Instant tax deductions for your embroidery business
Date Posted:13 June 2021
If you have or want to establish, a small home-based embroidery business, there has never been a better time to invest in new machinery.
Taxation can be a confusing topic, but a basic understanding is essential for running a business, and often the more you know the more you stand to benefit. What follows are answers to some of the most common questions we've been asked by customers in the past.
But first, we need to clearly state that the following information is of a general nature and does not take your specific needs or circumstances into consideration. We recommend that you discuss such a purchase with your accountant, tax or business adviser to ensure that your business qualifies and it suits your situation.
What is a tax deduction?
Business profits are taxed on the income earned minus any legitimate business expenses (“deductions”). Hence, deductions reduce the total amount of tax payable for the year. A deduction isn’t a full refund for the expense, but rather a saving on tax – the exact amount depends on your situation. Your accountant can help you work out exactly how much you’d save.
Sometimes, particularly for new businesses, it may take a few years before the business is profitable. Even in this situation a tax deduction can still be beneficial in the long run. In some circumstances, it is remembered (“carried over”) by the Tax Office to create a saving in later years. Again, only your accountant can give you specific advice on this.
Is a sewing or embroidery machine a tax deduction?
If you purchase a new piece of machinery that is primarily used in the running of your business then yes, it will most likely be considered a deductible expense. For a small home-sewing or embroidery business this would include, but is certainly not limited to, the following: embroidery machines, sewing machines, overlockers, cutting machines, printers etc. Even home-style machines can be tax deductible as long as they are used mainly for business purposes.
Typically, machinery is considered a “capital asset” purchase, which means you can only claim a small tax deduction each year as the value of the machine declines (“depreciates“). Depending on the particular product, it can take several years to claim all of the asset as a tax deduction.
Since 2015 any asset purchase up to the value of $20,000 could be claimed as a 100% tax deduction in the year that it was purchased and installed (for eligible businesses). More recently, the Australian Tax Office has introduced complete asset expensing for enterprises with less than $50 million in revenue. This means you'll get the full tax benefit for any value purchase this financial year, which will help your cash flow and reduce your tax bill. This current instant asset write-off threshold is in effect until June 30th, 2022.
Is it restricted to only one asset purchase?
No, the immediate tax deduction applies to as many pieces of new equipment as your business needs. It’s also a great time to consider new office furniture or computer equipment.
Do I need to purchase the asset outright or can it be financed?
Either – you can pay outright or finance the equipment. If you take out finance, you will usually also be entitled to claim the interest charged as a legitimate tax deduction as well. Be careful however, as there are many types of finance available, some of which are not ideal for taking advantage of the Federal Budget Tax Incentive. We can discuss the options available but ultimately you should talk to your financial/business adviser for advice.
Do I need to be a registered business or company to claim the 100% tax deduction?
All entities carrying on a business activity in Australia need to have an Australian Business Number (ABN). It’s free and easy to apply for – you’ll find more information by visiting the Queensland Government website and searching for “Register for ABN”. You don’t need to create a company, the simplest option is to operate under your own name as a sole trader (eg “Mary Smith”). We recommend also registering a business name (eg “Mary’s Topnotch Embroidery“). For more details visit the ASIC website at: www.asic.gov.au.
Do I need to be registered for GST?
If your business has revenue of less than $75,000 per year you do not need to be registered for GST. Your invoices to customers should be marked “GST Exempt”.
It sounds like I need an accountant
Yes! A good accountant is more than someone who looks after your shoebox of receipts at the end of the year. They should be a trusted business adviser, and be involved in any major business decisions. It could make a big difference to the profit you have at the end of the year, and avoid any potential brushes with the taxman. Accounting doesn’t have to be an expensive service – your local accounting practice is a great place to start.
A real-world example
Running a home-based embroidery business is a great opportunity to make a supplementary income while doing something you enjoy. This latest Federal Budget initiative has certainly helped the small business owner to grow and prosper. To make it easier to understand in context, here is a typical example:
Mary is semi-retired and has various sources of income. She works two days a week at a local café and also has some investment income which combined, totals $25,000 a year. Mary also runs a small embroidery business from her home to help supplement her income. This year she expects to have total sales of $52,000. After the cost of her raw materials and other normal business expenses, Mary’s business has a before-tax profit of $33,000. Add this to her personal income and Mary has a total taxable income of $58,000, resulting in tax payable of $11,557.
But if Mary purchased a new embroidery machine costing $10,000, she can now claim the entire $10,000 as an instant tax deduction. This reduces her taxable income to $48,000, which in turn reduces the amount of tax she will pay to just $8,107 — a total saving of $3,450.
In short, more than one third of the cost of her new machine has been subsidised by this latest Federal Budget initiative. Of course this is just an example and everyone’s circumstances are different. But if you run your own business or are thinking about starting one, now is a great time to act.
Running your own business can be very rewarding and is not as scary as you may think. We have pages of useful information on our website, including links to helpful government publications on how to start your own business.
We can help you with all aspects of sewing and embroidery machines for business, from selecting the right machinery to arranging finance. Plus you’ll receive our legendary Echidna after-sales service and support.