Want to take advantage of the small business tax break? Here’s a step by step guide on how to balance transfer your next business loan.
The 2015 Federal Government Budget introduced a new tax benefit for small businesses in the form of immediate tax deductions, which the 2017 Federal Government Budget has extended until 2018.
The 2017 budget extended this benefit to small businesses with an annual turnover of less that $10 million, if they make these purchases between 1 July 2017 and 30 June 2018. This means businesses with an annual turnover of less than $10 million can claim immediate tax deductions for business-related purchases of less than $20,000.
This gives small businesses a window of time when they can take advantage of these tax benefits.
While some small businesses may be interested in taking advantage of this new legislation, the potential debt from making these purchases may be deterring them from doing so. Unfortunately time is already running out on the tax benefits available, so if you’re a small business owner in this position, debt management options to consider might be to manage your debts with a balance transfer to a credit card or loan. This strategy allows you to pay off your purchases over time, while taking advantage of the currently available tax breaks.
The immediate tax offsets might help free up your cash flow for other business needs, while the acquisition of necessary business equipment might help boost profitability.
Comparing Credit Cards for Businesses
How can you pay for your new small business purchase with a balance transfer?
Here are just some of the finance options available for small business owners who want to pay for new purchases using a balance transfer.
- Business credit cards. Business credit cards allow business owners to receive tax deductions and prestige benefits, and are available for those with an ABN (Australian Business Number). Similar to a personal credit card, business credit cards let business owners purchase goods or services at a merchant location, or remotely via the telephone or Internet.
- Rewards credit cards. Rewards credit cards allow cardholders to earn rewards points as they spend on their card. The points you accumulate when you spend on rewards credit cards can be redeemed in various ways, including cashback, frequent flyer miles and discounts on goods and services. The goal with any rewards credit card is to maximise the value from the points earned on purchases relative to the fees associated with the card.
- Low interest rate credit cards. A low rate credit card can be used to repay large business purchases at a competitive interest rate, keeping your credit card balance down. If your business struggles to pay back the card balance each month, then a low interest credit card could help you save money in the long run.
- Personal loans. Small businesses can also use personal loans to pay to pay for their purchases of up to $20,000. Unlike a large loan (such as a mortgage), personal loans are often used to finance smaller purchases and debts – such as car repayments – and could be used to pay for business purchases of up to $20,000.
- Small business loans. If you prefer to keep your personal and business finances separate, you may want to consider taking out a small business loan instead of a personal loan. Small business loans are designed to suit people who operate with an Australian Business Number (ABN) and can be either secured or unsecured options. Many small business loans allow you to borrow up to $20,000 for new or existing expenses and offer tax deductible interest repayments.
What is the small business tax break and how can you make a claim on your purchase?
The 2017 Budget provides small businesses with an immediate deduction for individual assets costing less than $20,000. The $20,000 limit applies to each individual purchase, so small businesses can apply this new tax break rule to as many individual items they like. Note that business owners can’t claim tax breaks on certain purchases such as software developed in-house and stocks.
The $20,000 tax break applies to businesses that can demonstrate ongoing activity and trading through quarterly Business Activity Statements (BAS). These arrangements will remain available until 30 June 2018.
How you can balance transfer your new small business purchase using a credit card
If you’re a small business owner who is interested in taking advantage of the new tax break, you may want to consider applying for a balance transfer to consolidate the subsequent debt from your purchases. To make it easy for you, here’s a step-by-step guide on how to balance transfer your new small business purchases of $20,000 or less.
- Make the planned purchases. Use an existing line of credit to make the planned purchases for your business. This step will allow you to take advantage of the low, promotional interest rates available for balance transfer credit cards.
- Compare your options and read the fine print. Keep in mind that most balance transfer cards have limitations. For example, that your balance cannot exceed the credit limit and some cards only allow balance transfers of up to a certain amount of the credit limit, such as 70% or 95%.
- Submit your balance transfer application. You will need to fill out the application and nominate the amount you’d like to transfer and the existing business account you would like to deduct it from.
- Activate your card. Once you get your new card and activate it, the balance transfer will be processed by your new credit card provider. This usually takes between 3 to 15 business days.
