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The sole trader's guide to tax deductions

What tax deductions can you claim as a sole trader

“I think I should pay more taxes,” said no sole trader ever.

If you’re self-employed and/or running your own business, you know how hard it is to set aside a percentage of your hard-earned income to pay your taxes. Maybe you find yourself itching to use some of these funds to grow your business, or even take a well-deserved break (imagine!).

Luckily, there is a way to (legally) pay less taxes each year.

To help sole traders and small businesses keep more of their money, the ATO allows some business expenses to be claimed as tax deductions. What this essentially means is that you’re rewarded for investing in your business, AND you get to keep more of your money come tax day. Woohoo!

Unfortunately, the tax deduction system isn’t as straightforward as buying an asset, paying less tax. For starters, only certain business expenses qualify for a deduction, claimable expenses differ from industry to industry, and some purchases are only partly claimable.

So how can you make the most of this complicated system? Buckle up team. It’s time to get fiscal. Here’s what we’ll cover:

What is a tax deduction?

Despite having “tax” and “deduction” in its name, a tax deduction isn’t money deducted from the taxes you pay, that you then get to keep. Instead, a tax deduction reduces the amount of income you have to pay taxes on, resulting in less tax and a lower effective tax rate.

💡Your effective tax rate is the average tax rate you pay on your income after applying all the tax rules.

The ATO allows you to claim certain business expenses (or part of an expense) as tax deductions. This means that you won’t pay tax on the claimed expense, NOT that you get this amount back as a tax refund.

Sounds confusing? Let’s break it down:

Bridgette is a custom furniture maker. She receives an order for a bespoke dining table and cabinet sets, which requires a purchase of $7,000 worth of wood and other materials to complete. She claims these purchases as a tax deduction when lodging her taxes, as they meet the ATO's requirements for a valid claim (cost of goods sold).

Bridgette makes $75,000 a year selling her furniture, excluding GST, which is income before expenses. By claiming the cost of materials as a tax deduction, she reduces her taxable income from $75,000 to $68,000.

At $75k, Bridgette's effective income tax rate was 19.8%, and she would have had to pay the ATO $14,842 as income tax. By claiming a tax deduction and reducing her taxable income to $68k, her effective tax rate becomes 18.4%, and her tax bill is $12,567.

That's a tax saving of $2275 just from this one deduction claimed!

💡You can calculate your own effective tax rates before and after allowable expenses using our tax calculator.

💡If you’re GST registered, claiming GST expenses happens separately from claiming tax deductions. For more information, check out our guide to GST.

Who can claim tax deductions?

In Australia, anyone earning an income can claim deductions for ATO-approved expenses they incur in relation to their work. The ATO has three golden rules you must meet in deciding whether or not to make a claim:

  1. You must have spent the money yourself and weren’t reimbursed.
  2. The expenses must directly relate to earning your income.
  3. You must have a record to prove it (usually a receipt).

Along with their three golden rules, the ATO has industry specific guides for what you can and can’t claim as a business expense. You can find these guides here.

Although technically anyone can claim a work-related tax deduction, the rules differ for PAYG employees as the company they work for usually covers work-related costs. Those who try to bend the rules in creative ways can end up on the wrong end of an Australian Financial Review article - ouch.

But for sole traders, deductions are a brilliant way to pay less in taxes, while spending more money on their business. No 7-year-old personal assistant required.

What expenses are tax deductible?

Fun fact: Not all tax deductions are business expenses, and not all expenses are tax deductible. The more you know!

Simple! Yet confusing. We hear you. Let’s dive in.

Business expenses

Business expenses are the costs you incur as part of running your business day-to-day. Basically, if you need something to help you get the job done, that purchase will be a business expense.

BUT the ATO won’t automatically accept every expense as a tax deduction. As we’ve already talked about, they have strict criteria for what is and isn’t tax deductible.

A good example is work clothes. The ATO only allows deductions for uniforms with logos, occupation-specific clothing, and unconventional costumes. Even if you only use certain clothes for work, if they could feasibly be worn outside of work, you’re out of luck:

Sameer is a baker, specialising in complex cake art. Because his creations are usually quite delicate, he often cuts and serves his cakes at events as part of the service. He purchased black dress pants and a crisp white shirt to wear for these events, and only uses them while at work. But because he could reasonably wear this outfit to a personal event, it is not tax deductible according to the ATO.

Tax deductions

We’ve already covered what tax deductions are and how they work. But did you know that you can claim tax deductions for things other than business expenses?

The biggest example here is Superannuation. If you make personal contributions to your Superannuation, you may be able to claim a tax deduction for Superannuation contributions up to $27,500. Eligibility for this deduction varies according to personal circumstances however, so it’s best to check the ATO website.

You can also claim a tax deduction for a gift or donation. In order for it to be eligible, it has to meet four conditions:

  1. It must be made to a deductible gift recipient (DGR: an organisation or fund that can receive tax-deductible gifts. You can check the DGR status of an organisation through the ABN website).
  2. It must be a voluntary transfer of money or property without receiving, or expecting to receive, any material benefit or advantage in return.
  3. The gift or donation must be of money or property. This can include financial assets like shares.
  4. The gift or donation must comply with any relevant gift conditions. For some DGRs, the income tax law adds extra conditions affecting the types of deductible gifts they can receive.

