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Sole Trader Tax Deductions & Tax Rate

Sole Trader Tax Deductions

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!

Sole Trader Tax Deductions

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

Capital 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.

Can I claim rent as a tax deduction?

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.)

Taxable income
Tax on this income
0 – $18,200
Nil
$18,201 – $45,000
19 cents for each $1 over $18,200
$45,001 – $120,000
$5,092 plus 32.5 cents for each $1 over $45,000
$120,001 – $180,000
$29,467 plus 37 cents for each $1 over $120,000
$180,001 and over
$51,667 plus 45 cents for each $1 over $180,000

The above rates do not include the Medicare levy of 2%.

 

As your business and income grows and you may want to transition to operating as a company.  Most companies are taxed at a rate of 26% to 30%, whereas your sole trader tax rate (individual tax rate) can increase up to 47%.  

Check out our article on the differences between Companies and Sole Traders or get in touch with POP to work out which business setup is best for you!

Personal Services Income (PSI)

As a sole trader you may also be subject to Personal Services Income classification (PSI).  If your income is considered personal services income, your eligible business expenses are limited, as you will receive the same tax deductions as an employee.

For more information on PSI, you can view our article on PSI here.  Alternatively, get in touch with POP to optimise your Sole Trader Tax Return.

POP Business for your Sole Trader Tax Return

We’ve covered a lot of information in this article, highlighting the many items you should consider with your annual tax return.  While we have covered how to pay tax as a sole trader, unfortunately there isn’t a quick and easy sole trader calculator to make your tax return easier.  However, POP Business can provide you with solutions for your sole trader tax return starting from $350 + GST.  

In addition to what we have discussed in this article, POP can assist you with any industry-specific tax deductions you may be able to claim, to maximise your tax return.

With a typical turnaround time of within 5-10 business days, POP can get your tax return lodged online quickly and efficiently.  With excellent customer service and friendly & professional communication, POP will provide you with the peace of mind you need come tax time.

Get in touch today! 

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1300 180 630

Patrick Sargent

Patrick Sargent

Patrick Sargent is a Chartered Accountant and registered Tax Agent who is passionate about helping business owners and individuals achieve their goals. He co-founded the cloud and tech-focused accounting firm POP Business back in 2018. Since then, Patrick and his team have won numerous awards and accolades including the 30 Under 30 ‘Tech Innovator of the Year’, and coming in as a finalist in the Australian Accounting Awards 2020.   He has expertise in helping small businesses with a range of accounting services, including tax preparation, financial advisory, accounting and bookkeeping, and personal tax planning, as well as company, trust, and partnership tax returns and more.

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