If you are a sole trader in Australia, there are several tax deductions that you may be able to claim to reduce your taxable income. In fact, you can deduct many of the costs associated with running your sole trader business as a tax deduction.
So, this article will provide an overview of the most common deductions that sole traders can claim.
Keep in mind that you should always speak to an accountant or tax specialist to determine which deductions are available to you and how best to claim them.
1. Occupancy Expenses
In the event you work from home, you can claim occupancy expenses for that portion of your home you use for your business. These expenses can include:
- property insurance;
- interest on a mortgage;
- council rates; and
- land taxes.
However, you need to meet specific eligibility criteria to successfully claim these deductions. The Australian Tax Office (ATO) requires home-based sole traders to pass the interest deductibility test. Essentially, the test helps identify whether the space you’ve set aside in your home to conduct your business can be characterised as a place of business.
There are a few indicators that can help determine this, including:
- there is an area set aside exclusively (or almost exclusively) for business use;
- You clearly mark the area as your business (for example, with a sign);
- there isn’t an easy way to convert this space into a space for domestic use (such as a spare bedroom); and
- this area is where you frequently see clients.
Once you’ve passed the interest deductibility test, you’ll need to calculate the portion of your home that you use for work purposes – you’ll claim your occupancy expenses based on that proportion. To do this, you’ll need to multiply the percentage of the floor area you use for your home office by your total occupancy expenses.
For example, if your hair salon covers 15% of the floor area of your home, you can claim a tax deduction for 15% of your occupancy expenses.
2. Running Expenses
Running expenses are generally classified as expenses you incur in the day-to-day operations of your business. The ATO allows you to claim any of the following expenses as a tax deduction:
- the cost of home office equipment such as computers, printers, furniture and phones
- general home office expenses such as stationery, printer ink and paper;
- utilities such as internet, aircon, electricity, gas and telephone lines;
- cleaning costs; and
- any office equipment or furniture repair costs.
3. Super Fund Contributions
The current concessional contribution cap is $27,500, which means you can contribute up to $27,500 and claim a sole trader tax deduction.
4. Prepaid Expenses
Paying some of your expenses in advance is an excellent tax minimisation strategy for sole traders. Not only do you not have to worry about paying them the following year, but you can also claim your prepaid expenses as a tax deduction.
You can generally pay the following expenses in advance and claim a tax deduction:
- service contracts;
- travel expenses;
- conference bookings or training; and
- professional membership subscriptions.
If you have an office and a range of office equipment that you use to carry out your business operations, you may know that the value of those assets decreases each year. This is generally due to wear and tear, and the ATO refers to it as depreciation.
Depreciation is quite an unassuming expense for sole traders, and many don’t actually take advantage of this tax deduction. But it can make a significant difference to your bottom line, so it’s worth investigating what expenses you can claim depreciation on.
To give you an idea, you can claim depreciation on things like:
- office furniture;
- carpets or other types of flooring;
- printers and photocopiers;
- desktop computers; and
6. Bad Debts
In the event you are unable to collect a debt from one or more of your clients, you can write them off and claim a sole trader tax deduction. However, you’ll have to take a few necessary steps before you can just write the debts off, including:
- notified the debtor of their outstanding payments;
- ensured enough reminder notices were sent;
- determined your debtor’s financial situation; and
- taken appropriate debt recovery steps to retrieve the debt.
If you can prove that you attempted to, on numerous occasions, retrieve the debt but was unsuccessful, you should be able to write it off and claim a tax deduction.
There are many benefits to claiming sole trader tax deductions, especially if you know exactly what you can claim and how you can claim it. Having this knowledge will enable you to make the most of all tax return opportunities available to you as a sole proprietor.
However, you must retain all proof of the expenses. Without adequate records, the ATO won’t allow you to claim any tax deductions. So make sure to keep all your receipts, invoices, and any other documents relating to the business portion of your expenses incurred.
DAVIE MACH – Director of Box Advisory
Davie has over 10 years of experience in advising businesses in management accounting and taxation issues. He leads a passionate team who are dedicated to offering proactive and outstanding service to our clients.
Davie’s astute business knowledge and extensive experience in providing tax and consulting advice, has paved the way to success for many businesses.
He is a member of the Chartered Accountants Australia and New Zealand, the Australian Tax Practitioners Board and holds a Bachelor of Commerce degree from the University of New South Wales.
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