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Small Business Taxable Income


What is taxable income?

In order to pay your taxation obligations, you must first understand how to calculate the amount that is due and as a result, what is your taxable income. Generally, any revenue from carrying on a business is income, although there is some revenue that, for a number of reasons, is exempt.

Tax is paid on your "taxable income" which includes your assessable income less any exempt income. From your assessable income you are allowed tax deductions to arrive at your taxable income.

This is demonstrated in the following formula:

Assessable Income – Allowable Deductions = Taxable Income

Allowable tax deductions include all expenses that are incurred in gaining or producing assessable income, except when they are of a capital or a private or domestic nature. When all deductions have been made from assessable income, the resulting figure is your taxable income. The cost of any goods sold, together with rent, repairs, leases, telephone, stationery, bank fees, rates, etc., all qualify as allowable deductions.

Some common deductions for small businesses which owners should know about include:

• Wages and salaries to employees
• Insurance premiums
• Repairs to equipment or premises
• Motor vehicles
• Bad debts
• Superannuation.

These are just a few the areas which can incur tax deductions. All will have factors which influence whether a deduction is allowable or not, and how to work out the deductable amount. For example, if you need a vehicle for your business, you can claim a tax deduction for any vehicle expenses incurred in earning your living. Deductions may be claimed for: petrol, oil, repairs, servicing, new tyres, lease charges, interest on any loan and depreciation.


How to calculate vehicle deductions

A self-employed sole trader can claim tax deductions for vehicle expenses in two ways. The first is by apportioning actual expenses between income producing activities and private use of the vehicle. The second method is by claiming an arbitrary percentage of vehicle expenses or the cost of the vehicle.

When claiming deductions based on actual expenses, a log book must be kept for at least 12 weeks in the first year of assessment and when there are any changes in travel patterns. Documentary evidence of expenses (invoices, receipts, etc.) is also required.

The arbitrary methods available are:

• One-third of total car expenses. Documentary evidence of expenses must be kept but no log books are required.

• Deduction of 12% of the cost of the vehicle. In the case of a leased vehicle, 12% of the market value at the commencement of the lease.

Also available is a set rate per kilometre method. This is available for business travel up to 5,000 kms. If greater than 5,000 kms are travelled and you still wish to use this method, the maximum deduction available works out at about 55 cents per kilometre.

However, these expenses are fully deductible only to the extent that the vehicle is used for business purposes and these expenses must be apportioned for business use.

What is business use? The distance you drive from your home to your place of business is not deductible, but the distance you drive from your place of business to anywhere else for business purposes is.

Likewise, while deductions are allowable for repairs, they are not permitted for improvements or replacement items for your business.

Therefore, if you upgrade some piece of equipment, a computer for instance, to improve the efficiency of your business, this cost is not allowed. However if your existing computer malfunctions, the repair costs are allowable.

We advise you to seek help from your accountant to make sure you are getting the greatest deductions available for your business.


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