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The end of the financial year — you either love it or you hate it. Sole traders may have especially strong feelings about tax time, but it’s important to start considering the types of things they will need to complete for sole trader tax returns.
We understand that this is a difficult time for small businesses. It’s especially so for sole traders, who don’t always know what they must provide their accountant with come tax season. However, there are a few tips that will help filling out tax returns much less stressful.
Here are five tips for filling out your income tax return as a sole trader.
1. Separate Business and Personal Expenses
This tip may seem obvious, but it is one that most often gets sole traders in trouble.
As a sole trader, it may seem easy to have just one bank account and one credit card for all of your expenses, both business and personal. However, that mistake may end up causing you trouble when it comes time to fill out your personal tax return.
Be sure to pay all of your business expenses through a business account and also have a separate credit card that is solely for business. This will ensure you don’t miss out on any tax deductions come tax time.
You may end up in a situation where you have to pay for something in cash or from your personal account. When this happens, don’t fret. You can reimburse yourself from your business account. Just make sure you have a record of the transaction.
In fact, not claiming expenses that were paid for personally can cause you to lose out on eligible deductions. Be sure to reimburse yourself as soon as possible.
2. There are some startup expenses that are tax deductible
As of July 1, 2015, the Australia Taxation Office (ATO) established new rules permitting small businesses to deduct particular startup expenses immediately. Before, these expenses needed to be expensed over five years. To be eligible, your small business must have a turnover of less than $10 million.
Expenses that can be claimed include:
- Fees paid to professionals to obtain advice or services related to the proposed structure or operation of a business.
- Payments to government agencies for fees, charges, or taxes related to establishing a business.
Examples of eligible expenses include fees paid to register the business name, as well as any fees paid to a professional to obtain the advice on registering the business name.
3. Instant asset write-off for eligible small businesses
The ATO offers an instant asset write-off for eligible small businesses. This is to a great advantage for small businesses. A small business that buys an asset costing less than $1,000 can deduct that asset immediately, instead of letting it depreciate.
Instant asset write-offs can be used for multiple assets if the cost of each individual asset is less than the relevant threshold, as well as second-hand and new assets.
It is important to note, though, as a small business, the simplified depreciation rules must be utilized in order for you to be eligible for the instant asset write-off. You aren’t allowed to use it for assets that are excluded from those rules. Check out the ATO website for a full list of the rules.
4. Small business income tax offset
The small business income tax offset (SBITO) is a deduction that may provide small businesses with an offset of no more than $1,000 per year. It is also referred to as the unincorporated small business tax discount, because your business needs to be unincorporated to be eligible for it.
This offset was introduced in the 2015 government budget and came into effect in July 2015. The SBITO is meant to support and encourage small business owners to drive growth and create jobs.
The maximum amount you can receive is $1,000, but the Australian Taxation Office (ATO) uses your business income to determine the amount of your offset. Your offset amount will be shown separately on your notice of assessment.
The best part about this tax deduction is that, as long as your business is eligible, you do not need to do anything special to qualify. You do not need to fill out any formal application to receive the small business income tax offset. The government will deal with it for you.
5. Claim interest expenses
Sole traders often have to borrow money in order to start up their business. This money can be used for materials, equipment, or other business needs.
If you have to borrow money to fund your business, know that you are entitled to a deduction on the interest that you pay on that loan.
Although you should only use a business loan for business, if you for some reason used a portion of that loan for personal expenses, make sure that you apportion the interest deductions to only include the amount that relates to the business percentage of the loan.
Other Sole Trader Tax Return Tips
Here are some additional mistakes to avoid when filling out a tax return as a sole trader:
- Be sure to declare all of the taxable income your business receives. Make sure you keep a record of all of your invoices.
- Do not try to claim expenses that are not related to business. This will get you in trouble if the ATO decides to audit your business.
- If you use a vehicle for your business, make sure you keep a logbook. Without records, you may not be able to claim the motor vehicle expenses you are entitled to claiming.
Sole trader tax returns can seem daunting, but by claiming the right expenses and keeping the right records, you will be able to make the most out of tax season.
To make sure you are properly lodging your returns and that you don’t miss out on any deductions, check out the ATO’s website to stay up to date on eligible tax deductions.
