One of the big benefits of being a sole trader is the flexibility you have in managing your business. This flexibility also applies to your tax obligations, which are more straightforward when compared to other business structures.
One of the most common questions we receive each year is ‘how can a sole trader pay less tax?’
This article will outline some key strategies for sole trader tax reductions, so you can minimise the amount of tax you pay this financial year.
Your tax accountant can help you minimise the amount of tax you pay, so you keep more of your hard-earned money where it belongs. Read on to find out more about how we can help with tax planning, and book in a free 90-minute business tax strategy session.
What is a sole trader?
As a sole trader, you’re the owner and operator of your business. As the owner and operator, you’ll typically trade either under your own name or a business name.
You might be a freelancer or a contractor, operating your business with your home as your base of operations.
While a sole trader is typically a solo affair, you’re able to take on employees. But you’re still in complete control of your business, and take on all legal liability.
Sole traders are in a good position when it comes to tax deductions as you’re able to claim most direct business expenses. Most—but not all.
Below are some common expenses you can claim, and some you may not have realised you’re able to claim.
Claiming operating expenses as a sole trader
Essentially, you’re able to claim the majority of expenses that you’ve incurred in order to generate income. This includes things like your hardware or software expenses, equipment cost, vehicle expenses, and even rent.
When you claim these operating expenses as tax deductions, this means the amount of taxable income attributed to your tax file number is reduced. This in turn effectively reduces the amount of tax you’re required to pay.
But this doesn’t mean you should just go out and spend gratuitously in the name of a tax deduction. You’re still spending money, which eats away at your profit. And the less profit you make, the less cash you receive.
So when looking at making a purchase purely as a way to reduce tax, make sure you weigh up whether or not it’s actually needed.
Prepaying expenses as a sole trader
There’s no getting around it: running a business incurs expenses.
But some of these expenses you’re able to pay in advance.
So, for example, you may be able to pay your rent, service contracts, insurance, conference bookings, or any professional association subscriptions up to a year in advance.
This means that you don’t have to worry about them in the following year, and you’re able to claim them as a tax deduction for the current financial year.
If you do choose this option, the amount must be over $1,000. It also doesn’t include salary or wages, or any costs incurred under state law.
Asset purchases as a sole trader
As a sole trader there are likely to be a number of important assets that your business requires in order to run. This includes things like vehicles, laptop or desktop computer, and equipment needed in the operation of your business.
If your business has an aggregate turnover of less than $50,000,000, then these assets qualify for the Australian government’s instant asset write-off. This allows you to claim the cost of these assets as sole trader tax reductions, rather than in depreciation costs throughout their lifetime.
All you need to do is determine how much of this asset’s use is for your business, and then, you’re able to write off this amount as a tax deduction that year.
On 24 March this year the Coronavirus Economic Response Package Omnibus Bill 2020 was approved, which significantly increased the instant asset write-off threshold from $30,000 to $150,000 per asset. Initially available until 30 June 2020, this increase has been extended until 31 December 2020. It’s also important to note that the threshold for passenger vehicles has been capped at $57,581.
Here’s how it works.
Your business relies on you being mobile, so you buy a $30,000 vehicle. If 80% of your car’s use is for work purposes, then $24,000 of this purchase can be considered a business asset. You can then deduct this $24,000 from your taxable income for the financial year.
Even if you’ve bought the car on a finance option, you can still receive a tax deduction for the amount in that financial year.
Superannuation contributions as a sole trader
Making contributions to your super not only boosts your retirement savings—it’s also a smart way to reduce your tax.
Sole traders can claim up to $25,000 of their super contributions as a tax deduction. If you’re over 60, you can claim up to $35,000.
It’s easy to do, too. You simply make a contribution to your super fund and add this as an expense when it comes time to lodge your tax return. Then at the end of the year, register the amount you wish to claim as a deduction with your super fund. Once this is approved you’ll be able to claim it on your tax.
Get in touch with your super fund to request the form that allows you to claim a tax deduction for personal contributions.
Writing off bad debts as a sole trader
In the current uncertain climate of COVID-19, businesses all across the world are feeling the crunch of bad debts.
As a sole trader, you’re able to write these bad debts off as tax deductions. You must document when the debt is written off, and then claim the tax deduction in that financial year.
However, this is a bit more involved than simply waiting too long on a payment. You must be able to prove that you’ve taken appropriate steps to retrieve the debt. This includes:
- Logging all communication with the debtor
- Evidence of reminder notices
- Proof of actions taken to determine their financial position
- Any formal debt recovery proceedings - bad debt collection can be outsourced to a professional recovery service. Once a debt is non-recoverable after 90 days, you should consider using a service such as Debt Recoveries Australia.
So be sure to keep records of all dealings with your debtors, just in case.
If you have the necessary evidence that proves you’re sitting on a bad debt, then you should be able to claim this debt as a tax deduction.
Other deductions sole traders can make
Outside of the tactics outlined above, there may be other income tax deductions you can make that you may not have realised. This can include deductions like:
- Non-asset business expenses, such as advertising
- Phone and internet bills
- Home office expenses
- Home repairs or maintenance (if you conduct business within your home)
- Bank fees, and interest on your accounts
- Business travel expenses
- Training, education, and professional membership fees
On top of this, one simple thing you can claim is your accounting fees.
The final word
Engaging the services of an expert tax accountant and paying for good advice not only counts as a tax deduction, but will likely lead to more deductions.
So when tax time rolls around, it pays to get in contact with the right accountant.