Sole Trader Tax Deductions & Tax Rate

As a sole trader there are many items you may claim as deductions to offset your operating expenses and reduce your taxable income.  In this article we will cover what you can and cannot claim as sole trader tax deductions, the sole trader tax rate, how to pay tax as a sole trader and more.  Being aware of this information will help you optimise your tax return!

What can a Sole Trader Claim on Tax?

The ATO allows both capital and operating expenses to be claimed as sole trader tax deductions. 

Operating expenses can include:

• Advertising
• Bad debts
• Home office expenses or portion of rent
• Bank charges
• Motor vehicle expenses
• Business travel
• Education and training
• Professional memberships
• Licenses and registrations
• Insurance
• Interest
• Phone & internet
• Business-related subscriptions
• Repairs/maintenance
• Contractor expenses
• Employee wages and superannuation
• Accountant fees

Capital expenses can include:

• Computers
• Electrical Tools
• Furniture
• Motor Vehicles
• Plants and Equipment
• Website Expenditure

In order to claim these items as sole trader tax deductions they must meet certain criteria:

• The expense must have been for your business, not for private use.
• If the expense is for a mix of business and private use, you can only claim the amount proportional to business use.
• You must keep records to prove either of the above.

For example:

You may have a laptop that is used for work 50% of the time.  As you use it for other activities for the remaining 50%, you can only claim 50% of its value as a deduction.

What can’t I claim on tax?

Expenses that are not eligible as sole trader tax deductions include:

• Entertainment expenses
• Traffic fines
• Private or domestic expenses (clothes, childcare, etc.)
• Private health insurance & life insurance
• The private portion of motor vehicle expense usage
• The private portion of computer & other equipment
• Non-assessable income from hobbies
• GST components of purchases if they have been claimed as GST credit on your BAS

Can I claim my rent as a tax deduction?

This is a great question that could have a significant impact upon your tax position. If you pass the PSI tests (which we touch on down below), and your main business is at your home, then you can claim the business portion of the rent or interest.

An example of this:

A Doctor may have a room in their house which they use for client consultations, including a welcome office area. As this is the place of business, they are eligible to claim the business portion related to the business. (The claim amount is usually calculated based on floor space).

On the contrary, a builder may have a dedicated office space at their home, but spends the majority of the day at various clients building their houses. As this is not the usual place of business, the occupancy costs cannot be claimed, only the running costs.

Occupancy vs Running Costs

Occupancy costs are what you need to pay to own or rent your home. These expenses are things like council rates, interest on mortgage or rent, land tax & house insurance premiums.

Running costs are the increased costs from using your home facilities. These expenses are things like electricity, cleaning, lighting and heating, furniture and equipment & decline in value of assets. 

If you own your own home and live in it, it is typically tax-free and is called your principal place of residence. Once you start claiming the occupancy costs as business expenses, you will lose the tax-free status for the portion that you claim the expense.

When I claim my tax deductions?

Sole Trader operating expenses are claimed within your personal tax return in the financial year they are incurred. The expenses will be used to reduce your taxable income. As you will pay tax on your taxable income, claiming deductions correctly will lower your payable tax.

Example

Business Income – Business Expenses = Taxable Income 

Taxable Income x Tax Rate(s) = Tax Payable

If you acquire assets like a motor vehicle, these are considered capital expenses and are claimed over a longer period. This is called depreciation where a portion of the expense is claimed each year over the effective life of the asset. 

As an example;

If a Motor Vehicle has a useful life of 8 years, you will claim an expense in each of the 8 years.  You won’t be able to claim the full amount as a tax deduction in the year it is purchased.

Business items only used for part of a year must have their claim restricted to that period.

How to Pay Tax as a Sole Trader

As a sole trader, you are operating under the simplest business structure.  When it comes to taxation, you don’t report income under your business – all income and expenses are recorded under your name.  

So your sole trader tax rate is actually your individual income tax rate and your tax is lodged with your individual Tax File number.  Don’t forget that even if your sole trader business falls under the tax-free threshold, you still have to file a tax return!

Resident tax rates 2020-21 (A.T.O.)