• Determine whether or not you are a sole trader.
• Find out what expenses you can claim towards your business.
• Learn how to keep track of your records to maximise your tax deductions.

With the advantage of the technology we have today, many entrepreneurs and business savvy individuals are taking it upon themselves to follow their passion or take charge and generate multiple income streams. While this is wonderful, it could make things more complicated when tax season comes around. As the sole owner of a business or sole trader, it's essential to be aware of deductions you can claim to avoid paying more than you have to. 

Information can be muddled. With that in mind, we wanted to create a no-nonsense guide covering the in's and out's of tax deductions for sole traders to help you understand what you can claim.

What is a sole trader?

One of the first and most important things to consider is whether or not you're a sole trader.

As summed up perfectly in a previous article we published, a sole trader is essentially the business. If you're responsible for all aspects of the business, no entities withhold your tax, and your business is tied in with your personal income, congratulations! You're a sole trader. 

If you're not yet a sole trader and would like to become one, you can learn about setting up shop as a sole trader here. 

Expenses you can claim to reduce taxes

When you work full-time as an employee, tax returns are relatively simple. You're given an income statement by your employer and use that to file your tax return once a year. 

As a sole trader, you're essentially your own employer, so it's your responsibility to maintain your own accounting records to determine your business's income, expenses, and taxable income. 

A vital tip to remember is to use accounting software to keep this process as simple as possible. Accounting software will help save you time as well as provide you with many other benefits. 

When it comes to filing taxes, we receive constant questions about whether certain expenses are tax-deductible.

It’s a question we receive mainly from sole traders whose personal and business taxes are intertwined.

As a sole trader, you’re in charge of maintaining your business which means you will incur expenses to either run or enhance your business. Fortunately, these expenses can be claimed as business expenses which means you will pay less tax on them. 

So what are some common business expenses sole traders claim?

As per SavvySME community member and tax expert Gillian Nathan:

• Valid business expenses, such as advertising, accounting fees, subscriptions, stationery and postage, uniforms or PPE, bank and merchant fees, legal fees (not capital in nature) - to name a few
• Phone and internet bills (apportioned for business use)
• Home Office equipment - like computers, printers, phones, desks and chairs and other office furniture
• Home office expenses (if your home serves as a base for your business) include running expenses and occupancy expenses that would need to be apportioned for the area used for the business. There is the option to use cents per KM to claim on a per hour basis.
• Rent expenses for any commercial office space
• Home repairs or maintenance (if you conduct business within your home) and repairs to any business equipment       
• Bank fees and interest on your accounts
• Business travel expenses
• Training, education, and professional membership fees
• Insurance
• Depreciation on assets purchased
• Motor vehicle expenses- either cent per KM (set rate per business KM you travel, limited to 5,000km per car per year) or logbook method (business use % of actual expenses like fuel, repairs, insurance, rego, lease payments, insurance, depreciation, interest on finance).
• Other deductions include tax agent fees, donations, and income protection premiums.

She also notes that the above list is not meant to be exhaustive and needs to be considered in light of what you do as a business. Some expenses will be deductible in one type of business but could be a private expense to another kind of business. For example, a cake maker could deduct eggs, milk, butter, flour and other ingredients to produce the cakes, but these expenses would not be deductible for a mechanic, as they are not related to the business.

Key Tip: So, when determining whether or not an expense is tax-deductible, ask yourself: 

"Did I incur the expense to produce income?"

If so, it's reasonably tax-deductible, but it's also important to remember that you can only claim an expense to the extent that it has been used for your business.

For example, if you pay $100 for gas and only use 50% of that for your business, only $50 of gas is tax-deductible.

Gillian Nathan also points out that if you're mainly making purchases to reduce tax, it's essential to consider whether your business can reasonably afford the expenses. 

Another tax strategy as a sole trader is to contribute to your Superannuation. Contributing to your Super not only grows your retirement fund, but it's also tax-deductible. Sole traders can claim up to $25,000 per year as tax-deductible.

It’s also important to note that the money you withdraw from your business is not a business expense. While an employee’s pay can be deductible, you legally are not considered an employee but rather the proprietor. 

You can learn more about your industry’s specific deductions on the Australian Tax Office website or find a tax agent to help you sort through deductions.

Staying organised

As previously mentioned, when determining which expenses are tax-deductible, it's important to remember only to choose costs incurred to produce your income and claim an expense to the amount used for the business. 

On top of that, you must have records to prove your expense. This includes electronic copies, so screenshots or photos of physical receipts are valid. I would recommend uploading photos and screenshots onto either your accounting software, a secure storage system, or the ATO app.

Bank statements or EFTPOS receipts are not sufficient. Receipts will need to be readable and contain what was explicitly purchased.

When keeping track of expenses, it's best practice to regularly update your accounting software, sheet, or storage application. This will assist you in:

• Keeping records up to date
• Maximising tax deductions
• Organising your records
• Not forgetting claims

How tax deductions work

So, you have your receipts stored, your software up-to-date, and an accountant to help you work out how much you spent on business-related expenses.

Now what?

You apply your tax deduction or expenses subtracted from your taxable income. This results in you having to pay fewer taxes.

For example, if your business made $100,000 during the financial year, and you spent a total of $20,000 on business-related expenses, your taxable income is $80,000. This means you’ll only be taxed towards $80,000, not $100,000, so you pay fewer taxes!

Conclusion

As a sole trader, it’s understandable to forget about taxes and consider them secondary, but taxes and, more specifically, tax deductions can make or break your business. Along with the above information, remember to:

1. Ask for help
2. Remain aware of important dates
3. Use accounting software
4. Don’t exaggerate
5. Don’t rely on pre-filled information from the Australian Tax Office.

Tax deductions can be tricky, but if you read this article, stay diligent in keeping your records, and have a solid tax agent, you are on track to maximising your tax deductions. 

Going about your taxes alone can be particularly daunting. Fortunately, we have members who are experts and are happy to help if you have questions! If you need help with a problem or need more focused guidance regarding tax deductions and any other of your tax needs, you can find the answers here.