Sole trader tax deductions in Australia

End of financial year looming? Or just managing your quarterly BAS? Here are some tips for tax time plus details of some common sole trader tax deductions.

 

Our tax time tips

End of financial year is an important time for your sole trader business. With some preparation and planning, you can make tax time work for you – not against you.

 

Here we'll walk you through what you can do to get prepared for tax time, and help you think about what business expenses you may be able to claim.

Get your financials in order and up-to-date

As a sole trader, it’s important to keep on top of your financial affairs. To help do that, you'll need a record of your business financials for the year, which would generally be a balance sheet and profit and loss statement. 

 

A balance sheet is a statement of your financial position for the year. It outlines your assets (stock, cash, money owed to you) and liabilities (loans, money you owe), and also shows your net assets or equity. 

 

A profit and loss (P&L) statement tells you how much money your business made over a period of time, listing your income and expenses. Subtracting your total expenses from total income allows you to calculate your profit. 

 

Need help putting your financials together? The Federal Government has balance sheet and profit and loss templates to get you started.

Ensure you have sufficient funds

As a sole trader, you may not have made PAYG payments throughout the year. If that’s the case, and depending on your business income, you could be faced with a big tax bill to pay at the end of financial year.

 

It may be difficult to estimate your tax costs as you go but to avoid a single big hit on your cash flow, try to put an amount of money aside on a regular basis throughout the year in preparation for tax time. Tucking it away in a business savings account could help keep it out of reach. 

 

This is one of the most important things you can do as a sole trader to ensure your cash flow isn't affected too much when it comes to tax time.

Think about your tax deductions

You can generally claim a deduction for most expenses required to keep your business running. It's important to maintain a record of your business expenses by keeping receipts you've accumulated throughout the financial year.  

Common tax deductions for sole traders

Examples of areas you may be able to claim a tax deduction on include: 

 

• Depreciation on business equipment such as laptops and mobile phones (and see more examples listed later)
• Software used for your business 
• Marketing costs
• Business finance costs 
• Business travel 
• Professional memberships
• Tax accountant costs
• Interest paid on business loans.

 

Find out what else you may be able to deduct on the ATO website, including costs associated with your home, vehicle and business equipment (which we talk about next).

Do you operate your business from home?

If you operate some or all of your business from your home, you may be able to claim tax deductions for some home-based business expenses, including:

 

• Occupancy expenses (such as mortgage interest or rent, council rates, land taxes, house insurance premiums)
• Home office expenses (such as the business portion of electricity, phone, furniture, furnishings, repairs, cleaning).

 

However, it's a good idea to chat with a registered tax agent if you want to claim deductions such as these, as they might affect the tax status of your home itself.

Do you use your car for business purposes?

The expenses associated with motor vehicle trips for business purposes – such as travel between business locations – are generally tax deductible. You may also be able to claim depreciation on vehicles for the loss of value and wear and tear.

Do you own business equipment?

Similar to tax deductions for vehicle use for business purposes, you may also be able to claim depreciation on the loss of value and wear and tear on equipment used in your business.

 

Depreciation deductions may be claimed on most asset types as long as they are used for your business. They might include:

 

• Computers
• Office furniture including filing cabinets and bookshelves
•  Hand tools, such as spanners, hammers and screwdrivers or power tools, such as grinders, sanders and hammer drills
• Protective items, such as hard hats, safety glasses, sunglasses, sunscreens and cosmetics containing sun protection
• Professional libraries
• Safety equipment
• Technical instruments
• Forklifts.

 

Other things you can claim a tax deduction on are the cost of repairs and insurance cover on your tools and equipment, as well as any interest on money you borrowed to buy these items.

 

Find out more about equipment tax deductions on the ATO website.

Consider buying new business equipment 

Well before the end of the financial year, start thinking about whether you'll need new equipment in the coming year, or if existing equipment needs to be repaired or replaced. Depending on your purchases and the prevailing tax rules, vehicles or equipment may also be eligible for immediate tax deductions.    

 

You could help your business get equipped for the year ahead with a business vehicle or equipment loan. Don't forget to consider what monthly repayments your business can afford, and remember that equipment financing can be helpful when you don't want to tie up your working capital by buying outright.

Equip yourself with a plan 

A simple plan can remove a lot of the anxiety associated with tax time – and it can also make you feel empowered to take control of your taxes.

 

1. Get your financials in order and up to date
2. Compile a list of expenses you can claim
3. Consider how government incentives could help you
4. Put the required dates in your calendar to give yourself a reminder of tax deadlines.

Keep your business finances separate

Many sole traders find that having a business bank account that's separate from their personal finances helps simplify calculations when preparing for BAS and EOFY. Keeping your business and personal expenses well apart gives you a clearer view of exactly what your business is spending (and on what) and how much it's making.

 

With Westpac for example, you can choose between a $0 monthly fee business account (Business One) and an added value business account (Business One Plus) that gives you access to exclusive discounts on popular business products and services. To simplify financial management and bookkeeping, you can connect your account to accounting software such as MYOB and Xero.