligible small business owners can now claim an immediate deduction for assets costing less than $6,500.  If you have purchased a camera to use as a marketing tool to take photos for your blog articles and website, then you can now claim the cost up to $6,500 as an outright deduction in the year you purchase it.

Remember that if you’re using the camera for personal as well as business, then you will need to apportion your claim between business and private.

So for all those multi skilled entrepreneurs out there who have a knack for taking photos as well as building an online business.  Start snapping and save some serious dollars come this tax time.  As for the rest of us, you will be happy to know that any photos you purchase from a photographer to place on your website are also a tax deduction.

 

Did you like this article?  Why not download our free book!

 

tax tips 3

10 Tax Tips and Strategies for Running a Business and working at the same time     

This tax book includes information on:

                • contributing to super
                • Motor Vehicle Travel
                • Putting money aside to pay taxes
                • Splitting home office expenses
                • are you a hobby or a business?
                • asset protection
                • GST
                • Income Protection
                • Which software should you use?
 
 
This information, facts, insights and ideas (“Content”) are for general informational purposes only and nothing contained in it is or is intended to be, construed as advice. It does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon or treated as a substitute for specific or professional advice. You should, before you act or use any of this Content, consider the appropriateness of this information having regard to your own personal objectives, financial situation and needs. It should not be your only source of information but should be treated as a guide only. You should obtain your own independent professional advice before making any decision based on this information.  In no event will we be liable for any loss or damage including and without limitation, indirect or consequential loss or damage, or any loss or damage howsoever arising from, out of, or in connection with the use of this Content.

Claiming home office expenses

March 15th, 2013

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Claiming home office expenses

Do you run a business from home?  Do you have a room set aside exclusively to run your business?  Are you claiming home office expenses? 

Did you know that you can claim cleaning costs for keeping your home office clean.  Cleaning costs include the following:

  • A portion of your vacuum cleaner
  • Cleaning products such as disinfectant, cleaning clothes and furniture polish.
  • Light globes
  • Fly spray
  • Tissues
  • Bin Liners
  • Dust pans and brooms
  • Pretty much everything that you need to keep your home office in tip top shape

So ladies you now have no excuse!  Go out and buy that new vacuum cleaner you have had on your wish list for a long time.  And if the hubby complains…..well after all it’s a tax deduction.

 

Did you like this article?  Why not download our free book!

 

tax tips 3

10 Tax Tips and Strategies for Running a Business and working at the same time     

This tax book includes information on:

                • contributing to super
                • Motor Vehicle Travel
                • Putting money aside to pay taxes
                • Splitting home office expenses
                • are you a hobby or a business?
                • asset protection
                • GST
                • Income Protection
                • Which software should you use?

 

This information, facts, insights and ideas (“Content”) are for general informational purposes only and nothing contained in it is or is intended to be, construed as advice. It does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon or treated as a substitute for specific or professional advice. You should, before you act or use any of this Content, consider the appropriateness of this information having regard to your own personal objectives, financial situation and needs. It should not be your only source of information but should be treated as a guide only. You should obtain your own independent professional advice before making any decision based on this information.

In no event will we be liable for any loss or damage including and without limitation, indirect or consequential loss or damage, or any loss or damage howsoever arising from, out of, or in connection with the use of this Content.