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Everything you need to know about tax for sole traders and freelancers

For some of us (and I’m looking at myself in the mirror here), coming up to the end of June is definitely not the most wonderful time of the year. Because for Australian sole traders and freelancers, July means tax time and it brings up all kinds of questions like: “How do I pay tax as a sole trader?” and “What tax deductions can I make as a sole trader?” and “How much tax do I have to pay when I’m self-employed or as a sole trader?”

So I spoke to Mark Chapman from H&R Block Australia to find out all about tax returns for sole traders in Australia and how to make the most of your deductions.

What are some of the most important things for freelancers to know when preparing their tax return and for sole trader tax?

If you want to make a claim for work-related expenses, you need to follow the three golden rules:

  • The expense must relate to your work
  • You mustn’t have been reimbursed by your employer
  • You must be able to prove that you spent the money. That means that you must keep receipts, invoices or statements to demonstrate that you actually incurred the expense.

Our tip is to keep electronic copies of all documentation relating to expenses.

Paper receipts get lost or fade, so keeping everything together on your phone or computer will save time and effort when you come to complete next year’s tax return.

Your tax accountant will be able to go through all the items you have spent over the last year and point out which ones are legitimate tax deductions. It’s vital that you have documentation proving your claim; if you don’t, you can’t claim it, even if the expense would otherwise have been claimable.

[And if you’re looking for information about the sole trader tax rate, this article is great].

What are your top EOFY tax tips and advice for sole traders and freelance writers?

You need to keep all relevant paperwork to support your income; at the very least you’ll need bank statements and receipts of income, invoices/receipts for deductions, record of debtors and creditors and payroll records covering any employees.

If you run your business from home, don’t forget to claim the appropriate proportion of home-office expenses, such as internet fees, landline or mobile phone bills, costs of office furniture, etc. In addition, you may be eligible to claim a proportion of your rent or mortgage interest and also your land rates.

Finally, where expenses relate to a mixture of business use and private/domestic use, make sure you only claim the business related element.

Are there common mistakes freelancers and sole traders make when completing their tax return?

1. Claim what you’re entitled to…

You’re entitled to claim a deduction for any expense which you incurred in earning your income. So, if you have incurred a work-related expense, and you have the paperwork to prove it, don’t hesitate to claim it.

A good tax accountant will be able to tell you exactly what you can and can’t claim, minimising the chances of an audit at a later date.

2. But don’t embellish deductions….

You can only claim what you’ve spent. So, don’t inflate deductions in order to get a bigger refund and only claim for costs you can prove you spent, by producing an invoice, receipt or bank statement for instance.

If your deduction claims are found to be incorrect, you will be required to repay the tax avoided, plus pay interest.  If the ATO believes that you have acted carelessly, a penalty between 25% and 95% of the tax avoided may also be charged.

3. Don’t rely on pre-filled data from the ATO

These days, with the push of a button, you can pre-fill lots of your income information straight from the ATO’s systems. Take care though and don’t assume that income data is correct or complete. Particularly if you are lodging early, always use your own information as the key source data.

Some people assume that because the data comes from the ATO, it must be right. That’s a dangerous assumption, especially in July and early August.

If you omit income and get questioned by the ATO, the legal burden will be on you, even though you’ve taken the information straight from the ATO’s pre-filled data.

4. Get help!

There’s a reason 70% of Australians use a tax agent to prepare their tax return; tax is complicated! Get your tax return wrong and the comeback is on you, either with a lower refund or ATO penalties. 

Most people find it far less stressful to simply pass on all their information to a tax agent and leave it to the agent to complete their return, safe in the knowledge that the return will be accurate and complete.

An experienced agent will usually be good at sniffing out those obscure tax deductions you didn’t know you could claim so they can often pay for themselves several times over.  Best of all, the tax agent’s fee is also tax deductible!

What’s the best way for sole traders to get ready for tax time?

Take some time out to gather together all the information you will need to help you prepare your tax returns, including invoices and receipts for work-related expenses and any bank/credit card statements that contain items of work-related expenses that you no longer have (or never had) receipts or invoices for.

If you’re not sure if it’s claimable, collect together the receipt or invoice anyway and discuss it with your tax agent.

If you don’t have the paperwork, you can’t claim a deduction so it makes sense to set aside this time in advance of the end of the financial year to spare yourself a stressful document hunt whilst you’re actually in the process of getting your return prepared!

In addition, if you’re claiming any expenses that have a work-related element and a private element (such as for the use of a personal mobile phone) set some time aside to work out what a reasonable apportionment is for the work-related bit.

