Tax Time 2022: businesses get ready

As the end of another tax year approaches, the ATO is reminding businesses that it is time to:

• see if there are tax-deductible items the business needs before 30 June;
• check if there are any concessions the business can access before 30 June – for example, the small business restructure rollover CGT concession or the increased small business income tax offset (now 16%) for sole traders (capped at $1,000);
• think about their recordkeeping habits this past year – should anything be done differently in future?

For businesses with employees, the Single Touch Payroll (STP) information for 2021–2022 must be finalised by 14 July. Businesses should let their employees know when the information is finalised, so they can lodge their income tax returns.

Deductions

Increasing tax deductions will lead to a lower tax bill. For example, businesses can bring forward expenditure from the next tax year to the current tax year and may be able to deduct the full cost of a depreciating asset under the temporary full expensing rules. An immediate deduction is also available for start-up costs and certain prepaid expenses.

Businesses that are in an industry that requires physical contact with customers, such as healthcare, retail or hospitality, can claim deductions for expenses related to COVID-19 safety. This includes hand sanitiser, sneeze or cough guards, other personal protective equipment and cleaning supplies.

Charitable donations (including, in some circumstances, donating trading stock) are a good way to increase deductions. Don’t forget to keep receipts for all charitable donations. The deductibility status of charities can be checked at https://www.abn.business.gov.au/Tools/DgrListing.

For sole traders or partners in a partnership, the benefits of reducing their taxable income could include:

• reducing their marginal tax rate from, for example, 45% to 37%, or 37% to 32.5%;
• qualifying for the maximum amount of the low and middle income offset – remember it has been increased to a maximum of $1,500 for this tax year; and
• avoiding liability for the Medicare levy surcharge (at least 1%) if they don’t have appropriate private health insurance.

The ATO’s golden rules

The ATO has three golden rules for a valid business deduction.

1. The expense must have been for business, not private, use.
2. If the expense is for a mix of business and private use, only the business portion can be claimed as a deduction.
3. The business must have records to prove it incurred the expense.

For example, if a business owner buys a laptop and only uses it for their business, they can claim a deduction for the full purchase price. However, if the laptop is used 50% of the time for the business and 50% of the time for private use, only 50% of the purchase price can be claimed as a deduction.

The GST component of the purchase price cannot be claimed as a deduction if it can be claimed as a GST credit on the business activity statement.

Recordkeeping

Records explain the tax and super-related transactions conducted by a business. Businesses are legally required to keep records of all transactions relating to their tax and superannuation affairs as they start, run, sell, change or close the business, specifically:

• any documents related to the business’s income and expenses;
• any documents containing details of any election, choice, estimate, determination or calculation made for the business’s tax and super affairs, including how any estimate, determination or calculation was made.
• Your clients should make sure that they understand what records are needed for their business and make accurate and complete recordkeeping practices a part of their daily business activities. You may like to use the following general information to talk to your clients about what records they need to keep and for how long.

What is a record?

A record explains the tax and super-related transactions conducted by your business.

The record needs to contain enough information for the ATO to determine the essential features or purpose of the transactions. The minimum information that needs to be on the record is generally:

• the date, amount, and character (eg sale, purchase, wages, rental) and the relevant GST information for the transaction;
• the purpose of the transaction; and
• any relevant relationships between the parties to the transaction.

Five rules for recordkeeping

The ATO has five recordkeeping rules, which are based on law and the ATO’s views.

1. You need to keep all records related to starting, running, changing, and selling or closing your business that are relevant to your tax and super affairs.
   If your expenses relate to business use and personal use, make sure you have clear documents to show the business portion.
2. The relevant information in your records must not be changed (for example, by using electronic sales suppression tools) and must be stored in a way that protects the information from being changed or the record from being damaged.
   You need to be able to reconstruct your original data if your record-keeping system changes over time.
3. You need to keep most records for five years.
   Generally, the five-year retention period for each record starts from when you prepared or obtained the record, or completed the transactions or acts those records relate to, whichever is later. However, in some situations, the start of the five-year retention period is different. For example, for super contributions for employees, the five years starts from the date of the contribution.
   You also need to keep all information about any routine procedures you have for destroying digital records.
4. You need to be able to show the ATO your records if they ask for them. The ATO will also need to be able to check that your recordkeeping system meets the recordkeeping requirements.
   If you store your data and records digitally using an encryption system, you will need to provide encryption keys and information about how to access the data when asked. You also need to ensure the ATO can extract and convert your data into a standard data format (eg, Excel or CSV).
5. Your records must be in English or able to be easily converted to English.