- Check your statement. After the balance transfer has been processed, the details of the transaction will appear on your new credit card statement. To ensure the balance transfer has cleared the total balance, check your old credit card statement for a zero balance (or lower balance if you were unable to transfer the total amount).
- Close or manage your old account. If you were able to transfer the total balance, you may consider closing the old credit card to avoid any annual fees. If not, you will need to continue repaying your existing debt.
- Manage your card. Once the balance transfer is complete, you can begin paying off your debt. Some cards may have promotional offers in place, such as a period of low or zero interest charges, and it can be a good idea to pay off as much as reasonably possible before this expires.
A similar process applies if you plan to balance transfer your small business purchases with a personal or business loan. You will need to already have the debt from your purchases, compare and apply for a product that suits your needs, and then manage the new account.
Things to be aware of
- Credit and balance transfer limits. Most credit cards have limits on the eligible balance transfer amount and won’t accept balance transfers that exceed the credit limit. Therefore, if your business has a debt that exceeds the credit limit of your new card, you will only be able to transfer a portion of the total debt. Here, you might want to prioritise paying off the one with poorer rates.
- The balance transfer rate and period. While 0% for the first 12 months may sound appealing, most balance transfer cards will revert to a hefty cash advance or purchase rate at the end of the introductory period. Make sure you confirm what these fees and conditions are to avoid a nasty surprise when the rate reverts.
- Associated fees. As with any credit card comparison, read the fine print and research the card’s features, including relevant fees and exclusions, to ensure that the benefits of the card outweigh the costs.
Luke is a sole trader who owns and runs a landscaping business. When he heard about the extended concessions for small business in the 2017 budget, he decided to purchase new tools. All up he spent about $20,000 on new gear, including a second hand van that he claims as an immediate tax deduction. It’s important to note that Luke can not claim on the plants he purchases for his business.
Luke purchased these items using his credit card, the ANZ Low Rate Mastercard. Although this card has a low ongoing rate of interest, Luke decided to transfer the balance to a new credit card, the Bank of Melbourne Vertigo Platinum Visa credit card. This credit card has a 0% balance transfer offer for 20 months. That means Luke has 20 months to pay off the items he purchased for his business without paying any additional interest, while also getting the benefit of the government’s small business tax break.
The government first introduced the tax break in the 2015 Budget in an attempt to increase the depreciation threshold and improve cash flow for small businesses. In 2017 this now applies to small businesses with an income threshold of $10 million, so more businesses can benefit from these immediate tax deductions.
A balance transfer is just one of the ways small business owners can repay their purchases, and there is a wide range of credit cards that offer you competitive rates for this type of expense.
Make a comparison based on your business’ individual financial needs, and factor in your tax claim requirements and any fees involved to help work out whether you can benefit from a balance transfer on new business purchases.
Frequently asked questions
Can I claim items that are more than $20,000?
Individual items over $20,000 cannot be claimed to the fullest extent, but a single purchase might consist of multiple items. For example, you might get a business vehicle for $19,000, along with $2,000 of necessary business accessories. While it costs $21,000 all up, you may be able to claim the vehicle and accessories separately for the full benefits.
Assets over $20,000 can also be pooled together and depreciated at the same rate. These assets are depreciated at 15% in the first income year, and 30% per year thereafter.
What items can I claim based on the tax break announced in the 2017 budget?
You can claim tax breaks on the following items related to your business as long as they cost less than $20,000 each:
- Vehicles such as cars, vans and motorbikes
- Equipment including photocopiers, lawnmowers, ovens, fridges, coffee machines
- Furnishings such as carpets, tables and chairs
- Items including computers, generators, solar panels, pumps, sound and security systems.
See the Australian Tax Office’s website or call 13 28 61 to find out more about eligible purchases and exclusions.
What if my business purchase exceeds the card’s credit limit that I want to balance transfer to?
Most credit cards pose minimums and maximums for balance transfers, with the latter usually complying with either part or all of the credit limit. If the balance of your original card exceeds the balance transfer limit, you will only be able to transfer part of it onto your new card.