As we’ve not yet reached the end of the financial year, it’s not too late to generate some additional tax deductions this tax year:

  • If you have any professional subscriptions or union fees due, pay by 30 June and you can claim the deduction for the whole amount this year.
  • Charitable donations are tax deductible – anything over $2, with a receipt, paid to a charity registered as a deductible gift recipient (which covers most major charities) will be deductible.
  • If you have some spare cash, look at making a personal contribution into your super fund. Provided the total amount of your contributions (including the contributions made on your behalf by your employer) does not exceed $27,500, this can be a great way to boost your retirement savings and claim a tax deduction for the personal contribution. The payment must be made by June 30th and you need to advise your super fund that you’ve made the payment by the time you lodge your return (your super fund or accountant can give you guidance on how to complete the form and there’s a standard form on the ATO website here)
  • If you use a bag for work, to carry papers or a laptop perhaps, you can claim a tax deduction for the cost. That could include a briefcase, a backpack or a handbag, whichever suits your needs.

What other tax deductions can sole traders claim?

Superannuation contributions

Make sure you pay into a superannuation fund when you receive your income from freelancing. Unlike employees, nobody is paying into super on your behalf – so you’ll need to do it yourself. Super contributions are deducted from your taxable income and you can pay up to $27,500 each year into your fund.

Car and travel expenses

If you are out and about visiting editors or publishers or researching stories, make sure you claim all the car and travel expenses you are entitled to. Keep a record of all your work-related car journeys and claim 72 cents per km or, alternatively, claim your actual costs if you have kept a logbook. You might also be able to claim for:

  • Parking
  • Tolls
  • Taxi fares
  • Flights
  • Accommodation and meals if you need to stay away from home. 

Equipment

Look to utilise the “temporary full expensing” measure. This allows you to claim an immediate tax deduction for all capital purchases (irrespective of the cost), rather than depreciating the cost over several years, as used to happen.

This is great for tech items such as computers, tablets, cameras and phones, as well as office furniture and even motor vehicles.

The allowance is available to all businesses with an aggregated turnover of less than $5 billion.

Remember, as well as making a purchase, the asset you acquire also has to be used or available for use in your business, so realistically you need to get the item delivered and installed by 11:59PM on 30 June in order to claim a tax deduction in this financial year. If you buy something now for delivery and/or installation in July, you won’t be able to claim the deduction until the next tax year.

What Covid expenses can freelance writers claim?

You may be able to claim the cost of RAT tests if the tests are required for work-related purposes. For example, you might be required to visit your editor’s or publisher’s premises and they may have a RAT test mandate in force which would affect you. In addition, if you are writing a story that involves dealing face to face with people who might be expected to have had COVID-19 and you decide to take a test before or after meeting them, this would also qualify.

A COVID-19 test may also be required by certain countries and states in order for an individual to enter that territory or return to their home state. This too is tax deductible where the test is required for a work-related trip. 

RAT kits purchased by individuals for private purposes (eg personal travel, convenience, no access to PCR testing) will not be tax deductible.

If you must quarantine either during or after a trip while travelling on work, any costs paid by you that relate to the quarantine (eg hotel fees, meals) would be tax deductible.

Could you briefly explain the GST ($75,000) rule?

The basic rule is that your business must register for GST once your annual turnover is $75,000 or more. 

Once you’ve passed the annual turnover threshold, you have 21 days to register so it’s worthwhile checking your turnover each month to see if you’re close to exceeding it. Registration is voluntary before that point.

Once you are registered for GST you will need to:

  • include GST in the price you charge for your merchandise, provided the sales are taxable
  • issue tax invoices for your taxable sales and obtain tax invoices for your purchases
  • claim credits for the GST included in the price of your business purchases, such as stock
  • account for GST on either a cash or non-cash basis and put aside the GST you have collected so you can pay it to the ATO when due
  • lodge activity statements or annual returns to report your sales and purchases, and pay GST to the ATO or receive a GST refund.

If you choose to voluntarily register, you generally must stay registered for at least 12 months.

If you’ve just started a new business and expect it to reach the GST turnover threshold or more in its first year of operation, you should register for GST even if you haven’t yet reached the $75,000 threshold.

You can register for GST online via the Australian Business Register website.  You can also register for GST via the Business Portal on the ATO website. 

TIP: You only register once for GST, even if you operate more than one business. So, you only need the one registration unless one of the businesses is operated through a different entity, such as a company.

If you fail to register when you should have done, you may be forced to account for GST on all sales backdated to the point at which you became required to register, plus penalties and interest. If you didn’t charge GST to your customers, that will be a hit to your profits.

Anything else you’d like to add to help sole traders and freelance writers navigate tax time?

Still have some questions about lodging your tax return? Talk to H&R Block‘s experienced tax consultants who can help maximise your personal return by applying all relevant deductions.

And if you’re looking for great accounting software specifically designed for freelancers, I highly recommend Rounded (affiliate link). You can use the code “LindyRounded20” for any annual plan for Australian and New Zealand customers and it’ll give you an additional 20% off you plan of choice (just add it into the coupon field of the subscription page). It applies for the first 12 months.

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There’s never been a better time to be a freelancer. But how do you make the leap from writing as a hobby to full time freelancing? The Freelancer’s Year has all the tips and tricks you need to be a successful freelance writer.