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CPA Australia’s top tip for small businesses is to ask their tax adviser if they’re eligible for any COVID-related tax incentives and deductions this tax time.CPA Australia Senior Manager Tax Policy Elinor Kasapidis says, “Ninety-five per cent of small businesses seek professional advice with their taxes. This year it’s even more important to ask the right questions and provide relevant information to help your adviser determine if you’re eligible for any COVID-related tax incentives and deductions.

“Around 98 per cent of businesses in Australia are small businesses. Together they employ over 40 per cent of the entire Australian workforce. Their importance to our economy cannot be understated.

“Small businesses did it tough over the past 12 months, with many still struggling. Every dollar of tax saved can help them recover and grow. Making sure businesses claim everything they’re entitled to is important.”

The 2020-21 tax year is the first full year of operating in a COVID-environment. There are multiple tax deductions and incentives small businesses owners need to be aware of.

“Small businesses which need to buy assets should take maximum advantage of depreciation incentives introduced as part of COVID-19 economic stimulus. However, the benefit will depend on your circumstances, so ask your tax agent for advice before making major purchases.”

COVID-19 has left many businesses experiencing cash flow difficulties or financial distress. Some small businesses may have a higher than usual number of bad debts on their books this income year.

“Businesses can claim a deduction for bad debts if there is little or no likelihood of the debt being recovered, but proceed with caution. Debts that have been forgiven can’t be claimed.

“The temporary loss carry-back is also available for companies that made a loss this year. This allows businesses to get a refund for previous years’ tax paid instead of carrying the loss forward.

“If your business is in financial difficulty, or you have complex tax matters like debt refinancing and restructuring, it’s critical to get proper tax and accounting advice as early as possible.”

Some small businesses experienced significant fluctuations in their inventory levels and value due to COVID-19. “Ask your accountant whether a different trading stock valuation method for tax purposes may be more effective.”

Many businesses received COVID-19-related government supports or grants during the income year. “Unless there is a specific exception, government payments designed to assist businesses continue operating, such as JobKeeper, need to be included in assessable income.”

The tax rate for companies with an annual turnover of less than $50 million has been reduced from 27.5 to 26 per cent for the 2020-21 income year.

However, companies that earn 80 per cent or more of their income from passive investments such as rental income or interest income will continue to pay the full company tax rate of 30 per cent.

Many businesses reduced their tax instalments during 2020-21. “If you reduced your instalments and your business did better than expected, be prepared for a tax bill when you lodge your return.”

The ATO is cracking down on incorrect expense deductions and unreported cash transactions in 2020-21 tax returns. “Business owners are increasingly being contacted regarding their income and expense claims.”

“It’s legal to accept payment in cash, but you must keep accurate records of these transactions. The ATO’s data capabilities are vast and growing, and so is their ability to join the dots when it comes to expenses claims and cash transactions.”

There are also rules around the private use of business assets and funds. “If you took money out of your businesses, for example, to pay school fees, you need to account for it as a fringe benefit, salary, dividend, loan or repayment. Each of these has tax implications and getting it wrong can be costly.”