How to maximise your tax return as a small business

This content is for educational purposes and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.

Taking the plunge to start your own business is a big step. Whether you’re a brand-new sole trader, a freelancer on the side, or someone who wants to make money from their hobby, there’s one financial obligation that any self-employed person needs to understand — tax.

I’m talking about not just paying what you owe, but working towards reducing your tax bill.

After all, why pay more than you have to?

Understanding how tax works, what tax you have to pay and how you can claim back tax deductions can help you save hundreds — if not thousands — of dollars.

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1. Claim every allowable business expense

There are three main rules when it comes to claiming your tax deductions:

You must have already incurred the expense and can prove it
The expense must have been made out of your own pocket
The expense must be work-related only. No private expenses can be claimed.

Claimer beware: You cannot claim any personal expenses, even if your expenses are mixed.

Calculator on orange background — Photo: Towfiqu barbhuiya on Unsplash

You can only claim business expenses.

This can be a temptation for the self-employed, but you don’t want to be caught out. The Australian Taxation Office (ATO) have been at this for a long time. They know some expenses are business and private in nature. ATO will look to see if you’re claiming the right percentage of your costs for business use.

You could be surprised at how common these types of expenses are.

You may have bought or leased a car for your business, but also use it privately on the weekends and to take the kids to school.
Perhaps you’ve attended an interstate conference and stayed an extra day at a resort in your personal time.
Perhaps you bought a computer for work, but also use it to surf the net and stream movies.

Business and private expenses can be apportioned out by claiming a percentage of the costs relative to your use. Showing how you worked out the percentage use is a must.

The ATO may ask for a logbook to support your vehicle expenses or a travel diary when claiming travel. They may also request receipts, tax invoices, bank statements or written correspondence. Accounting software like MYOB Business can help you keep track of all the important details and documents.

While the ATO expect a true and fair estimation, it’s best to be prepared in any way you can.

Pro tax tip: Capital expenses can be claimed over time using depreciation methods, while running costs can be claimed in the same year they’ve been incurred.

As a self-employed worker, the types of expenses you can claim include:

Vehicle – purchase price or lease costs, fuel, oil, maintenance and repair
Travel – plane, train, bus, taxi fares, accommodation and food
Working from home – running costs such as electricity, gas, heating and cooling, as well as capital costs such as computer equipment, laptops and office furniture (more on this below)
Business expenses – advertising, promotions, printing
Professional services – graphic designers, web developers, bookkeeping and accountancy service fees
The costs of organising your tax affairs – software, tax agent or tax accountant fees

Pro tax tip: The ATO deems entertainment costs as a private expense, even if you’ve taken a business associate to dinner. Traffic fines, schooling, childcare and hobbies are also considered private expenses and will be rejected as business deductions.

Work your business from home?

Woman working at a laptop in her kitchen

If you're working from home during the income year, you might have some additional expenses that you need to cover.

The good news is that the revised fixed-rate method can help you claim any tax deductions you may have.

Basically, this method lets you apportion your expenses on a fair and reasonable basis using a fixed rate of 67c per hour for each hour worked from home. Previously, the fixed rate was 52 cents per hour.

This fixed rate covers a few different things, including:

Energy expenses for things like lighting, heating/cooling and any electronic items you use while working.
Internet and data expenses, as well as mobile and home telephone expenses.
Computer consumables like printer ink and stationery.

All of these things can add up, so it's nice to have a clear way to keep track of them.

Proper records are key

The ATO is cracking down on proof of working from home expenses this year, and requirements have changed. If you're planning on claiming work-from-home expenses on your taxes for the 2024-25 income year or later, there are some record-keeping requirements you'll need to follow.

First off, you'll need to keep track of the number of hours you worked from home for the entire income year.

You can't just estimate this based on a particular period and apply it to the rest of the year. You’ll need to keep a record of your hours using things like:

Timesheets
Rosters
Logs of time spent accessing work systems
Time-tracking apps
A diary

As for expenses like energy, mobile and home telephone, and internet, you'll need to keep a bill for one month or quarter to show how much you spent. If the bill isn't in your name, you'll also need additional evidence like a joint credit card statement or a lease agreement.

