For sole traders, the end of the financial year can be a stressful and confusing time. There are deadlines to keep track of, expenses and receipts to collate, and one long-form with a lot of really obscure stuff in it.
In this guide we’ll cover the following:
- How to make tax-effective super contributions
- Claiming business expenses
- Key tax dates to be aware of
- How Hnry helps
Making effective superannuation contributions
There are two ways you can go about making super contributions to maximise the benefit you receive from the Australian government.
Superannuation concessional contributions
Unlike a salaried/PAYG employee, sole traders are (usually) on their own when it comes to saving for retirement - which leads many self-employed contractors and freelancers to kick their retirement planning down the road.
But there is a tax benefit in contributing to super - under the concessional contribution. Your super contributions come out before tax, and are taxed separately at just 15% up to a limit of $25k a year, which means the concessional contribution is a great way to lower your tax rate.
For example, if you earn $80k per year, your top rate of tax is 32.5%. If you make a concessional contribution of $10k to your superannuation fund, then that $10k gets deducted from your income before tax. The $10k super contribution would then get taxed in your super fund at just 15% rather than 32.5%, thus reducing your total annual tax bill by $1,750!
It’s worth noting that you can add up to another $100k (on top of the $25k concessional limit) towards superannuation, but you can’t claim a deduction for this and it comes out of your post-tax income.
Contributing to your super is an important way of saving for your long term future and the tax deduction is a nice sweetener to incentivise good behaviours.
Superannuation co-contributions
The Australian government has an initiative called the Super co-contribution scheme, to help low- and middle-income earners increase their superannuation contributions. The government will match a certain amount of contributions you make into your superannuation up to a maximum of $500. So put simply, if you meet the eligibility criteria and put $1000 into your superannuation scheme, the government will give you $500 for free. This government contribution gets paid directly into your super scheme after you have lodged your tax return. Just a note, however, if you make personal contributions and claim an income tax deduction for the contribution, you won’t be eligible for the co-contribution scheme.
The amount of super the government is willing to contribute depends on two factors:
- Your income, and
- How much you personally contribute to super
The table below shows how much the government will contribute to your super given each of those factors.
Claiming business deductions
No matter what your income or level of business expenditure, there’s a real benefit to raising as many business expenses as you can before the end of the financial year.
How business deductions work
There’s a common misconception among sole traders that claiming a business deduction entitles you to reimbursement from the ATO for the value of the deduction.
Unfortunately, it doesn’t work that way.
But raising business expenses is crucial for reducing your overall tax bill at the end of the year. There’s a double benefit you get whenever you raise a business expense - here’s what happens:
- First, your taxable income is lowered by the value of the expense.
- Second, your overall tax rate is reduced (ever so slightly)
Let’s look at an example.
Let’s say you earned $50,000 over the course of a financial year. If you had absolutely no business expenses, your income tax rate would be roughly 13%.
But if you had spent around $10,000 on business expenses throughout the year, then your business’s profit (after expenses) would be $40,000 - this is your “taxable income.”
The income tax rate on $40,000 annual income is around 10%, which is 3% lower than your original 13% tax rate.
In this example, the business deductions had two effects: the first was to reduce your taxable income by $10,000; the second was to lower your tax rate by about 3%. And the impact to your bottom line is significant: before claiming the expenses your total tax owing was about $6,700; after claiming the expenses it dropped to $4,100!
Feel free to play around with our tax rate calculator here to see how much of an impact claiming expenses can have on your tax rate.
Knowing what you can and can’t claim
A lot of confusion from sole traders comes from knowing what they can and can’t claim as a business deduction.
Here’s a helpful list of some of the more commons things you can claim as a sole trader:
- Clothing: some types of clothing are deductible - but only when they are solely used for work purposes. This includes:
- Protective clothing - things such as safety glasses, gloves, scrubs, masks, etc., or
- Compulsory uniforms - these must either be distinctive to your particular organisation or identify the products or services provided by your employer.
- Occupation-specific clothing - these are clothes that distinctly identify you as a person associated with a particular occupation
Any other items of clothing that are not specific to these categories or don’t include a company logo cannot be claimed as an expense.
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Equipment purchases: equipment used for work purposes, such as tools, computers, printers, and mobile phones can often be claimed as a tax deduction. More expensive items may be eligible for accelerated depreciation (also called temporary full expensing) due to Government pandemic stimulus initiatives, but it’s worth speaking to your tax agent before jumping into that big purchase.
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Mobile phone bills - if you use your mobile phone exclusively for business purposes, then the deductions you can claim include the cost of the phone and the monthly service fees (prepaid or monthly plans). If the phone is mixed-use (business and personal), then you can only claim the percentage that is used for business.
- Professional fees and subscriptions - there are several types of professional fees and subscriptions you can claim:
- annual subscription to an association for annual practising certificates, memberships, or accreditation,
- union fees,
- business-related software, magazines, or licensing fees.
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Professional insurance - if you have professional indemnity insurance for the protection of your clients, public liability insurance which covers your business in an event that an incident occured, or if you have insurance for all of your business assets - then you can claim the insurance as an expense.
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Advertising - if you advertise your business in any way (including website costs, signs, digital advertising, printed brochures, or newspaper advertisements), then these costs can be claimed as a business deduction.
- Professional development - if you pay for any courses or training and development that maintain or increase the knowledge, capabilities or skills you need to earn your income in your current employment.
Key Dates to Remember
Perhaps the most important thing to remember is that your tax obligations aren’t over at the end of June. There are a handful of dates throughout the year, all of which are crucial to ensuring you’re all up-to-date and compliant with your taxes and obligations. So what are some of the big tax dates you need to remember?
1st of July. This is the big tax date, the start of the new financial year. This is the date that all tax-related obligations centre around: from this date you can begin applying for your tax refunds for the prior financial year.
31st of October. If you don’t have an extension of time, or don’t have a tax agent, you’ll have until this date to lodge your tax return, and pay the amount owing if needed.
15th of May (of the following year). If you do have a tax agent or accountant, you’ll have until the last day of the following financial year to submit your completed tax return. Note: **once your tax return is lodged you might inevitably have money owing, so don’t delay! Conversely, if you are owed a refund, any delay in filing your return is money you are missing out on. This date is also different if you have had years where you have failed to lodge a tax return. **
28 October, 28 February, 28 April and 28 July.As a GST-registered contractor, freelancer, independent consultant, sole trader, or other self-employed earner, you may need to complete quarterly Business Activity Statement (BAS) or Instalment Activity Statement (IAS) as well; if you do, those are the lodgement and payment dates for your quarterly BAS.
How Hnry Helps
If you’re a sole trader and earning an income through freelancing, contracting, or consulting, you don’t have to put up with all of this tax nonsense: the forms, the key dates, the confusion.
Instead, you can let Hnry take care of it all for you.
Hnry automatically calculates, deducts, and pays all of your taxes whenever you get paid. Income tax, GST, Medicare, and Student Loan repayments - it’s all sorted as you go so you don’t have to worry about owing tax money at the end of the year.
As your accountant, Hnry also manages all your expenses AND lodges your tax returns whenever they’re due - all as part of the service!
You also get access to our app, which gives you so much more, including:
- Smart invoicing software
- Ability to automate payments to savings, investments, friends and family
- Easy logging of business and home office expenses
- Expense receipt storage for 5 years
- Registered tax agent support
You’ll get all of this for just 1% of the self-employed income you process through Hnry, and it’s all calculated on a pay-as-you-go model – meaning you don’t pay for the service unless you’re getting paid yourself!
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