If you’re a sole trader running your own business, then you’re lucky enough to have the flexibility and freedom to do things your way. Unfortunately, at tax time, you have to fall in line like everybody else. If you’re not up to speed, filing your annual return can be a little daunting. What rules apply? What deductions can you claim? What paperwork do you have to do? Here are a few tips to get you through.
Know your tax obligations
If you earn $18,200 or more as a sole trader, you’re required to pay tax. The rate you’ll pay is the same as individual tax payers. Exactly what you pay depends on how much you earn each year and is worked out by the Australian Taxation Office (ATO).
Even if you fall under the threshold, you will still need a tax file number (TFN) and an Australian business number (ABN), and you’ll have to submit an annual income tax return. If you earn $75,000 or more each year, you’ll need to register for Goods & Services Tax (GST) and submit a Business Activity Statement (BAS) either monthly or quarterly.
Assess for PSI
If you’re predominantly paid for your personal efforts, skills, or expertise, you could be receiving what’s called personal services income (PSI). If you’re a copywriter, legal advisor, management consultant, or similar, it’s likely you are. It could be that some of your income is PSI and some isn’t. To work this out you need to look at each job or contract. If the service you provided is more than 50% based on your efforts, skills, or expertise, it’s classified as PSI. If you are receiving PSI, this changes some of the rules, so take note.
Don’t miss out on deductions
As a sole trader, you can claim deductions for most expenses you incur running your business – as long as they directly relate to your assessable income. This includes:
- Business travel expenses such as bus, train, and taxi fares
- Vehicle expenses including fuel and oil, servicing and maintenance, loan interest or lease payments, insurance, and registration
- Maintenance costs of machinery, tools, or premises
- Home office expenses including occupancy (mortgage interest, insurance, council rates) and running (electricity, phone, cleaning) expenses
- Other expenses including stationery, advertising, banking and accounting, work uniform, relevant courses, and subscriptions
- Personal super contributions for yourself and any employees
- Depreciation of things like furniture (sole traders can use the simplified depreciation rule to work this out)
- Bad debts or invoices that aren’t going to be paid
- Pre-paid expenses on items or services delivered in the following tax year
It’s important to note that if you use something, such as your home or car, for both business and private use, you can only claim the business-related portion of the expense.
Be a strict record keeper
To make things simpler for yourself come tax time, make sure you’re keeping detailed financial records throughout the year. Things you should be keeping track of include sales records, purchase and expense records, bank records, and payments to employees or contractors.
You’ll also need to show details of your debtors (accounts receivable), creditors (accounts payable), and current inventory. And make sure any asset purchases or sales are properly accounted for. While spreadsheets work, cloud-based accounting software, such as QuickBooks Self-Employed makes documenting and recording all your tax data far easier. Using the app, you can scan and store receipts, create and send invoices, and even track your vehicle mileage.
Understand the basics
The fastest way to prepare and lodge your tax return is online with myTax. The other options are to do it via a registered tax agent or by filling in a paper form. When completing your return, use the allocated section for business items to show your income and expenses – there isn’t a separate form for sole traders.
If PSI rules apply to you, you’ll have to fill in that section, too. The deadline to lodge your return is 31 October, so don’t miss it or you could be hit with a hefty fine. Doing your taxes may not be your favourite business activity, but it is a legal requirement.