Introduction
Knowing if you need an ABN to claim tax deductions can be confusing if you have personal and business income streams. We’re going to explain the need for an ABN to claim tax deductions by explaining a few things. First, we’ll briefly explain what an ABN is. Then, we’ll explain how the tax system works in Australia generally, before identifying when an ABN is necessary in claiming tax deductions.
What is an ABN?
An ABN is a unique eleven-digit number which identifies registered businesses in Australia. ABN’s were introduced in 1999 under A New Tax System (Australian Business Number) Act 1999 (Cth). Their main objective is ‘to make it easier for businesses to conduct their dealings with the Australian Government…by establishing a system for registering businesses and issuing them with unique identifying numbers…[to] identify themselves reliably’. Arguably the most common of these dealings between businesses and the Australian Government is taxation.
How the Australian tax system works
Tax deductions are an integral part of Australia’s tax system. This is because the system operates on a self-reporting basis. In terms of income tax, both individuals and businesses have to report their taxable income to the Australian Taxation Office (‘ATO’) each year. On top of this, they can assert reasons as to why this declared taxable income isn’t their actual income. For example, you may have incurred necessary expenses to actually earn that income (e.g. uniforms or fuel). These discrepancies are what we refer to as ‘tax deductions’. Tax requirements relating to individual income differ from those for business income. This includes the deductions you can claim.
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ABN requirements for taxable business income
The way the ATO distinguishes between individuals and businesses for tax purposes is through ABNs. Therefore, you need to use your ABN to lodge the correct tax return and claim the relevant deductions for your business.
Lodging tax returns
Your ABN is a necessary requirement for making a tax return regarding your business income. Sole traders declare their business income in their individual tax return. More specifically, you would typically declare both your ABN and income in a ‘business and professional items schedule’ (or similar item) of your tax return. Companies declare both their ABN and business income in a company tax return. Additionally, most of your company’s interactions with the ATO have to be managed using the ‘Relationship Authorisation Manager (‘RAM’)’. To use this service, it is necessary for you to provide your ABN.
Business tax deductions
As a business, you can claim tax deductions for expenses incurred in ‘carrying on your business’. Remember, if you are ‘carrying on a business’ in Australia, you need an ABN. It is also an offence to falsely declare that you have an ABN. Therefore, it is important to actually have an ABN to be eligible for these deductions. For mixed personal and business expenses, only the portion incurred for business purposes can be claimed. Examples of business deductions include car expenses (e.g. fuel and registration), operation expenses (e.g. equipment and internet services), and employee wages. For more information about how to claim business deductions in your tax return, we recommend talking to tax experts and lawyers.
Conclusion
In conclusion, an ABN is a unique identifying number given to Australian businesses, used to distinguish between individuals and businesses for tax purposes. Finally, it is necessary to have an ABN to lodge the correct income tax return for your business, and to claim business expenses as tax deductions.
