Online Accounting School
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Reducing tax by maximizing tax deductions
Individuals and companies, irrespective of their size or scale of operations, are plagued with one question – how can they manage to reduce their tax liability? People need to operate within the purview of the laws laid down by the government and within this perimeter they need to seek ways to reduce the liability on them. One of the best ways to reduce your total payable tax is to maximize on the possibilities for tax deductions. Before you can venture out on your quest to find ways to get maximum tax refunds and deductions, you need to be familiar and thorough in your understanding of basic tax concepts. This knowledge will be critical if you are planning to work on your taxes alone.
Tax deduction is considered as the sum of money that has been spent by a person (this is a compulsory condition) and which has been incurred in your earnings or your income. This is an expenditure, which has been incurred because you made an investment or donation or took part in any such activity, which involved spending something that you had earned. So what you need to understand here is that the tax deduction is an expenditure that is related to your total income. When you deduct this expenditure from your total income, the resultant figure of money is called as your taxable income. No matter how complicated the tax system gets, the definition for taxable income and tax deductions remains the same. Refer to Australian Taxation Office for more details.
The fact that you should understand from these concepts is that your tax liability is calculated on the basis of your taxable income. So, if you can reduce your taxable income by claiming tax deductions then your tax liability would also get reduced. For the residents of Australia, it is possible to calculate and work on your taxes alone without seeking help from any professional because here we follow a self assessment tax system. Even if you do hire an accountant he or she would look to you to provide the information based on which they would calculate your tax liability. Once they complete the exhaustive calculations of deductions and refunds and the tax that is payable, you would be asked to sign the papers that would confer all the legal responsibility on you. So whether you calculate your tax liability on your own or you ask your accountant to make the calculations, the ultimate responsibility and accountability lie with you.
In your search for effective ways to reduce the amount of tax that you would have to pay, you would notice one pattern that would set everything else in motion: the higher your business expenditures, the higher would be a refund or the tax deductions that you will be able to claim. This means that your tax deductions would be proportional to the business expenditures that you have incurred in a particular business year. The first thing, then, which you should do to reduce your tax liability is to be meticulous in your records of all your expenses. There are certain categories under which you can claim deductions. Being aware of these is necessary because it has been known to happen that businessmen do not realize that the expense they are incurring is tax deductible.
Some of the most categories that you should keep in mind are travel, prepaid expenses, repairs, telephone expenses, security expenses, interest on a loan property or any asset for the business, cleaning or housekeeping services and even bank charges among others. Of these, travel, telephone charges and security charges are often the categories in which maximum expenses are incurred so you must be sure that you keep an account of all the money that you spend when you are traveling for business or when you make business calls.
Accountants Sydney are advising, that for small business owners, the smallest deduction can get translated into huge benefits, and they can get a substantial refund or cash benefit. One other way that you can get or you can claim tax deductions are by making prepaid expenses. You are allowed to claim a deduction of your taxable income if you have made prepaid expenses. Another way you can do this is by deferring your income. When you delay your income so that you receive it after June 30th, you can avoid having to pay any tax on it. The best way you can defer your income is by reviewing the maturity dates of your investments and term deposits. Make sure that you get this income after 1st July, and so you would not have to pay tax on them for that year.
Businessmen can also think of doing some charity work to claim a tax deduction. This is one expense for which they are allowed a full deduction. The same applies for individuals as well. For businesses, it would also be advisable to keep reviewing your business structure to check if it has become redundant or if it is applicable as per the current structure. You can reallocate cost centers and profit centers to reduce your tax liability. Bad debts are also a source of the tax deduction along with stationery. Although stationery is one item that people take for granted, you should give it due consideration when you are working on your taxes.
You can also write off your assets to get tax deductions. Businesses can immediately write off small assets that have worth less than $6500. If you have an accountant then he or she would be able to advise you in detail about this aspect, but be sure that you enquire about this. If you have a large staff working for you then you would liable to pay out for their superannuation. This could also be used to get a tax deduction. Normally these payouts are not due till July but if you pay them in June then you can get a tax deduction in the amount paid.
These are some of the points that can help small business companies claim tax deductions on their income.