ABN and Small Business Basics - what you need to know!
So, you have registered your ABN, applied for a Trading Name. What next??
What records do you need to keep? What deductions can you claim?
For the purpose of this blog, the term “business” means an type of business – sole trader, partnership, Company (Pty Ltd) or a Trading Trust.
Most income your business receives is assessable income – which means you need to declare it and it's subject to tax.
You can claim tax deductions for most costs you incur in running your business but there are exceptions. For example, you cannot claim deductions for private or domestic expenses. Entertainment, fines and some other expenses are also specifically excluded.
The rules for business income and deductions vary depending on your business structure, whether you hold and sell trading stock, and the nature of your income and expenses.
You can claim a deduction for most expenses you incur in running your business as long as they are directly related to earning your assessable income.
You can generally claim operating expenses (such as office stationery and wages) in the year you incur them. However, you typically claim capital expenses (such as buildings, machinery and equipment) over a longer period of time.
Most expenses you incur in running your business are tax deductible. You claim these deductions in the annual tax return for your business or, if you’re a sole trader, in your personal tax return.
What you can claim
You can only claim expenses that are directly related to earning your assessable income.
If you make a purchase or use an asset for both business and private purposes, you can only claim a deduction for the business portion of the expense. If you use an item in your business for only part of a year, you may need to restrict your claim to the period it was used for the business.
What you cannot claim
You can't claim a deduction for the goods and services tax (GST) component of a purchase if you can claim it as a GST credit on your business activity statement. You also can't claim:
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, such as entertainment and parking fines.
We have seen a big increase in “home based businesses “of late. It is so important for Start-ups and small businesses to limit their costs and outlays in the first two years of trading. An effective way of doing this is by running a home based businesses.
The following information specifically applies to these businesses:
Running your business from home
If your home is also your place of business, you can claim income tax deductions for a portion of the costs of owning, maintaining and using your home for this purpose. When you sell your home you may be liable for capital gains tax.
Your home is your place of business if you run your business from home, and a room is set aside exclusively for your business activities. Examples of a place of business include:
a small business operator whose main office is in their home
a tradesperson or craftsperson who has their workshop at home
a doctor or dentist who has their surgery or consulting room at home.
Deductions you can claim
If you run your business from home, you may be able to claim the following expenses:
Utility costs – The cost of using a room's utilities, such as gas and electricity – these should be apportioned according to actual usage.
Business phone costs – if you used a telephone exclusively for business. You can claim for the rental and calls, but not the installation costs. If you used the telephone for both business and private calls, you can claim a deduction for business calls.
Decline in value (depreciation) of office plant and equipment (for example, desks, chairs and computers). If you also used the equipment for private purposes, your claim must be apportioned.
Decline in value of curtains, carpets and light fittings.
Occupancy expenses – your costs of owning or renting the house (such as rent, mortgage interest, insurance and rates). You can claim the portion of these costs that relates to the room or workshop you use as a place of business. A common method of working out how much to claim is the floor area (as a proportion of the floor area in your whole home).
Please note: If you have a place where you conduct business elsewhere – such as a factory, shop or office – generally your home will not be considered a place of business, and you can't claim occupancy expenses.
If you own your own home and are not renting, you need to be aware of the following:
Capital gains and the main residence exemption
Generally, when you sell your home or main residence, you can ignore a capital gain or loss you make. This is called the 'main residence exemption'.
If your home is your place of business, you generally can't obtain the full main residence exemption. However, you are probably entitled to a partial exemption.
To determine how much of the capital gain is not exempt, you generally need to work out the following:
the proportion of floor area of your home that is set aside to produce income
the period of time you used it for this purpose.
If you first used your home to produce income after 20 August 1996, the period before this is not taken into account in working out the amount of any capital gain or loss. Instead, you use the market value of your home at the time it was first used to produce income.
It's a good idea to get a valuation of your home at the time you first use it as your place of business, so when you come to sell your home you don't pay more capital gains tax than necessary.
We advise that anyone new to business book in for an appointment with one of our Qualified Accountants, to review their personal situation. Please call us on 07 5502 6673