- Everyone loves that time of the year - the end of the financial year. But before you and your accountant start panicking and stressing over it, there are a couple of tips you should know about small business tax deductions.
- As a sole trader, you are entitled to claim certain tax deductions you probably didn't even know about.
- Among those are particular startup expenses, home office expenses, and so on and so forth.
- Read on to learn 8 sole trader tax tips to make tax season a little less stressful.
Editor's Update 07/07/20:
Sole trader superannuation: As a sole trader, it's not compulsory to make super guarantee (SG) payments yourself. But it is worth considering your options to ensure you have some funds set aside for your retirement. There are two ways to manage your superannuation if you're self-employed:
1. If you pay yourself a regular wage, send at least 9.5% of your gross wage to your super fund, or
2. If you pay yourself out of your business revenue, most super funds allow you to send a lump sum to your self-managed superannuation fund (SMSF) when you have enough cash flow.
Sole trader superannuation and tax: If you make a concessional contribution up to the limit of $25,000 per financial year (which includes payments reflecting 9.5% of your salary), you are entitled to claim a tax deduction on this. There is a 15% tax on concessional contributions, and an additional 15% may apply to higher self-employed earners.
Sole trader instant asset write-off: Businesses eligible for instant asset write-off can claim an immediate deduction for the business's part of the cost of an asset - but only in the year the asset is first used or installed and ready to use. The asset write-off is available for multiple assets as long as the total sum of all assets doesn't surpass the threshold.
Now that we are past the Christmas and New Year period, we are quickly heading towards every accountant's favourite time - the end of the financial year! To avoid the mad panic of year end it is important for businesses to start thinking about the types of things they will need to complete for their 2018 income tax returns.
This is often a difficult time for small businesses, particularly sole traders, who aren’t always aware of what exactly they need to provide to their accountant or what types of deductions they are entitled to claim.
Sole trader tax advice
With this in mind, below are my top 8 sole trader tax tips that I think every business should know.
1. Certain startup expenses are immediately deductible
As of 1 July 2015, the ATO introduced new rules to allow small businesses to immediately deduct certain startup expenses that were previously required to be expensed over 5 years.
These deductions are available to small businesses that have turnover of less than $10 million. The types of expenses that can be claimed include:
- fees paid to professionals to obtain advice or services relating to the proposed structure or proposed operation of the business, or
- payment to a government agency for fees, taxes or charges relating to setting the business up or establishing the business.
For example, Penny wishes to establish a business manufacturing children’s clothes and selling them online. She makes an appointment with her accountant, and together they create a business plan and decide that it would be best for her to register the business name as a sole trader. Penny will be able to immediately deduct the fees paid to register her business name as well as any fees paid to her accountant for their advice.
2. $20,000 instant asset write off for small businesses
A small business that purchases an asset that costs less than $20,000 will be able to immediately deduct that asset rather than having to depreciate it over a prescribed number of years. This instant write off concession was first introduced in 2015, and is set to be finished on 30 June 2018. After 30 June 2018, the instant write off threshold will reduce back down to $1,000. Therefore, it is important that if you wish to take advantage of it you purchase the asset and have it ready for use prior to 30 June 2018.
As an example, Penny has purchased a van to assist her with picking up materials and making deliveries for her business. She uses the van solely for her business. The van cost Penny $15,000. Penny will receive a $15,000 deduction for the van in her 30 June 2018 tax return. Should she have purchased it after 30 June 2018, Penny would be required to deduct the van over a number of years, and would have received a deduction of up to $3,750 in the first year of purchase.
3. Income protection insurance
As a sole trader, you are reliant on the income that you receive from your business. In most cases you are the person that does all of the work and generates all of the revenue. This makes it more important that you have income protection insurance in place to cover your income should you not be able to work for an extended period of time.
Good news is the full cost of the premium for income protection insurance is deductible in your income tax return.
4. Home office expenses
As a sole trader, it is common to operate your business from your home. If you do this, you are entitled to claim a deduction for your home office expenses. Examples of expenses that you claim for running your business from home include, but are not limited to:
- telephone expenses,
- Internet and computer expenses,
- gas and electricity costs,
- repairs to office equipment and furniture, and
- cleaning costs.
If you are renting your home, you can also claim some of your rental payments. You will be required to work out what portion of your home is used for your business and then apply this same proportion to your rental expense.
We are commonly asked by home owners who run their business from home whether they can claim home occupancy costs such as mortgage interest, council rates, land taxes and home insurance. The simple answer to this is yes, you can. Much like the rent expense, you will be required to apportion the expenses for how much the business use is.
However, and this is very important, if you do claim occupancy costs for running your business from home, you will lose part of your capital gains exemption when you eventually sell your home. This means that the same portion of the home that you were claiming expenses on, you will also have to pay capital gains tax on.
In the majority of cases, this is an adverse outcome and means that claiming occupancy cots is not in your best interests.
An alternative to the above is that the ATO offers a prescribed rate per hour as an available deduction for home office expenses. The current rate is 45 cents per hour of use of your home office.
5. Interest expenses
A lot of sole traders will invariably use their own money to support their business whilst it is starting out. If you have to borrow money in order to fund your business, you are entitled to a deduction for the interest that you pay on that loan.
It is important to note that if part of the proceeds of borrowing is used for your business and part for personal purchases, you must apportion the interest deduction to only include the amount that relates to the business percentage of the loan.
For example, continuing on from Penny’s story above, she had to take out a $10,000 personal loan to fund the initial purchases of materials and equipment to start her business. Penny is entitled to claim any interest that she pays on this loan each year.
6. Superannuation contributions
A lot of sole traders that I meet are aware that they are legally required to make superannuation contributions for their employees, but they often neglect to make any contributions for themselves. It is important that sole traders start saving for their retirement, and make superannuation contributions each year.
Good news is that a sole trader can contribute up to $25,000 to their superannuation and claim a tax deduction for these amounts. These contributions are known as concessional contributions. In order to claim the deduction for super contributions, you must notify your superfund on a specified form that you wish to claim a tax deduction for your contribution and how much you wish to deduct.
7. Small business income tax offset
Recently the government has made cuts to the company tax rates. In order to give a similar benefit to sole traders and partnerships they have also introduced a small business income tax offset. For the 2016-17 year onwards, small business sole traders are entitled to an 8% rebate, up to $1,000, on the tax payable on their business income.
In order to be eligible for this offset, the following criteria must be satisfied:
- You must carry on a business as a sole trader or have a share of business income from a partnership or trust; and
- Your aggregated turnover must be less than $5 million.
The ATO will apply this offset to your tax payable when you include small business income in your tax return.
8. Small business restructure rollover
The small business restructures rollover allows a sole trader to transfer their business CGT assets, trading stock, revenue assets and depreciating assets to another entity, such as a Unit Trust or Company, without incurring an income tax liability.
This particular concession was introduced from 1 July 2016 and is particularly useful for those sole traders that may have had substantial growth in their business since they first started trading. This concession will allow you to move to a new business structure that is more suitable to your current business situation and not have adverse tax consequences.
In order to be able to access this concession, the following criteria must be satisfied:
- You must be a small business (aggregated turnover of less than $10 million),
- It must be a genuine restructure as opposed to an artificial or inappropriately tax-driven scheme,
- There must be no change to the ultimate economic ownership of the transferred assets (i.e the sole trader must be the shareholder of the company or unitholder of the trust that the assets are transferred to).
The small business restructure rollover is a useful tax concession for any sole trader that would like to move their business to another structure that will allow them to further grow their business.
What I have covered are just a few examples of what sole traders are entitled to claim in their income tax returns. So keep an eye on them in the future.
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