Tax Time 2022 for small business — ATO focus areas and toolkit

We hope you enjoy our Tax Time 2022 content series.
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The ATO has recently flagged what it will be focusing on for small business tax returns for 2021–22. It has also released a small business tax time toolkit to assist small business taxpayers and tax professionals to complete their income tax returns.

ATO priority areas for small businesses

For small business tax returns 2021–22, the ATO will be focusing on:

  • deductions that are private in nature and not related to business income, as well as overclaiming of business expenses (especially for taxpayers running a home-based business)
  • omission of business income, for example income from the sharing economy or new business ventures
  • record keeping — including insufficient or non-existent records that are needed to substantiate claims.

Income

Assistant Commissioner Andrew Watson has reminded small businesses to include all income, including earnings from ‘side hustles.

Almost half of the 1.9 million sole traders also have non-business income, like salary and wages or income from investments, so make sure to double check that all non-business income is included.

Small businesses should include all income in their income tax return, including cash, coupons, EFTPOS, online, credit or debit card transactions, and income from platforms such as PayPal, WeChat or Alipay.

The ATO also reminded small businesses (including sole traders) in the building and construction, courier, cleaning, information technology, road freight, security, and investigation or surveillance industries that payment information is provided to the ATO through the taxable payments reporting system.

Most government payments or financial support received as a result of COVID-19 need to be included as taxable income, whereas some others are exempt and should not be included. The ATO website contains a list of how COVID-19 support payments should be treated.

Deductions

Mr Watson has reminded small businesses to only claim what they are entitled to, and that their business structure affects their entitlements and obligations.

There are three golden rules for what the ATO accepts as a valid business deduction:

  • the expense must have been for the business, not for private use
  • if the expense is for a mix of business and private use, only the portion that is used for the business is claimable
  • the taxpayer must have records to prove it.

Note

    • Eligible businesses can claim an immediate deduction under the temporary full expensing rules for the business portion of the cost of an asset in the year the asset is first used or installed ready for use.
    • If an individual’s home has been their main place of business (e.g. if they relocated from an office because of COVID-19), they can claim deductions for home office expenses.

The small business toolkit

Small businesses are a large part of our economy, with 4.3 million small businesses contributing more than $422 billion to our economy in 2019–20 and providing around six million jobs. We understand how difficult the past years have been for small business owners and appreciate their efforts in keeping on top of things as they adjust their ways of operating based on the impacts of COVID and natural disasters. We also appreciate the role that tax professionals have played to helping small business during this difficult period.

We want to continue to support small businesses at tax time and throughout the year. One of the ways we do this is through the small business tax time toolkit – we review it every year to make sure the fact sheets are up to date and reflect what small businesses want to know.

Assistant Commissioner’s foreword, Small Business Tax Time Toolkit 2022

Reference

Tax Time 2022 toolkit — small business

The toolkit includes:

  • a helpful directory of links to help small businesses find information, tools, calculators, learning resources and other support and services
  • small business guides — including:
    • home-based business expenses
    • motor vehicle expenses
    • travel expenses
    • digital product expenses
    • using business money and assets
    • pausing or permanent closing your business.

In addition, information on the following topics are not part of the toolkit but the links are available on the toolkit directory website:

  • COVID-19 and fringe benefits tax
  • primary producers (new for 2021–22).

What is covered in the toolkit fact sheets

The Home-based business expenses fact sheet will help a small business owner claiming deductions for the costs of using their home as their main place of business. In particular, it explains:

  • how the business structure may affect the taxpayer’s deductions for home-based business expenses
  • how to calculate deductions for running expenses, depreciation and occupancy expenses
  • CGT implications.

The Motor vehicle expenses fact sheet explains:

  • how the business structure may affect the taxpayer’s deductions for motor vehicle expenses
  • how to calculate a claim under the cents per kilometre method or the logbook method
  • other considerations depending on the ownership of the vehicle
  • how to claim depreciation of a motor vehicle.

The Travel expenses fact sheet helps a small business owner claiming a deduction for expenses they incur when travelling for business, and explains:

  • the different types of common travel expenses
  • how to claim expenses
  • employee travel expenses
  • travel diaries.

The Digital product expenses fact sheet (new for 2021–22) explains:

  • operating expenses vs capital expenses
  • software expenses
  • how to calculate a claim for expenses, including apportionment.

