We hope you enjoy our Tax Time 2022 content series.
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.
For small business tax returns 2021–22, the ATO will be focusing on:
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.
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:
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
The toolkit includes:
In addition, information on the following topics are not part of the toolkit but the links are available on the toolkit directory website:
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:
The Motor vehicle expenses fact sheet explains:
The Travel expenses fact sheet helps a small business owner claiming a deduction for expenses they incur when travelling for business, and explains:
The Digital product expenses fact sheet (new for 2021–22) explains:
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:
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:
All of these fact sheets also outline the small business taxpayer’s record-keeping obligations.
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.
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 can also claim the cloud storage costs ($150 per month) as an operating expense in its tax return.
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.
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.
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.
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