What can small businesses claim this year?
As a small business owner, there are a plethora of tax benefits, incentives, concessions and offsets that can potentially be used. This represents a significant challenge when you have 1,001 matters to think about and an enterprise to run. Here are three changes to the simplified depreciation rules that you may have missed (they apply from July 1, 2012).
1. Increase to instant asset write-off threshold
Eligible small businesses that use the small business pooling rules can now claim an outright deduction for most depreciating assets purchased that cost less than $6,500 each – an increase from the original amount of $1,000.
Catherine runs a small business as a photographer. She has elected to use the small business pool method for depreciation purposes. She buys a $5,900 camera and a $4,500 high resolution printer. Both the camera and printer are depreciating assets used entirely for the business. As each costs less than $6,500, she can claim a deduction of $5,900 for the camera and $4,500 for the printer in the 2012-13 income year.
2. Accelerated deduction for motor vehicles.
A small business from July 1, 2012 can claim a $5,000 deduction for a motor vehicle if they satisfy the following conditions:
- they are an eligible small business (turnover under $2 million)
- they choose to use small business pooling in order to work out their depreciation
- the car is worth more than $6,500 (if the car is worth less than $6,500 and you satisfy the previous two conditions, you will be able to write it off under the increased instant asset write-off threshold)
The remainder of the cost is deducted through the general small business pool at 15% for the first year and 30% for later years.
Ali runs an eligible small business and uses pooling to calculate his depreciation. He bought a $37,080 truck in the 2012-13 income year which was used 50% for business purposes. Ali calculated his depreciation deduction for the 2012-13 income year like this: $5,000 + 15% x [(50% x $37,080) – $5,000] = $7,031.
3. Simplified depreciation pooling rules
For the 2012-13 income year, the long life small business pool and the general small business pool have been consolidated into a single pool to be written off at one rate. After the pools are consolidated the new increased opening pool balance is subject to the general pool rate of 30%. This means that from July 1, 2012, most depreciating assets that cost $6,500 or more (regardless of their effective life) can be pooled under the simplified depreciation rules and deducted at 15% in the year they are added and a single rate of 30% in subsequent years.
Gina’s Pizzeria is a small business. At the end of the 2011-12 income year the closing balance of its long life pool was $8,000 and the closing balance of its general small business pool was $10,000. For the 2012-13 income year, Gina’s Pizzeria’s long life pool no longer exists but its general small business pool is now $18,000 ($8,000 + $10,000).
During the year, Gina’s purchased a new wood-fired oven for $7,500. The business can deduct 15% of the cost of the oven in the 2012-13 income year.
The calculation of the total deduction for the general small business pool for the 2012-13 income year is made up of the following items:
Opening Pool Balance
[($10,000 Old General Pool
+ $8,000 Old Long Life Pool) X 30%]………. $5,400
Depreciation of assets acquired during the year
[($7,500 wood-fire oven) X 15%]…………. $1,125
Total deduction……………………………………….. $6,525
The closing pool balance is calculated by adding the opening pool balance and the cost of all new assets acquired during the year minus the total deduction calculated above. For Gina, the closing pool balance is calculated as follows:
Opening pool balance:………………………….. $18,000
Assets acquired during the year……………. $7,500
(from previous calculation)………………… ($6,525)
Closing pool balance…………………………….. $18,975
Below are some concessions that have been available to small businesses since before July 1, 2012:
- Expenses paid in advance – Eligible small businesses can use the prepayments concession to claim a deduction for expenses they prepaid provided they receive the goods or services in full within 12 months of making the prepayment. Some prepaid expenses can be claimed even if the goods or services are not received within 12 months. They are as follows:
a. goods and services costing less than $1,000
b. a prepayment of salary or wages (under a contract of service), or
c. required to be incurred by:
i. a law of the Commonwealth, a state or a territory (for example, statutory fees or charges payable to a government body such as vehicle registration fees), or
ii. an order of a court of the Commonwealth, a state or a territory.
- Expenses you can claim in the income year you incur them – Working or operating expenses you incur for the everyday running of your business are called revenue expenses. Revenue expenses can sometimes include office stationery, rent of office premises, and salary or wages. You can generally claim a deduction for these expenses in the year you incur them.
Consult this office for a more exhaustive list of expenses you can claim in the same income year you incur them.
- Expenses you can claim over time – These include the cost of assets that have a longer life (typically longer than one income year) or that relate to establishing, replacing, enlarging or improving the structure of your business – typically referred to as capital expenses.
These can include depreciating assets that have a limited life expectancy such as computers, electrical tools, furniture, carpets and curtains, motor vehicles, and plant and equipment.
Also includes borrowing costs (other than interest which may be deductible in the year it is incurred) which are deductible over either the life of the loan or five years, whichever is less. This is provided the funds borrowed are used for the purpose of producing your income.
Some of the more unusual deductions that businesses can claim include:
- environmental protection activities
- exploration or prospecting
- trees in carbon sink forests
- expenses of managing tax affairs i.e. the fees you pay this office for managing your tax affairs, and
- water facilities and horticultural plants.
- Some expenses you can never claim include:
- private or domestic expenses, such as childcare fees or clothes for your family
- expenses relating to income that is not taxable, such as money you earn from a hobby
- expenses that are specifically non-deductible under the tax law, such as parking fines.
Consult this office for more advice on the new simplified depreciation rules and information on other deductions that small business owners can claim.