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In Australia, the small business industry is considered the engine room of the economy and also the largest employer. This industry has been able to generate over 5 million jobs and according to the tax office, there are around 4 million small businesses in the country.
From their perspective, a small business is one whose turnover is less than $2 million. There are several requirements that a person needs to fulfil to run a small business in Australia successfully. Below is a tax guide for small business in Australia.
What is a Business Expense?
Can be defined as the necessary and ordinary expense for running a business. Ordinary means that other traders in the same business also pay for the same things while necessary means that the expense helps run the business. The business owner would not be able to carry out his or her business tasks without it.
Here are some of the common types of business expenses that small businesses may be familiar with.
Types of Business Expenses
Startup Expenses
These include all the costs that you incur while setting up a business such as:
- license fees
- advertising costs
- legal fees
- office supplies
- market research expenses
- accounting fees
They also consist of all the operating expenses you acquire before the business starts operating such as the cost of employee training and those that you use to carry out your research.
Operating Expenses
These are day-to-day costs that a company requires to remain in business. They are put into two categories; general and selling expenses. The former are all the expenditure you incur in managing and supervising the business while the latter include any costs related to the marketing of the business, salaries, supplies, rent, utilities, maintenance, repair, car and fuel expenses and all other operating expenses.
Capital Expenses
This is the cost you incur buying assets that have a useful life of over a year. They include machinery, vehicles, patents, books, equipment and furniture.
Inventory Costs
These are all the direct and indirect costs that are associated with keeping inventory. They include taxes, storage costs, insurance and shortage costs. Inventory is divided into 3 categories; raw materials, work in progress and the finished product.
What Small Business Expenses Are Deductible?
Any expense that meets the criteria of ordinary and necessary for running a business is tax deductible. Although some business expenses are fully deductible, others are just partially deductible. This means that only a percentage of the total cost can be claimed for tax purposes. Here is a list of some fully claimable expenses for small business:
- Accounting fees
- Subscriptions to publications
- Employee benefit programs
- Advertising and marketing costs
- Membership Dues
- Legal fees
- Insurance expenses
- Wages paid to all contract workers
- Interest paid
- Continuing training and education expenses
- Laundry charges
- Equipment rentals
- Office supplies and expenses
- Printing expenses
- Office space rent
- Repair and maintenance costs
Utility expenses
Normally, business expenditure should be separated from personal and capital expenses and all the overheads used in figuring the cost of goods sold. Business owners can also claim immediate deductions for capital assets like computers, plant and equipment and any vehicles that cost them less than $20,000 each.
Partially Deductible Expenses
Some business expenses are not fully deductible, and can include:
Meals and Entertainment- This is because you also benefit from the entertainment and meal. Only 50% of the expense is deductible.
Gifts– if you choose to offer your client a gift, you can spend as much as you want.
However, you can only deduct 25% on each gift. Instead, you should consider making a charitable donation in the client’s name as this might be fully deductible.
What You Need In Order to Take Deductions
When you are filing out your returns, you are entitled to claim for some deductions on various expenses. You are free to claim for the deduction for those expenses you incur while running your business provided that they are directly related to how you earn assessable income.
Work-related Expenses
For you to claim a work-related deduction:
- You must have personally used the money and not reimbursed it
- You must have proof in the form of records
- The expense must be directly related to earning your income
Any work expense that was reimbursed by your employer is not considered deductible as it has to be work-related only. Employees are free to claim work-related expenses of the particular financial year they incurred them.
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