Working as a sole trader or freelance worker means that you are operating a small size business and can take advantage of heaps of tax concessions and deductions provided by the Australian Taxation Office.
Simple and Effective Ways of paying tax for Sole Traders
Keep Track of Your Income and Expenses
This is the most important step which will not only help you calculate taxes but also let you know the financial progress of your small business. After all, the main reason for operating business is to generate income and the only way to know the actual income is by keeping track of your sales and expenses.
If you are determined to grow your business and have a serious goal to increase sales, you need to monitor your sales and expenses to know point A before you decide to get to point B.
The income and expenses can be tracked via maintaining an accounting software such as MYOB, Xero or QuickBooks which cost around $15 – $50 per month or you can use a simple excel sheet and record income and expenses on a regular basis.
Alternatively, you can find a bookkeeper or an accountant in your local area who can take care of your bookkeeping and taxes.
When it comes to the end of financial year which is 30th June of every year, we need to provide a list of our year to date income and expenses to the taxman and pay taxes only on profit which is sales minus expenses. The tax amounts will be calculated on marginal rates and will vary depending upon your income.
A common myth among small business owners is if they should pay taxes on drawings they are taking out of the business. Please note, when we operate as a sole trader or freelancer, we cannot claim tax deductions for our own salary/wages or drawings from the business.
The tax is only paid on the profits earned by the business which is income minus expenses and it cannot be any simpler than that.
List of Common Tax Deductions for Small Businesses
80% of businesses in Australia are small businesses and therefore Australian Government has always tried to promote the local businesses by providing capital/finance, training and lots of tax concessions which are not available for medium-large size enterprises.
When you operate a small business, here are the common types of tax deductions which we can claim to reduce the tax payable to the taxman.
Work from Home Expenses
Primarily, there are two methods provided by the Australian Taxation Office to claim work from home expenses.
45 cents per hour
This is a very simple method where we do not need any receipts or paperwork to prove to the taxman, but the amount of tax deduction is limited.
As per this method, we work out the average number of hours worked in a whole year and multiply by 45cents which becomes our tax deduction for working from home. It does include your rent or mortgage, electricity and gas expenses.
Here is a simple example,
Tracy works on average 25 hours per week and assuming she only worked 48 weeks in a year, her tax deduction will be
25 x 48 x $0.45 = $604
Pro-rata method for actual home expenses
As per this method, you work out the home office area and can claim a percentage of expenses for a home office.
For example, your house is 300sqms and you use 50sqms for home office and in this case, you can claim 17% of your house rent or mortgage and electricity and gas expenses.
Please note, to claim these expenses you literally need to work on your house map as the tax office is very picky on higher home office expenses claimed for small business.
Car Related Expenses
As small business owners, we all need to attend business meetings with clients or attend training sessions for work.
There are two simple methods to claim car-related expenses.
Cents Per Km Method
This is a simple method and does not involve any paperwork or receipts to show to the taxman. As per this method, you can work out the average number of kilometres traveled throughout the year and multiply by 66 cents per km.
The maximum tax deduction we can claim is capped up to 5000kms or $3,300 in a year.
Using this method, we can maximise our tax deduction to claim car-related expenses, but it requires an extra effort to maintain a logbook for a period of 12 weeks where we need to record every single trip and the reason if it is personal or work related.
After 12 weeks of a logbook, you work out the business percentage and can claim your fuel, insurance, depreciation, registration and car repairs based on the percentage on the logbook.
For example, John maintains a logbook for 12 weeks and his business use is 70%, therefore he can claim 70% of his car-related expenses.
The other common tax deductions we can claim are insurance, telephone, materials and any expenses directly related to the business.
I hope you enjoyed reading the article and please let us know if you have any questions.