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Essential Tax Tips For SME And Sole Traders

Taxes are never anyone’s favourite thing, but they’re something that needs to be done. Being self-employed or working for a small business is no different. However, there are some essential tips you need to know about when it comes to tax time for your company. 

This blog post will go through what information you’ll need and how best to keep on top of everything during the year so that come Tax Day in April, there isn’t any nasty surprises waiting for you! 

As you’re probably aware, Tax time is fast approaching, and with the constant changes to the Australian Tax system, it can be hard to keep up. So we are here to help by providing some essential tax tips for SME’s and sole traders in Australia.

Tax Tips For Sole Traders

If you’re a sole trader and need to get your taxes organised, start by reading these expert tips for maximising your return and get a jump start on the next financial year.

End of the financial year can be stressful for any business owner, especially when it comes to completing your tax return. But rest assured, with a little pre-planning and expert help, you can easily reduce your tax-time stress while maximising your return.

To help make tax timeless well, taxing, we chatted to Chartered Accountant and small and solo accounting practice coach Amanda Gascoigne.

Here are her top tax time tips for sole traders – and some common mistakes to avoid. Remember: you have until 31 October to lodge your tax return for the last Financial Year, so now is the time to act.

Key takeaways:

  • Organising your records and setting up good recordkeeping practices now will save you time in future
  • Don’t leave tax planning to the very last minute if you want to be thorough, reducing the risk of an audit and maximising your deductions
  • There are tech tools to help streamline the process
  • Seek professional advice from a certified tax agent near you

Separate Business And Personal Expenses

It might seem simpler as a sole trader to have a single bank account and credit card, but it’s a mistake that could impact your tax return. According to Gascoigne, if you don’t already have a business account set up, you should make this a priority.

“Pay all of your business expenses through a business bank account and a dedicated credit card as this will ensure you don’t miss out on any tax deductions,” she said.

And if you do have to pay for something business-related with cash or from a personal account? Reimburse yourself from your business bank account, so you have a record.

Know The Rules Around Expense Claims

“If you are spending money on things that help you make money in your business, it will be either fully deductible or partially deductible,” said Gascoigne.

But it’s important you only claim the portion that is used for your business. For example, if you have one mobile phone for both work and personal use, you can only claim a certain percentage of your bill as a business deduction.

According to Gascoigne, an expense that’s regularly overlooked is the use of a privately-owned vehicle. “Often, it could be this vehicle that is used for quotes, banking and collecting mail or business supplies,” she said.

A logbook should be maintained as proof of business use or business kilometres if this is the case.

For other expenses such as mobile phone and home internet, Gascoigne advised keeping a diary for a representative four-week period to show your usual pattern of use, which can then be applied to the full year.

To learn what can and can’t be deducted, head to the ATO website’s business tax deductions summary.

Keep Digital Copies Of Work-related Receipts

There’s a lot of confusion around the need for receipts, said Gascoigne.

“Many business owners believe that they don’t need a receipt if an expense is less than $82.50, however that is for GST purposes only, not tax purposes.

coin piles with clock

“You cannot claim a tax deduction for an expense if you do not have a receipt.”

You are required to keep these records for a minimum of five years. And, as paper receipts fade and are easily misplaced, it’s best to have a backup in case of an audit.

“My top tip here would be to start keeping your receipts digitally by using MYOB’s Capture App or Receipt Bank,” said Gascoigne.

Don’t Leave Tax Planning And Returns To The Last Minute

According to Gascoigne, it’s always best to undertake tax planning strategies prior to 30 June. This enables you access to a range of tax reduction strategies you may not be able to put in place at a later date.

A good accountant is invaluable during the tax planning stage of your financial year.

Instead of leaving completing tax returns until the last minute, Gascoigne recommends sole traders complete their returns well before the due date, even if a tax bill is anticipated.

“This way, they can start setting aside money for that year and the current year.

“Sometimes the bill is less than anticipated, and they could be losing sleep unnecessarily,” she said.

And if you do have a tax debt and do not have the funds available? You can apply to the ATO for a payment arrangement.

Don’t Go It Alone

Whether you’re yet to submit last year’s tax return or planning for the new year, consider seeking some outside help.