With all this in mind, let’s update that snazzy venn diagram:

Examples of deductible expenses

Industry-specific deductions

The ATO’s 3 golden rules are actually just a starting point, and claimable expenses differ between industries and contexts. For example:

  • Only nurses and doctors can claim non-slip shoes.
  • Only actors can claim grooming costs (and that’s only if a specific role requires a specific hairstyle/colour etc).
  • Only a judge can claim a judge’s robe. Why anyone would want a judge’s robe if they’re not a judge is anyone’s guess, but each to their own.

Because of this, you can’t automatically claim everything your friends and family claim - their deductions might not be applicable to your industry.

Partially-deductible expenses

Some business expenses are also only partially tax deductible. For example, you can only claim a deduction for:

  • The business use of a work vehicle, not the personal.
  • The percentage of your internet bill you used for business purposes while working from home.
  • Business calls made from a personal mobile phone.

💡If you can’t prove that an eligible expense was partly or solely for business use, the ATO may not allow you to claim it.

Depreciating Assets

Finally, there are depreciating assets, which are claimed a little differently.

A depreciating asset is an asset that declines in value over time as it’s used. This might include cars, tools, computers, even books!

If you purchase a depreciating asset, there are few ways you can claim this as a tax deduction.

If the asset cost over $300 and was bought/installed between 1st July 2020 and 30th June 2023, you might be able to claim the business portion of the expense in full immediately. It’s called temporary full expensing, and it was introduced by the ATO to help businesses during the pandemic.

You can read more about temporary full expensing on the ATO’s website. Otherwise:

  1. If the asset cost $300 or less, you can claim an immediate deduction
  2. If the asset cost more than $300, you can claim a deduction for the decline in value over the effective life of the asset.
    • An asset’s effective life is the length of time it can be expected to last. You can use your own estimate based on personal usage, or use the ATO’s estimates.
    • Due to Covid-19, the ATO has introduced a new method to calculate the decline in value of assets. For more information, visit the ATO website.

Keeping records for the ATO

There’s nothing worse than putting hours of blood, sweat, and tears into your financial admin, only to realise at the end of the financial year that you lost the receipts!

Keeping clear, organised records of purchases and goods/products sold will help make tax time as stress-free as possible. It’s also good practice; the ATO requires you to save a record of your expenses (receipts) for five years after purchase, either physically or digitally. Imagine five years of receipts strewn across your office floor, and you’ll appreciate the value of a good filing system.

Alternatively, if you’re a Hnry customer, you can take a quick photo of your receipts and upload them to the Hnry app. We’ll calculate your expenses and claim your tax deductions for you, AND store your receipts for you for 5 years from purchase. No shoebox full of records required - ever again.

10 most common business expenses (as raised by Hnry users!)

Now we get to the fun stuff! Here are the top 10 most-raised expenses for our users in the last financial year:

  1. Bank feesYou can claim a deduction for any transaction fees charged when you make a work-related purchase. You can’t claim a deduction for account-keeping fees or overdraft fees.
  2. Subscription feesAny recurring subscription costs for business-related products e.g. recurring software costs, online magazines, newspaper magazine subscriptions, licensing fees.
  3. Equipment purchasesAny equipment purchased that you need in order to do your job e.g. Mobile phones software, camera equipment, tools. Remember though: If the equipment is for both business and personal use, you can only claim the business portion of the cost.
  4. Mobile phone billsAs mentioned, if the phone is for both business and personal use, you can only claim the percentage of the bill that was for business use.
  5. Cost of goods soldThese are the costs incurred as part of producing your work or providing your services (outside of computer equipment). For example, a canvas purchased by an artist to produce a commissioned portrait.
  6. Internet billsJust like your mobile phone bill, you can only claim for the cost of business use of your internet. You also can’t claim a deduction for installation or set-up costs.
  7. Advertising costsThis covers any costs of advertising your work in any way. So go ahead and commission that billboard you’ve been dreaming about forever.
  8. Home office expenses (actual cost method)It does what it says on the tin. You can calculate home office expenses by calculating the actual cost of running your business from home. For more information, you can visit the ATO website.
  9. Motor vehicle expensesThis refers to maintenance expenses for non-car work vehicles like motorcycles, scooters, utes, and trucks. Once again, you can only claim the percentage you use the vehicle for business purposes. You can calculate Car expenses using either the cents per kilometre method or the logbook method.
  10. Subcontractor feesYou can claim a deduction for the business expense of hiring subcontractors, third parties, or other service providers to carry out work for you.

How Hnry makes claiming tax deductions easier

We may be biased, but we believe that the best way for sole traders to maximise their tax deductions (legally) is to use Hnry. Hnry is an award-winning app that’s helping sole traders spend less time on financial admin, and more time doing what they love (unless what they love is financial admin). Once you’re up and running with Hnry, we’ll automatically deduct all relevant tax payments and levies every time you’re paid, so you won’t accidentally end up with a massive tax bill at the end of the financial year. We’ll even lodge your annual tax return for you, at no additional cost.

Raising expenses through our app is as simple as taking a photo of your receipt and inputting a few extra details. From there, our accountants will manage all your tax deductions, so you get the right tax relief in real time (rather than having to wait until the end of the financial year). Easy as!

Get your tax ducks (and deductions) in a row by joining Hnry today!

DISCLAIMER: The information on our website is for general educational purposes only. It doesn't cover all situations and circumstances, and shouldn't be taken as direct tax advice. If you're looking for specific help with your taxes, join Hnry and our team of experts can provide you with assistance tailored to your business needs.

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