Top 3 Frequently Asked Questions About Tax in Sole Trade Businesses
ITP Research Team
If you have recently become a sole trader, then you’d know that managing tax returns is one of the most important albeit frustrating tasks you need to accomplish. While a sole trader business is taxed at the same rate as individual that are not in business (ie. Salary and wage earners), it’s still important to fully understand the process and nuances involved in order to maximise your returns. Income Tax Professionals answers our clients’ top questions about this below.
How Does a Sole Trader Pay Income Tax?
Registering as a sole trader is an inexpensive and easy way to set up your business when first starting out. It’s important to bear in mind, however, that a key component of operating as a sole trader is how you are taxed. Here are the different kinds of business tax:
Self Employment. Sole proprietors are considered as “self-employed individuals”, and as such would have to pay taxes based on their business’ net profit. The self-employment tax is included in the Individual tax return under the business section. For instance, if your business has a profit of 8,000, that number will be used to calculate your tax. If your business has a loss, however, no tax is payable on the business portion of the tax return.
Other Employment Taxes. If you have employees, your business must pay the taxes, superannuation and workers compensation insurance associated with the income of these employees. Wages, superannuation and business insurances are all tax deductible business expenses.
What Business Expenses Can I Claim?
To maximise your tax benefits as a sole trader, it’s important to know what business expenses you can and cannot claim. In doing so, you can determine whether you are paying more or less than you need to be. While tax professionals can walk you through these in detail, it’s worth knowing the most common ones.
Accommodation in business-related travels overnight can generally be claimed in full. Business trips are all about work, and that doesn’t require staying at the fanciest hotels. But that doesn’t mean you have to stay at the cheapest one either, simply select what is suitable for your situation and budget which can help you make the most of your trip.
Personal vehicles that are used for travelling to a temporary work location may be able to be claimed by either using the set rate per kilometre method or the log book method. Certain conditions must be met in order to claim either method. Just make sure to keep track of everything using receipts and a logbook. Riding other modes of transportation like taxis are allowed provided that you have satisfied the conditions associated with being treated as deductible business travel.
Computers, Software, Printers and Business Equipment
Items that are necessary for your business may also be deducted. This includes computers, software, printers and equipment and furnishing. These items may need to have their costs apportioned based on the business percentage use. Private use is not claimable.
How Does Sole Trader Compare to Other Business Types?
A sole trader business, a partnership and a corporation’s key difference lies in its ownership. While sole proprietorship means that the business and the owner are one, in a corporation the business is a separate legal entity from the owners. Partnerships are composed of two or more people that have agreed to operate a business and forms a legal entity.
Sole traders also have unlimited liability when it comes to lawsuits, debts and other business-related obligations. On the other hand, members of a Company can offer limited liability, however company directors in recent times may now be held personally liable to claims against the company.
Learn more about tax in a sole trader business, and in other types of business ownership, by consulting ITP The Income Tax Professionals. Schedule an appointment with our professional tax accountants today!