Enlisting an accountant can save you time and money and provide valuable insight into the health of your business.

According to Gascoigne, having an accountant produce your profit and loss statement and tax return is the best way to ensure your tax is minimised.

Additionally, a good accountant can help you achieve your business and personal goals.

“Accountants will be able to comment on how your results compare to other clients in the same industry, can help you set budgets and charge rates and so much more,” she said.

“An accountant is an integral part of your business team – see them as an investment and not a cost.”

Avoid These Common Sole Trader Tax-time Errors

According to Gascoigne, some of the most common mistakes made by sole traders at tax time are:

  • Not declaring all income received — that means keeping your invoices in order and staying on top of BAS.
  • Claiming expenses that are not business-related
  • Not taking into account the private proportion of expenses.
  • Not keeping a logbook, which can limit your motor vehicle claims.
  • Not claiming interest on motor vehicle loans and business loans.
  • Incorrectly claiming loan repayments as leases.
  • Not claiming expenses that were paid for personally.

Some Final Tax Time Tips For Sole Traders

Gascoigne recommends the following steps be taken to remove the stress from tax time:

  • Keep good records, preferably with online accounting software. This will ensure you can keep your eyes on your numbers throughout the year.
  • Set aside tax (and GST if registered) throughout the year to avoid a nasty surprise at tax time. Your accountant will be able to help you calculate the amount to set aside.
  • Hire a good accountant. Someone you can relate to, speak openly with, and who will consider all options to reduce your tax legitimately.

Some Essential Tax Tips For Sme And Sole Traders To Follow

There’s no doubt tax time can feel like a time-consuming hassle for anyone running their own business. Staying on top of tax obligations and avoiding an audit by the regulators can be a constant worry.

And with the COVID-19 pandemic having caused significant disruption for those in business, it’s never been more important to get tax time right and maximise your return.

Here are seven essential tax tips every small business owner, self-employed or sole trader needs to know this EOFY.

Keep Your Accounts Up-to-date

Having accurate information about your business at your fingertips can be a huge advantage. That’s why it’s important to ensure you reconcile your accounts regularly.

Using cloud-based accounting software, such as Xero, can make things far easier to keep your records up to date. This will allow you to see real-time information on your cash flow., shortfalls, revenue, and employees (if you have any). Ultimately, this can help you make quicker and better business decisions.

It can also enable you to access the government’s stimulus package like JobKeeper faster to help you get through this difficult period.

Know Your GST Obligations

A common pitfall that many small business owners make is failing to understand their obligations when it comes to registering for Goods and Services Tax (GST).

You will need to register for GST if your income for the financial year exceeds $75,000.

And, you only have 28 days from the point you earn $75,000 to register. So, don’t wait until the EOFY to do it.

Therefore, you must track your income throughout the year. This will help you to know when to register for GST.

Another thing to keep in mind is that if you have registered for GST, then your tax return should include your income and expenses net of GST. The GST component is handled on your Business Activity Statement (BAS) instead.

Take Advantage Of The Instant Asset Write Off 

Good news. The COVID-19 Government stimulus measure means you can utilise a $150,000 instant asset write off this financial year.

Plus, it has been extended until 31 December 2020… so you can claim a 100% tax deduction for any work-related asset purchase now and again later this calendar year.

The scheme is particularly important for self-employed workers with a reliance on tools, cars and other assets.

Claim Work From Home Expenses

tax deductions

To claim work from home expenses as a tax deduction, you need to be carrying out income-producing work at home and incur expenses in using your home for that purpose.

Here are some examples of expenses:

  • cost of using a room’s utilities, such as gas and electricity
  • business phone costs
  • Decline in value (depreciation) of office plants and equipment, such as desks, chairs, computers. If equipment is also used for non-business purposes, you can claim a portion of it.
  • decline in value (depreciation) of curtains, carpets and light fixtures
  • occupancy expenses (such as rent, mortgage, interest, insurance, rates). You can claim a portion of these costs that relate to the room or workshop you use as a place of business.

If during COVID-19 you have moved your place of business to your home, the period of time you have worked from home will be used to determine the proportion you can claim.

Don’t Forget Super Contributions 

It was important to use your $25,000 concessional cap by the end of each financial year in previous years. However, because of the COVID-19 pandemic, your income may have decreased, and you can defer your concessional superannuation cap this year for up to five years when you expect to earn a higher income.

