Are you claiming everything you possibly can at tax time? If not, here’s a run-down of those expenses that can help reduce tax and therefore put more money into your pocket, or back into your business. By Chris Sheedy
The first piece of accounting advice Dominic Morello gives to clients around tax time is not to try to spend more money in order create greater tax deductions. You’re spending a dollar in order to receive, at best, a 45-cent deduction. That dollar is far better off in your own pocket.
“It lowers your tax rate, but you’re still out of pocket,” says Morello, principal of DNM Group, a company specialising in business advisory and taxation advice. “Spend the money instead on business advice. Use it to get a better understanding of your business and to make accurate cash projections. Focus on increasing profit, not on increasing expenses just to get a tax deduction.”
It is wise advice, but at the same time a business owner must also ensure they have made all possible claims for that year’s expenses. Some are obvious, but some are less so.
“A lot of what people forget to claim is around petty cash expenses, the things that business owners will buy with cash, on weekdays or weekends, and forget to properly document with receipts and records,” Morello says.
One group of deductions that people in the restaurant and café industry often forget is research and development costs, Morello says. By this he means the costs of travel, dining and so on, when the purpose is business research.
“If it’s business related, it is deductible,” he says. “But then there’s also a level of quality of documentation required. People who own restaurants can generally claim research costs, including the costs of eating out, as long as it is business related. This may include a detailed travel diary indicating exactly how much of the trip was business related.”
“If it’s business related, it is deductible. But then there’s also a level of quality of documentation required.”—Dominic Morello, principal, DNM Group
Christmas parties and other entertaining expenses are also deductible, but only to a specific limit, Morello says. Such expenses usually stretch to $300 per employee.
Aly Garrett, director at CMS Private Advisory, an accounting and business advisory firm whose clients include those in the tourism and hospitality industries, says entertaining costs are a very complicated area of tax law. Depending on where the entertaining is being done or how much it costs, it may or may not be deductible.
Small business tax rules also recently changed to allow any business asset purchase up to $20,000 to be immediately deductible, as long as the business is turning over less than $2 million annually. But this only applies until the end of the current financial year.
Garrett says deductions can help to reveal where a business can save. After all, deductions are simply business expenses. If those expenses are unusually high, then they should be reduced.
“If the owner is a chef, they will often overspend on stock,” Garrett says. “Sometimes they have too much variety. They also often go a little bit overboard on staffing because they run the business from the heart rather than from the head. It’s very important for restaurant and café owners to think about the exact profit they will make from every dish. This will help them figure out what sort of service quality they can afford, rather than the service quality they’d most love to offer.”
In terms of deductibles, Garrett says the big ticket items that all restaurant and catering business owners should report are business-related purchases as well as stock that is obsolete, or is written off for some other reason—perhaps it is lost or stolen. This means regular stocktakes are vital.
“When you’re in a low-margin industry, you really have to be across all of your accounts, deductions and costs, and you must understand how your business is tracking.”—Aly Garrett, director, CMS Private Advisory
All of your wage, business insurance and occupancy costs (electricity, rent, gas, furniture, etc.), cleaning and laundry costs, advertising and marketing costs, depreciating value of goods, donations (as long as you receive nothing in return), subscriptions, industry association fees, website costs, technology purchased for use within the business and more, are deductible as long as they are business related and you have the necessary documentation. So are various building costs such as security and air conditioning systems.
Interestingly, if you are using your own motor vehicle then you can’t claim costs for driving to work each day but you can claim the kilometres you travel, for example, to meet with suppliers and pick up goods. Equipment purchased for use within the restaurant is deductible either immediately or through a depreciation scheme. Interest on loan payments for business related purchases should also be deductible, Garrett says. Even depreciation of the building itself can be claimed at 2.5 per cent annually if the business owner also owns the building in which the business operates.
You’ll attract unwanted attention from the Australian Taxation Office if you don’t report stock that you take home for personal use, Garrett says. The ATO has determined that any restaurant owner is likely to take $4,580 of stock for personal use in a financial year. If they don’t report it, they will likely warrant further inspection.
A surprising deduction for restaurant and café owners, Morello says, is the cost related to running a home office. An accountant would usually focus on whether the home office is a functionally dedicated space, and whether it is used solely as an office. But if you’re wanting to claim the use of the dining room table for work while you’re home, it’s not going to pass muster.
When you add up the deductions a business fails to claim, it can become a significant amount, Morello says. If a staff member bought something on their own credit card rather than the business card, it can cause issues. If you picked up some stock on your way to work and forgot to ask for a receipt, that cost is no longer deductible. Cars without log books can also be a problem for businesses hoping to reduce their tax bills.
When you’re in a low-margin industry, you really have to be across all of your accounts, deductions and costs, and you must understand how your business is tracking,” Garrett says. “In order to survive you have to become great at running a business, or employ specialist consultants who can help you become great.”