In this blog, Stellar Accounts CPA Debbie Hoffman outlines the ins and outs of tax deductions for a sole trader.
We know as small business owners that it’s often hard to find the time to work on your business and keep your accounts in order. This makes it even more crucial that you find partners that will help you navigate your tax requirements (and compliance with the ATO) with the least amount of stress and pain as possible.
What expenses can a sole trader claim?
- Anything you purchase which is then used to generate business income can be used as tax deduction
- If your home also serves as a base for your business you may be eligible to claim rent/mortgage interest, rates, water, electricity and insurance expenses; however it will be pro-rated based on the space within the property utilised for business purposes.
- Phone and internet – percentage of costs that relate to your business
- Car expenses – similarly, you may be eligible to claim a percentage of car expenses for travel to and from client sites, attending training sessions, travel to pick up supplies or post office collections to name a few.
What can’t sole traders claim?
Like any business, you do need to tread carefully and ensure that you keep in the ATO’s good books and only claim valid business-related deductions.
Some of the most common misconceptions where sole traders can put a foot wrong:
- You can’t claim 100% of all expenses – if you use something for personal AND business use, you must apportion the costs and keep records to support the percentage that you are claiming. EXAMPLE: mobile phone or internet costs.
- Car expenses do require a logbook. In the majority of cases, if you are using your car for business you need to maintain a logbook to claim actual car expenses. If claiming up to 5,000km as a deduction you need to be able to provide the ATO with details of your business-related car usage.
- Rules apply for meals and coffees depending on the situation:
- Meals, coffees and snacks are NOT tax deductible UNLESS incurred on business related overnight travel and make sure you keep the receipts!
- Meals and coffees consumed during meetings are classed as entertainment expenses by the ATO. They are NOT deductible for GST or income tax purposes UNLESS they are minor and infrequent (or you pay FBT on the expenses) – this is where getting good advice from a registered tax agent can help!
- Travel expenses – if family or friends stay with you, only the amount relating to the sole trader can be claimed as a tax deduction, the balance is considered a personal expense.
- You need tax receipts! Bank statements or EFTPOS receipts are not satisfactory. If you don’t have receipts to support your deductions these will be disallowed if you get audited. Tip: make sure the receipt is legible and show exactly what was purchased to be a valid tax deduction.
Key tax dates for Sole Traders
Mark your diaries, here’s the key dates sole traders need to keep top of mind for lodging their tax paperwork:
- Income tax return is due by 15 May each year when lodged via a tax agent (otherwise it’s due 31 October)
- BAS returns are due by the 28th day of the following month after the end of the quarter, or if lodging via a tax agent, you receive an extra month to lodge and pay.
Tax deductions for a sole trader
If you’re a sole trader looking for help with your income tax return and working out what tax deductions you are eligible for – speak to Debbie Hoffman at Stellar Accounts.
If you need a refresher on the different business structures, check out our other blog on sole trader vs company vs trust here .
Stellar Accounts is Brisbane’s leading small and new business accounting firm. We have a reputation for simplifying your accounting, tax and bookkeeping needs so you don’t need to stress or worry.
With more than 20 years’ experience across a wide array of industries – our clients (typically small and medium sized businesses) – gain a distinct advantage over their competitors because we keep them in the loop of the latest information and regulatory requirements. Call us on 0428 887 104.
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