Tax loopholes for small businesses

Understanding tax deductions and offsets

Instant asset write-off

The instant asset write-off allows eligible businesses to immediately deduct the cost of new or second-hand assets used in their operations. For the 2023–24 financial year, businesses with an aggregated turnover of less than $10 million can claim an immediate deduction for assets costing less than $20,000, provided the assets are first used or installed ready for use between 1 July 2023 and 30 June 2024. This measure encourages businesses to invest in assets that enhance productivity, such as machinery, vehicles, or technology.

Small business income tax offset

Sole traders and individuals with shares of net small business income from a partnership or trust may be eligible for the small business income tax offset. This offset can reduce the tax payable on business income by up to $1,000 each year. Eligibility criteria include:

• Being a sole trader or having a share of net small business income from a partnership or trust.
• The business must have an aggregated turnover of less than $5 million.

Temporary full expensing

Temporary full expensing allows businesses with an aggregated turnover of less than $5 billion to deduct the full cost of eligible depreciating assets. This measure applies to assets acquired from 6 October 2020 and first used or installed by 30 June 2023.

While this provision has concluded, understanding its application can inform future investment decisions should similar incentives be introduced.

Strategic business structuring

Choosing the appropriate business structure is crucial for tax efficiency and asset protection.

Operating as a company

Incorporating your business can offer tax advantages. Companies in Australia benefit from a flat tax rate of 25% for base rate entities, which may be lower than individual marginal tax rates.

Additionally, companies can retain profits for reinvestment, providing flexibility in managing tax liabilities.

Establishing a family trust

A family trust allows income distribution among beneficiaries, potentially lowering the overall tax burden by allocating income to individuals in lower tax brackets. Trusts also offer asset protection benefits.

However, trusts are subject to complex regulations, and professional advice is essential to ensure compliance.

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Maximising deductions through business expenses

Claiming operating expenses

Operating expenses directly related to earning assessable income are generally deductible. Common deductible expenses include:

• Rent and utilities for business premises.
• Office supplies and equipment.
• Insurance premiums.
• Advertising and marketing costs.
• Professional fees (e.g., accounting, legal services).
• Maintaining accurate records is vital to substantiate these claims.

Vehicle and travel expenses

Business-related vehicle and travel expenses are deductible. This includes:

• Fuel and maintenance costs.
• Depreciation of business vehicles.
• Airfares, accommodation, and meals for business travel.
• It's important to differentiate between personal and business use to ensure only eligible expenses are claimed.

Home office deductions

If you operate your business from home, you may be entitled to claim a portion of home expenses, such as:

• Electricity and gas.
• Internet and phone usage.
• Depreciation of office furniture and equipment.
• The ATO provides methods to calculate these deductions, including the fixed-rate and actual cost methods.

Leveraging government incentives

Research and Development (R&D) Tax Incentive

The R&D Tax Incentive encourages businesses to engage in research and development activities by providing tax offsets for eligible R&D expenditures. Companies with an aggregated turnover of less than $20 million may receive a refundable tax offset of 43.5%.

This incentive supports innovation and can significantly reduce tax liabilities for eligible businesses.

GST concessions

Small businesses with an aggregated turnover of less than $10 million may be eligible for GST concessions, such as:

• Accounting for GST on a cash basis.
• Paying GST by instalments.
• Annual apportionment of GST input tax credits.
• These concessions can simplify GST reporting and improve cash flow management.

Proactive tax planning strategies

Income splitting

Distributing income among family members in lower tax brackets can reduce the overall tax payable. This strategy is commonly implemented through family trusts or partnerships.

Caution is necessary to ensure compliance with the ATO's guidelines on income distribution.

Prepaying expenses

Prepaying certain business expenses, such as rent or insurance, can bring forward deductions into the current financial year, reducing taxable income.

This strategy is particularly useful when anticipating higher income in the current year compared to the next.

Contributing to superannuation

Making concessional contributions to superannuation funds can provide tax deductions while securing retirement savings. The annual cap for concessional contributions is $27,500.

Consult with a financial advisor to ensure contributions align with your financial goals and comply with superannuation regulations.

Avoiding common pitfalls

While pursuing tax-saving strategies, it's crucial to avoid actions that could trigger ATO scrutiny.

Accurate record-keeping

Maintaining comprehensive records of income and expenses is essential. Inadequate documentation can lead to denied deductions and potential penalties.

Utilising accounting software can streamline record-keeping and ensure compliance.

Avoiding personal use of business assets

Using business assets for personal purposes without proper documentation can result in fringe benefits tax (FBT) liabilities.

Ensure clear separation between business and personal use of assets and maintain appropriate records.

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How Thriday can maximise your taxes

Thriday takes the stress out of tax time by automatically tracking income, expenses, deductions, and GST in real time. Powered by AI, Thriday categorises every transaction, generates accurate financial reports, and prepares your business for BAS and tax lodgements—without the need for spreadsheets or a bookkeeper. By using Thriday, you can ensure you're claiming every eligible deduction, staying compliant with ATO rules, and maximising your tax efficiency—all in one seamless platform built specifically for small business owners.

Final thoughts

Legally minimising tax liabilities is a prudent aspect of managing a small business in Australia. By understanding and utilising available deductions, offsets, and strategic planning, businesses can enhance their financial health and sustainability.

Engaging with qualified tax professionals and staying informed about current tax laws are critical components of effective tax management. Implementing these strategies not only ensures compliance but also positions your business for long-term success.