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ATO reminder to small businesses this tax time

Small businesses are again in the ATO’s sights this tax time, with a focus on stamping out deductions not related to business income, overclaiming of expenses, omission of business income and insufficient records to substantiate claims. The ATO reminds small business taxpayers that it receives external data from a variety of sources, including the taxable payments reporting system for certain industries. This data can be used to data-match information included in tax returns to ensure completeness and accuracy.

Regarding deductions, the ATO reminds businesses that they can only claim what they are entitled to, and the claiming method may differ depending on the type of structure used (ie sole trader, partnership, trust, or company). For example, sole traders need to claim deductions in their individual tax return in the “Business and professional items” schedule, while partnerships, trusts, and companies need to claim deductions in their respective tax returns.

If a small business has purchased equipment or capital items in the 2021–2022 financial year, it may be able to claim an immediate deduction for the cost of those assets, subject to meeting eligibility criteria. However, only the business portion of the cost of the asset is eligible for immediate deduction. For example, if the business purchased a printer for $500, but it is used for both business and private purposes on an 80/20 basis, then the business can only claim a $400 deduction (80% of the purchase price, to match the 80% business usage proportion).

Because of COVID-19, many small businesses may have downsized their operations and relocated their offices to their homes. The ATO notes that a deduction can be claimed for the portion of expenses that relate to running the business. This includes occupancy expenses (ie mortgage interest or rent, council rates, land taxes, and home insurance premiums), running expenses (ie electricity, phone, decline in value of plant and equipment, furniture and furnishing repairs, and cleaning), and expenses of business motor vehicle travel between home and other locations.

However, small business owners should be aware that if they decide to claim a deduction for the portion of expenses in relation to running their business from home, they may be subject to capital gains tax (CGT) on that portion of their home if they later sell it, even if the home was their main residence.

On the other side of the coin, the ATO will also be focusing on the income of small businesses; the focus will not only be on cash, EFTPOS, and credit or debit card transactions, but also on coupons, online transactions, and income from platforms such as PayPal, WeChat or Alipay. According to the ATO, almost half of Australia’s 1.9 million sole traders have non-business income such as salary and wages, or income from investments which can be data-matched.

In addition, those small businesses (including sole traders) in the building and construction, courier, cleaning, information technology, road freight, security, and investigation or surveillance industries will have their payment information provided to the ATO through the taxable payments reporting system, which will ultimately flow to data-matching. Therefore, completeness and accuracy are important this year.