EOFY 2020: Tax tips for SMEs and sole traders

The end of financial year is just around the corner and in the wake of the COVID-19 pandemic and the earlier bushfire crisis, business owners are being advised to be on top of their game this year, as the stakes are higher than usual for most firms.

The Australian Taxation Office (ATO) is preparing for a mammoth task this tax time and is taking a range of additional measures to help firms process tax returns that may be quite different than they’re used to.

ATO Assistant Commissioner Karen Foat released a new “Tax Time Essentials” resource on Thursday, which is designed to help taxpayers understand what parts of their tax returns may change as a result of COVID-19.

“This tax time the ATO expects to see a substantial increase in people claiming deductions for working from home or for protective items required for work,” Foat said.

Working from home: Get your expenses right

Most business owners and their workers are getting things done from their homes at the moment, and that has some widespread tax implications.

In response to expected increase demand for working from home deductions, the ATO has launched a temporary ‘shortcut’  method that can be applied from March 1, 2020, to June 30, 2020.

Basically, the shortcut allows taxpayers to claim 80 cents for each hour they work from home if they’re fulfilling employment duties and have incurred additional expenses.

Crucially, it means taxpayers don’t have to have a separate or dedicated area of your home set aside to work from.

“If you use the shortcut method, all you need to do is keep a record of the hours you worked from home as evidence of your claim. But it is all inclusive, meaning you can’t claim for any other working from home expenses,” Foat said.

But here’s a warning: you won’t be able to claim traveling to and from work if you’re required to go into the office one or two days a week despite working from home the remainder of the time.

It’s also important to note that this method is optional — individuals can still choose to make working from home claims under existing arrangements that involve calculating all or part of their running expenses.

Careful! Your income may have changed during COVID-19

Here’s one for sole traders, which doesn’t apply to employees. If you are a sole trader receiving JobKeeper payments, you will need to include those payments as assessable income for your business.

This is just one consideration that falls under the income umbrella this year, because most people have had their take home pay affected by the pandemic in one way or another.

Every tax time business owners across the country make decisions about how much they’re going to pay themselves. But as Allied Business Accountants’ David McKellar explains, businesses need to make sure they’ve met their Pay-As-You-Go (PAYG) withholding obligations to claim deductions on salary payments.

“You need to ensure that you not only pay the wage, but that you also withhold the appropriate amount of tax and include it on your June Business Activity Statements and your PAYG Payment summaries,” McKellar says.

Should avoid the EOFY spending splurge?

We get it. It’s EOFY and there’s plenty of deals around. The instant asset write-off has been expanded to $150,000 and there are no shortage of items on business owner’s shopping lists.

But as Healthy Business Finance owner Stacey Price explains, it’s easier than you’d think to run yourself into cashflow issues at this time of the year — so spend wisely.

“Spending extra in time for EOFY might be great in theory, but do you really have the cashflow for those new tools, new car, new computer, extra subscriptions?” Price tells SmartCompany.

“If that is going to cost you extra money in the long-run, for minimal tax or productivity benefit, then are you really ending up in front? If you purchase on a loan/lease arrangement you will also need to factor in interest charges to the cashflow.”

Cashflow is always king, but particularly at the moment, given the impact of the coronavirus outbreak on revenue across the economy, and a forthcoming recession.

“Rather than spend money in areas that won’t bring increased efficiency or generate extra sales, maybe considering topping up your super contributions,” Price says.

“As always, you should speak to your financial advisor and understand the implications of extra contributions, but your future self will thank you for it down the track.”

Don’t forget the government has extended the $150,000 instant asset write-off until the end of the year, so there’s no need to rush if you can’t afford any additional assets right now.

Don’t forget super contributions

Because the COVID-19 pandemic has depressed incomes for many businesses in recent months, carrying forward your concessional superannuation cap could be an effective tax strategy this year, McKellar says.

“As long as your marginal tax rate outside of super is higher than the 15% contributions tax, then a super contribution will be an effective tax strategy,” he tells SmartCompany.

“While in previous years, it was seen as important to use your $25,000 concessional cap, this year, if your income is not as high due to COVID, you are able to carry forward your unused cap for up to 5 years.

“So if you only contribute $5000 this year, you may be able to contribute $45,000 next year instead of only $25,000. If you expect your income to be much higher next year, this may be a better strategy to defer the contribution.”

Get in early

There’s plenty of tax considerations this year, from expenses and deductions related to working from home, to charitable donations you’ve made in recent months as the world has turned upside down.

That means you are best getting to the front of the line and being proactive, rather than putting off dealing with your tax affairs. Think of it this way, the earlier you deal with it the faster you’ll get any refunds you are due. And that extra cash may be crucial in coming months.

“Instead of leaving your tax return to the very last minute of next year’s deadlines, as many individuals’ income has been impacted by COVID-19, you may wish to do your tax return earlier in case you are due a refund,” Price says.

“I am not talking about knocking on your tax agent’s doorstep on 1st July (please don’t do that), but book a meeting with them for August or September.”

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