As long as your marginal tax rate outside of super is higher than the 15% contributions tax, then it will be an effective tax strategy.

So if you only contribute $10,000 this year instead of $25,000, you may be able to contribute $40,000 next year.

Your Income May Have Changed During COVID-19

Most people have had their take-home pay affected by the pandemic in one way or another.

For sole traders receiving JobKeeper payments, you will need to include those payments as assessable income for your business.

Every small business owner will need to make sure they meet their Pay-As-You-Go (PAYG) withholding obligations to claim deductions on salary payments. This means you need to ensure that you not only pay the wage but that you also withhold the appropriate tax and include it in your June BAS and PAYG payment summaries.

No Need To Go It Alone

Most days, running your own business can feel challenging, least of all managing your accounts and tax obligations.

That’s why getting the right advice can help free up time and resources so that you can focus on growing your business.

Seeking professional services can also help you avoid the common tax pitfalls that many small business owners make.

Tax Time Tips For Sole Traders

It’s no secret that tax time can be a little on the stressful side. For the sole traders and freelancers out there, we thought we’d do something just for y’all and put together a definitive list of tips that’ll help you put your best foot forward at tax time this year, helping you stay as stress-free and calm as humanly possible throughout the process.

Don’t Pull A Homer And Leave It ‘til Last Minute

It’s amazing how many people do this. Putting it off again and again until there’s little time left to get it all done is pretty much the most common mistake people make when it comes to submitting a tax return, and it’s easy to understand why doing so can make it even more of a stressor than it already is. On the other hand, sorting everything out nice and early means a much more simple process.

Be Meticulous With Receipts

Did you know that every receipt you claim as a deduction needs to be kept for 5 years? Keeping them digitally makes everything so much easier, so make sure you scan any physical receipts and save them on your computer (backing them up to the cloud, too).

Stay On Top Of Record-keeping

It’s a total pain in the butt having to update spreadsheets, yes, constantly. But staying on top of things throughout the financial year means at tax time, you know it’s all up to date and ready to rock and roll. Otherwise, it’s a mad rush to go through invoices, receipts and other paperwork to prepare it all at the last minute.

Know What’s Deductible

The Government’s most recent Budget included some really great tax benefits for sole traders.

Outside of those, if you want to minimise how much tax you need to pay, you must know all of the deductions that you’re allowed to apply to your business income well. These will be completely dependent on a number of things – take time to read about them to determine which apply to your business.

Don’t Push Your Luck

You might hear other business owners and operators talking about some ways they’ve pushed the envelope when it comes to deductibles and expenses that perhaps shouldn’t have been put through and gotten away with it. Great – good luck to them, unless, of course, they get audited sometime over the next few years.

Be comfortable with what you’re putting forward to the ATO – there’s no point stressing and sweating about something that saved you all of $100.

Back-Up Everything In The Cloud

This includes scanning all physical receipts and any other physical documents, adding them and all of your digital receipts and documents into a folder along with locally-saved records such as P&L and other business-related spreadsheets, invoices, et cetera and saving everything to cloud-based file storage such as Dropbox or Google Drive.

Put Money Aside For Tax Payment

Ensuring you have a reasonable amount of money set aside to pay your tax bill means you’ll have peace of mind when tax time rolls around. There’s nothing worse than getting a request from the ATO for several thousand dollars when you have zero on hand!

Lodge Online Via MyTax

Keep things as simple as possible and utilise the myTax online tool provided by the ATO – it’s essentially the quickest and easiest way to submit (and let’s face it, who wants to draw the process out?!).

Get Expert Help From An Accountant

If you don’t already have an accountant, it’s important to do some research and find someone who has a reasonable amount of experience, specifically with sole trader businesses. This information should be on their website, but if not, you can ask them when you have your initial chat (make sure you ask what their areas of expertise are before you tell them the type of business you run, But on though).

Buy Business-related Assets To Reduce Your Tax Payable

With tax time drawing ever-nearer, if you’re in need of a few assets that’ll really help your business to thrive, purchasing them now can help to lower the amount of tax you’ll need to pay by effectively reducing your total taxable income.

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