Small Business Tax Considerations

Just hearing the words ‘tax time’ can immediately cause headaches for small business owners. What income do I declare? What deductions can I make? When do I pay? All these questions may make you think that you should get it over as quickly as possible. However, there are a couple of issues that you need to keep in mind in order to make sure you comply with the relevant requirements and save a bit of money in the process. In this article, Sync or Swim goes through the basics of two of the more complex aspects of tax – don’t worry, that’s not as bad as it sounds.

If you consider the information contained in this article may relate to you or your business, we recommend that you get in touch with your accountant to obtain further specific advice relevant to your individual circumstances. 

Personal Services Income

Personal services income (PSI) can be one of the trickiest areas to work through when completing your tax. PSI was introduced to prevent Australians from transferring their earnings to other people or a company to minimise their tax obligations. Consequently, if you earn PSI there a certain restrictions on what you can do with your earnings and what deductions you can claim.

The first thing to consider is whether you earn PSI; if you do not, then the PSI rules do not apply to you. The test here is simple: if more than 50% of the income that you earn is because of a person’s skills, knowledge, expertise or efforts it is PSI.

Example 1: John sells and installs whitegoods. 40% of his income is from the sale of whitegoods, 40% is from installing these whitegoods and 20% is providing advice on which whitegoods his customer should purchase. Installing and providing advice are a result of his efforts and knowledge; therefore he needs to add these two together. As 40% + 20% is greater than 50%, he is earning PSI.

After this, you still need to go through a series of tests to determine whether the full extent of the PSI laws will apply. As mentioned above, if you pass these tests then the PSI rules apply to you and you are prevented from claiming certain deductions. For more information, the Australian Taxation Office provides a simple instructional video here:

https://www.ato.gov.au/General/Contractors/In-detail/Personal-services-income/Personal-services-income---basic-information-you-need-to-know/

CGT Concessions

If you sell an asset you may be required to pay capital gains tax (CGT). Capital gains tax sees the profit that you have made on the sale of the asset included in your taxable income. However, there are some exceptions to this rule that may help reduce that tax burden.

A well-known option that is available to all individuals, sole traders and partnerships is the 50% discount where you have owned the asset for at least 12 months (the discount is only 33.33% for trusts). As a point of note, the discount is not available for companies.

There are also some less well-known deductions specifically for small businesses. One such deduction allows you to reduce your gain by another 50% if you hold it for over 12 months and it is an active asset – this brings it to 75% of the original gain. In addition, each person has the opportunity to completely discount the capital gains made on the sale of an active asset up to the value of $500,000 over their lifetime. Whilst these are the annual concessions you can access, there are other one-time concessions for when you retire or change you business’ status that can be found here:

https://www.ato.gov.au/Individuals/Tax-return/2014/In-detail/Publications/Guide-to-capital-gains-tax-concessions-for-small-business-2013-14/?page=8 - Meeting_the_basic_conditions_for_the_concessions

Example 2: Alice sells her business’ printing equipment for $10,000 more than they bought if for.  She has had the equipment for 3 years and it was continually used. She is therefore able to use the 12-month 50% reduction to reduce this to $5,000. Also, because she used it continually it is an active asset she can reduce it by 50% again to $2,500. Therefore Alice must include $2,500 in her taxable income.

Be Aware of Dates

The Australian Taxation office continually updates a chronological list of key tax dates throughout the year. It is important to make sure you are aware of those that could affect you ahead of time so that you can sufficiently prepare. This can be accessed at:

https://www.ato.gov.au/Tax-professionals/Prepare-and-lodge/Due-dates/

Whilst it can appear complex, once it is broken down, tax can be easier than you expect. It is certainly important to engage a tax professional, however you should still try and be aware of your own obligations and understand how they arise. Those headaches might still be there, but hopefully they can end with a bit more money in your pocket.

Article by: Liam O’Sullivan, Business Improvement and Compliance Consultant.