For occasional expenses like stationery and computer consumables, you'll only need to keep one receipt.

If you don't keep records of your hours worked and expenses incurred, you won't be able to make a claim.

Finally, if you're using any depreciating assets for work, you'll need to keep receipts for up to five years after claiming the last depreciation expense. If the receipt doesn't specify what the asset is, you can add that information yourself before you lodge your tax return.

You'll also need to keep records showing how you used the asset for work, which can be demonstrated by keeping records for a representative four-week period.

What if I'm working from the kitchen table?

Good news: you don't need a fancy home office to claim work-from-home expenses! Even if you're just working from your dining table or a shared space, you can still make a claim using this method.

And if there are multiple people in your household who are working from home and incurring additional expenses, you can all make a claim too. You don't have to be the only one using the space in order to claim.

Just keep in mind that you don't have to incur every single expense listed in order to make a claim. As long as you're incurring some of the expenses related to things like energy, internet, or phone use, you should be able to use this method to make a claim on your taxes.

2. Pre-pay expenses and plan ahead

At tax time, it pays to judge how you’re spending and making money to work out how to reduce your tax.

If you’re expecting a high income for a financial year, but think it will be lower in the next financial year, prepaying some expenses may be the way to go. This will reduce your taxable income, while giving you the benefits in the oncoming year.

Expenses such as these can be pre-paid to reduce your taxable income:

Loan interest repayments
Lease charges
Insurances
Subscriptions
Seminars
Self-education

Pro tax tip: Prepaying may also result in a discount from your supplier, so it might be smart to contact them prior to paying.

This can be a bit tricky to work out and might need some time to organize, so a chat with a tax agent is recommended.

Capital expenses

Capital purchases can be claimed if bought by June 30. For example:

Motor vehicles
Computer equipment
Manufacturing equipment
Office and warehouse fittings

As a part of the federal budget, most assets can be claimed at 100% in the year they’re purchased. Capital items purchased at other times will need to be depreciated over several years. Check your eligibility here.

If you’re a sole trader, you can receive 50% CGT discount on a capital gain.

You must have owned the asset for 12 months or more to be eligible.

Any capital gains you owe can be reduced by applying capital losses for the income year, as well as net unclaimed capital losses from earlier years.

Small business tax concessions

Tax concessions are available to small businesses earning under $10 million in aggregated turnover for all concessions except for Capital Gains Tax (CGT), or $2 million in aggregated turnover for CGT concessions only.

Have a chat with your tax accountant to see if you qualify and apply for these concessions.

Pro tax tip: There are CGT differences between sole trader and company business structures.

3. Charge your super account

As a self-employed person, you’re in charge of your day-to-day affairs, paying yourself an income and also paying yourself super.

Concessional (before-tax) super payments are a great way to save tax.

You can deposit up to $27,500 into your super and claim a tax deduction. The tax rate on super contributions is a flat 15% which may be lower than your current marginal rate.

Payments can also be made from your post-tax income. These are called non-concessional payments. It won’t change your tax rate and there are caps. The non-concessional contributions cap for the 2023/24 financial year is:

$110,000 a year or
$330,000 in a rolling three-year periodunder the ‘bring forward provision’ if you are under age 67

Pro tax tip: If your income is under $56,112 in the 2023/24 financial year and you make a non-concessional payment before 30 June 2024, you may be entitled to receive a Government Co-contribution payment where you’ll receive up to 50 cents per dollar you contribute up to a maximum of $500.

A little time spent now will pay off at EOFY

It’s well worth the time and effort to work out what you can do and how you can implement tax-saving strategies. If you haven’t spoken to an accountant or tax agent, maybe it’s time to make an appointment.

After all, you work hard. You deserve to keep as much of that hard earned profit as you can.

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