How to pay less tax for the self-employed

Being self-employed brings with it freedoms that working for someone else doesn’t contain. You’re in control of your time, and where and how you spend and earn your money. Maybe you’ve started your own small business as a sole trader, or maybe you’ve decided to do some freelancing on the side. However you’ve decided to take the self-employment plunge, there’s one financial need that all self-employed need to be across – tax. Not just paying your obligations, but working towards paying the minimum amount.

Claim Business Expenses Only

There are three main rules when it comes to claiming your tax deductions:

  1. You must have already incurred the expense and can prove it
  2. The expense must have been made out of your own pocket
  3. The expense must be work related only. No private expenses can be claimed

There’s certainly a temptation to claim private expenses, especially when both business and private expenses are combined. You may have brought or are leasing a car for your business, but also use it on the weekends and to take the kids to school. Perhaps you’ve attended an interstate conference and taken the kids and stayed an extra day at a resort. You’ll be able to claim the business portion of your expenses, but the Australian Taxation Office (ATO) will expect some private expenses as well.

You’ll need to apportion your business costs from the total expense as a percentage. Depending on the asset, use ‘hours worked’ or ‘kilometers travelled’ to work out your business costs. It’s important to note that the ATO might ask for a log book, timesheets, or work and travel diaries to substantiate your estimation, as well as receipts to back up your estimation. While they expect a true and fair estimation, it’s best to be prepared.

Pro Tax Tip: The types of expenses you can claim depends on the asset purchased or service engaged. Capital expenses can be claimed over time using deprecation methods, while running costs can be claimed in the same year they’ve been incurred.

As a self-employed worker, the types of expenses that can be claimed include:

  • Motor vehicle expenses – purchase price or lease costs, fuel, oil, maintenance and repair
  • Travelling expenses – plane, train, bus, taxi fares, accommodation and food
  • Working from home expenses – running costs such as electricity, gas, heating and cooling, as well as capital costs such as computer equipment, laptops and office furniture
  • Business expenses – advertising, promotions, printing
  • Professional services – graphic designers, web developer, bookkeeping and accountancy service fees
  • The costs of organizing your tax – software, tax agent or tax accountant fees

Pro Tax Tip: The ATO deems entertainment costs, even if you’ve taken out a business associate to dinner, as a private expense. Traffic fines, schooling and childcare and hobbies are also considered private expenses.


Pre Pay Expenses

If you have a healthy cash flow, it might pay to bring forward some expenses so you incur them in one financial year while reaping the benefits in the next. Expenses such as loan interest repayments, office furniture and lease charges, insurances, subscriptions, seminars and self-education are expenses that can be pre-paid to reduce your taxable income.

Pro Tax Tip: Prepaying may also result in a discount from your supplier, so it might pay to contact them prior to paying.

Capital Expenses

Capital purchases, such as motor vehicles, computer equipment, manufacturing equipment, office and warehouse fittings can be claimed if bought by June 30, even with a few days to spare in the fiscal year. For the 2022 financial year most assets can be claimed at 100% in the year they’re purchased, while in subsequent years they may have to be be depreciated over several years.

If you’re a sole trader, you can receive 50% CGT discount on a capital gain before you include it into your income. You must have owned the asset for 12 months or more to be eligible. Capital gains can be reduced after applying capital losses for the income year as well as net unclaimed capital losses from earlier years.

Pro Tax Tip: Being self-employed, you’ll need to pay your own tax. Set money aside into a separate account as you receive it to pay your personal tax as well as any GST you’re obligated to collect.  That way, you won’t have to find the money for a potentially large bill.

Small Business Tax Concessions Small Business Tax Concessions are available for self-employed small businesses. There are Capital Gains Tax (CGT) differences between sole trader and company business structures. Tax concessions are available if your small business earns under $10 million in aggregated turnover for all concessions expect for CGT, or $2 million in aggregated turnover for CGT concessions only.


Charge Your Super Account

Putting extra money into your super account is a great way to reduce your personal income as well as save tax. As a self-employed business owner, you should set aside some money at the beginning, but when your business is up and running, you may choose to make concessional super payments. You can add up to $27,500 per year from your pre-tax income. If you exceed the limit, the amount over the limit will be taxed at your marginal rate.

Concessional tax rates are set at 15%, which is very much lower than tax rates for most Australian residents.

Payments can be made from your post tax income. These are called non concessional payments. It won’t change your tax rate, but caps do apply. The non-concessional contributions cap for the 2021/22 financial year is:

  • $110,000 a year; or
  • $330,000 in a rolling three-year period under the ‘bring forward provision’ if you are under age 67.

Pro Tax Tip: If your income is under $56,112 in the 2021/22 financial year and you make a non-concessional payment before 30 June 2022, you may be entitled to receive a Government Co-contribution payment where you’ll receive up to 50 cents per dollar you contribute up to a maximum $500.

When sorting out your options to reduce your tax, it’s best done with the help of a tax agent or tax accountant to avoid purchases or decision that could be detrimental.  A tax accountant will work out ways you can plan for tax and keep reducing tax for the long-term. Strategies put into place do have far reaching consequences, so make your decisions the best you can make that suit your circumstances, income level and other obligations. If you haven’t spoken to an accountant or tax agent, maybe it’s time to make an appointment. After all, you work hard. You deserve to keep as much of that hard earned profit as you can.