Is your business claiming all its tax deductions?

It’s a simple enough question – are you claiming all your business’s tax deductions? But the answer may not be so simple. By TERRY HAYES of Thomson Legal & Regulatory.

By Terry Hayes

It’s a simple enough question – are you claiming all your business’s tax deductions? But the answer may not be so simple. The general principle under Australia’s tax laws for businesses is that an expense is tax deductible if it is incurred in carrying on the business. That is, the expense must be related to the conduct of the business.

Every business is different, so an exhaustive list of what is tax deductible will vary. The following is a sample of the kinds of expenses that could be deductible – it might get you thinking about what you are claiming concerning your business.

• Salary and wages and bonuses paid to employees.
• FBT on fringe benefits paid is deductible.
• Staff recruitment costs (advertising, agency fees).
• The cost of drawing up employment agreements.
• Superannuation contributions.
• Workers compensation insurance.
• Rent or lease costs of business premises (the rent itself, lease document preparation costs, etc).
• Bank fees and charges on business bank accounts.
• Bad debts (must actually be written off as bad).
• Borrowing expenses, for example interest on funds borrowed that are used in the carrying on of the business, legal expenses, registration fees. Note that this year-by-year test allows for changes in the use of the borrowed funds.
• The cost of trading stock, including freight, taxes and insurance.
• Licence fees.
• Motor vehicle expenses.
• Repairs.
• Lease of equipment or plant.
• Depreciation of assets of the business. This can include the businesses’ buildings themselves.
• Advertising.
• Power costs.
• The cost of promotional giveaways.
• Gifts and donations to the value of $2 or more – this can include gifts of things like property (including trading stock) bought by the business during the 12 months before the gift was made.
• Transport and freight expenses.
• Fees of a registered tax agent.
• Cost of attending conferences related to the activities of the business.
• Payroll tax and land tax on business premises.

It should be noted that it is not for the Tax Commissioner to say how much a business owner, or any taxpayer, should expend in operating the business. For example, a business owner might choose to buy an expensive car for use in the business, rather than a cheap runabout. That’s the owner’s choice and the Commissioner cannot dictate that. However, with cars, the tax law prescribes a limit on the cost of a car that can be claimed for depreciation of the car, that is, its decline in value. That car cost limit is indexed each year, and for the current 2007-08 financial year is $57,123.

From a tax point of view, the tax office’s concern is only with the amount actually spent and whether that expenditure is necessarily connected with the production of assessable income by the business. Of course, business owners will make their own commercial decisions on how much they will spend on the business.

For SMEs, an important consideration in thinking about the tax deductibility of an expense is whether it is totally referable to the business. Some expenses, such as travel costs and motor vehicle costs, may be part-business (deductible) and part-private (non-deductible) expenses. If so, those costs need to be apportioned so that only the business portion is claimed as a deduction. Again, this seems obvious, but the tax office says it often finds this a problem area that taxpayers get wrong.

Another thing to remember here is that tax deduction claims for business expenses must be able to be proved – by keeping invoices and receipts, maintenance of motor vehicle log books, etc. Again, obvious, but if the money has not actually been spent on the business expense (or a commitment to spending the money has not been made), it is not deductible.

A business will incur all sorts of expenses over its lifetime – some will be tax deductible, some won’t. The trick is to keep good records and talk to your accountant or adviser.