With H&R Block Australia’s research showing that 32% of Australians believe that the ATO will be scrutinising their tax return more closely this year, there’s never been a more important time to understand what you can and can’t claim. So, what are some of the key deductions your retail business could look to claim in your tax return? Here’s my A-Z guide to tax deductibility.
Advertising and sponsorship
Costs to promote your brand and garner publicity for your business are deductible and can be claimed, as can advertising or sponsorship to sell ‘trading stock’ and to hire staff. Take care to ensure that the costs incurred do not fall within the definition of ‘entertainment’, which is not usually deductible.
A debt that is unpaid and deemed to be a ‘bad’ debt is an allowable deduction as long as it was included as assessable income in the present or even a previous income year, and that it is written off as bad (uncollectable) in the same year that a deduction is claimed.
Expenses incurred in order to get the borrowed funds can be claimed as a deduction, the proviso being that the money must be used to produce assessable income. These expenses can include legal costs, registration fees, valuation costs, fees to guarantee an overdraft and any commissions paid. But you may have to spread the deductions over more than one year, depending on the extent of the expenses, to cover the period of the loan. These deductions are quite separate from the interest actually incurred on the borrowed funds, which is also deductible if the borrowed money is used to produce income.
Travel for business purposes can usually be claimed. Keep all receipts and your itinerary or diary, and of course airline tickets. Note the nature of the travel, its purpose, and where, when and for how long (and look out for any personal activities that are mixed in, as these expenses are non-deductible).
Car expense deductions
You can claim a full deduction for any expenses your business incurs while running a vehicle, leased or owned. If your business operates as a sole trader or partnership, you can claim a proportion of deductions for vehicle expenses to the extent the vehicle is used for business-related purposes, but they are subject to substantiation rules. If your business operates as a company, you can claim the entire cost, regardless of whether its business or private use, but private use is then subject to Fringe Benefits Tax.
You can generally claim a deduction for any costs involved with providing a fringe benefit to an employee.
Home work claims
If your work is done from home, or is partly home-based, you can usually claim deductions for expenses such as interest, telephone, insurance and a portion of running expenses like heating, lighting or cleaning.
Workers compensation insurance premiums are deductible, as are insurance costs for fire, business-use cars, public liability, theft and loss of profits.
Plant and equipment (depreciating assets)
Larger items like cars or even buildings can be claimed over time as depreciating assets. “Temporary full expensing” means that most items of a capital nature can be written off immediately, if acquired after 6 October 2020. And you may also be able to claim (either immediately or over a five year period) certain capital costs in setting up or ceasing a business, as long as an outright deduction can’t be claimed for that expenditure.
Repairs, replacement, maintenance
A deduction is available for the upkeep of machinery, tools or premises used to produce assessable income (provided they are not ‘capital’ costs). These deductions include things like painting, plumbing and electrical maintenance, upkeep to windows and fences, fixing up shop fittings, guttering and machinery maintenance. Generally it means fixing defects, not totally replacing an item, and does not include improvements or work done immediately after acquiring an asset.
You can claim a deduction for a contribution made to your own super fund if self-employed, although care must be exercised if you also have some earnings from employment upon which super contributions have been paid by the employer. Contributions to an employee’s fund should also be deductible. Employers legally must contribute to employees’ super under the superannuation guarantee laws.
Salary and wages
Operating as a trust or a company means you can claim a deduction for salary paid to employees or to yourself provided the salary is in respect of duties connected with the business. Partnerships can’t claim for salary paid to a partner, but a deduction is available for salary paid to other employees. Sole traders can’t claim for salary paid to themselves (and you can’t claim for amounts taken from the business for private purposes).
Get the right trading stock valuation.
Damaged and obsolete stock can be written down or written off entirely and a tax deduction claimed. Given that many retailers will have substantial surplus stock because of COVID-19 (and the bushfires before that) that cannot be sold, now is the time to crystalise that tax deduction.
Tax management expenses
Managing your business tax affairs can cost, and you can claim these as deductions. This includes paying a bookkeeper, having a tax agent prepare and lodge tax returns and activity statements, attending to a tax audit or the costs of appealing or objecting to an assessment.
For a telephone you use for business only, you can claim for calls and rental, but not installation. If the phone is used for both business and private calls, you’re able to claim all business calls and a proportional part of the rental. An itemised phone account will guide this, but you can also base the claim on using a representative four week period to get an average rate for the whole year.
Losses incurred by theft or stealing by an employee may be allowable deductions.
Still have some questions about lodging your tax return? Talk to H&R Block.
Mark Chapman is director of tax communications at H&R Block.