The Using business money and assets fact sheet (expanded for 2021–22) will help if the taxpayer is involved in running a business through a company or a trust and you are receiving financial or other benefits through the business. It explains how to record and report the use of business money or assets, including:

  • salary, wages and directors’ fees
  • FBT
  • distribution of income and profits — dividends, trust distributions
  • lending company or trust money or assets.

The Pausing or permanently closing your business fact sheet will help a small business taxpayer understand what they need to do for tax purposes if they have to pause or permanently close their business in relation to:

  • ABN and GST registrations
  • tax and superannuation obligations
  • GST and CGT implications of the disposal of capital assets
  • Single Touch Payroll reporting.

Note

All of these fact sheets also outline the small business taxpayer’s record-keeping obligations.

Some examples from the toolkit

Deductions for digital products
Example 1: Website development

In January 2022, Jenna engaged a consultant to develop a website for her small business. It cost $2,000 including labour and software and was ready for business use later that month.

She also pays service fees of $50 a month and $50 each year for the domain name.

Jenna can claim a deduction for the capital expense of developing the website ($2,000) under temporary full expensing in the 2021–22 income year.

She can also claim the monthly and yearly fees as operating expenses in the year she incurs them.

Example 2: In-house software — temporary full expensing

On 15 January 2022, Westside Recruiting Pty Ltd purchased client relationship management software for $5,000, with an effective life of more than one year. The software was downloaded and installed on its business computers the same day.

Westside Recruiting Pty Ltd also entered a cloud storage contract for $150 a month, to back-up its business files.

The aggregated annual turnover of Westside Recruiting Pty Ltd is $6 million.

Westside Recruiting Pty Ltd will claim the full purchase price of the software ($5,000) using temporary full expensing because:

  • it is a purchase of software with no amount deductible outside the general depreciation rules (in-house software)
  • its aggregated annual turnover is less than $5 billion
  • the software was purchased after 7:30pm, 6 October 2020
  • the software was installed and ready for use before 30 June 2022.

It can also claim the cloud storage costs ($150 per month) as an operating expense in its tax return.

Using business money and assets
Example 3: Taking money as salary or wages

Daphne is the sole director of a company that sells speciality gift hampers to customers. She and her partner Jo are equal shareholders in the company. Before this financial year, Daphne ran the business as a sole trader.

As a sole trader, Daphne paid herself $1,500 a month out of her business account and into her personal account. Daphne doesn’t need to report this because it is already included as business income on her individual tax return.

When she sets up the company, Daphne becomes an employee of the company and is paid $1,500 a month as a salary. Her tax agent explains that there are different tax consequences now that the business is run through a company, which is a separate legal entity.

Daphne now reports the $1,500 a month income as salary in her individual tax return. The company reports business income and claims a deduction for her salary in its company tax return. The tax agent helps Daphne set up PAYG withholding and STP reporting, as well as meet her company’s superannuation guarantee obligations.

Example 4: Loan received from the company

Amir is the sole director of a company that provides administration services to other businesses. He and his partner Aiesha are equal shareholders in the company. Before this financial year, Amir ran the business as a sole trader.

Amir’s and Aiesha’s daughter is about to start high school and they have to pay $2,000 in school fees. The business has had a few good years and Amir decides to use the money from the business to pay the fees.

However, Amir knows that he cannot pay for a private expense using the company’s money without properly accounting for it. As the director, he decides the company will lend him and Aiesha the $2,000.

He draws up a written loan agreement for the loan to be repaid over two years, with an interest rate equal to the benchmark interest rate. The loan agreement identifies the company, Amir and Aiesha as the parties, and the repayment terms. It is signed by all parties.

The company lends Amir and Aiesha the money, which they pay back to the company with interest each year according to the agreement over the next two years. When Amir prepares the company tax return, he declares the interest as income for the company.

Pausing or permanently closing your business
Example 5: Jodie pausing her café

Jodie runs a café and needs to pause her business. She does not provide takeaway services and she is uncertain when she will reopen her business.

Jodie keeps the café’s assets and continues to pay reduced rent on the premises. The business has not permanently closed so she does not need to cancel her ABN. Jodie will continue to report business expenses and losses in her income tax return and lodge her BAS to claim GST credits for the GST on expenses related to her business.

Further info and training

Join us at the beginning of each month as we review the current tax landscape. Our monthly Online Tax Updates and Public Sessions are excellent and cost effective options to stay on top of your CPD requirements. You can also browse our recording library for past topics if you need to catch up!

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