Contractors are independent individuals who are hired to complete a job based on a quote and agreement from an employer. As such, there are certain tax deductions that contractors can claim but employees cannot.
Who Are Contractors?
An individual who hires themselves to complete a job for payment is seen as a contractor in the eyes of the Australian Taxation Office (ATO). A contractor can be a sole trader, a person working in their own company, partnership or trust. A contractor can be called an independent contractor, sub-contractor or a ‘subbie’. Whatever the term, contracts have certain tax and super obligations they should be aware of.
Contractors essentially run their own business. You will need an Australian Business Number (ABN) and a Tax File Number (FTN) in order to claim tax deductions.
What Can Be Claimed?
There are three rules when it comes to claiming tax deductions:
- You must have already incurred the expense before you can claim
- The expense must have been personally incurred and not been reimbursed
- You must be able to prove the expense
Pro Tax Tip: Expenses must be apportioned between business and personal use. You can only claim the business portion of the expense as a tax deduction.
Some expenses can never be claimed. These are:
- traffic fines
- private or domestic expenses, such as childcare fees or personal clothing
- money earned from a hobby
- the GST component of a purchase if you can claim it as a GST credit on your business activity statement (BAS)
There are two types of expenses that contractor can claim:
- Running expenses – such as office stationery and wages
- Capital expenses – such as machinery, computers and laptops, and vehicles
Pro Tax Tip: Running expenses can be claimed in the same year as they’ve been incurred while capital expenses may need to be expensed over a period of time.
How Do You Claim Tax Deductions As A Contractor?
Tax deductions are claimed depending on your business structure.
Sole traders can claim tax deductions when individual tax returns are lodged.
Partnerships claim tax deduction when a partnership tax return is lodged.
A trust can claim tax deductions when a trust tax return is lodged.
Company tax deductions can be claimed in a company tax return.
Pro Tax Tip: Sole traders and partnerships can’t pay themselves a wage or salary for the purposes of claiming these costs as a tax deduction because it’s considered to be a distribution of profit. Companies and trusts can claim salaries and wages paid to themselves or other employees.
Several categories of tax deductions can be claimed as a contractor.
Motor Vehicle Expenses
The type of vehicle and your business structure determine what and how you can claim motor vehicle expenses. A sole trader or partnership claiming vehicle expenses is obligated to claim on how the vehicle is classified. Vehicles can be owned, leased or hired.
A car is a vehicle designed to carry a load of less than one tonne and fewer than nine passengers. Some four wheel drives and utes are classed as ‘cars’ for taxation purposes. ‘Other vehicles’ are motorcycles, minivans that carry more than nine passengers, utes or panel vans designed to carry load of more than one tonne.
Every day running costs for business purposes only can be claimed using the cents per kilometre or log book method. Note that both methods will require a log book to prove the expenses.
Cents per kilometre – 5,000 business kilometres per car can be claimed at a rate of 72 cents (from 1 July 2020). This method takes into account car running expenses, including depreciation.
Logbook – a log book is required to calculate actual business costs, and should include the odometer reading at the start and end of the logbook, details of the journey, starting and finishing date for each journey, odometer reading for each journey, kilometres travelled and the reason for your business travel. The logbook should be kept for 12 consecutive weeks in the same fiscal year and should be done every 5 years. Recording the odometer reading at the 30 June each year is required to maintain the validity of the original log book for 5 years.
Common types of motor vehicle expenses you can claim include: fuel and oil, repairs and servicing, interest on a motor vehicle loan, lease payments, insurance, registration, depreciation (decline in value) of the vehicle.
Contractors often have a need to run their business, or at least the administrative side of their business, from home. How you operate your business and the type of business structure will depend on what tax deduction can be made. Some deductions may incur Capital Gains Tax (CGT) in certain circumstances.
Certain running expenses can be claimed, including: heating, cooling and lighting; cleaning; landline phone and internet; decline of furniture and equipment; cost of repairs and maintenance.
There are three ways to claim your home-based expenses:
Actual cost – The actual costs from decline of depreciating assets, cleaning expenses, heating, cooling and lighting, phone and internet, and computer consumables are calculated.
52 cents an hour fixed rate – Contractors can claim this rate for each hour and includes decline of depreciating assets of office furniture, electricity and gas for heating, cooling and lighting, as well as cleaning. The work-related portion of phone and internet charges, and decline in value of computers and laptops can be claimed.
80 cents an hour shortcut method (From 1 March 2020 to 30 June 2022) – Use the shortcut method to claim 80 cents per hour flat rate. Nothing else can be claimed as a home-base expense if this method is used.
Business Travel Expenses
Business travel expenses that can be claimed include:
- train, tram, bus, taxi, or ride-sourcing fares
- car hire fees and the costs you incur (such as fuel, tolls and car parking) when using a hire car for business purposes
- meals, if you are away overnight.
Personal expenses relating to business travel can’t be claimed. A travel diary is required alongside receipts, tax invoice, contracts as well as other forms of proof in order to claim these expenses as tax deductions.
Repair and Maintenance
As long as expenses are not capital, tax deductions can be claimed for repairs, maintenance or replacement of machinery, tools or premises where you produce a business income. These types of expenses include: painting, conditioning gutters, plumbing, repairing electrics, mending leaks, replacing broken fences or windows and repairing machinery.
Pro Tax Tip: Contractors don’t have to own the property to claim these expenses.
Other Operating Expenses
General business expenses can be claimed. These include:
- purchases of trading stock, including delivery charges
- advertising and sponsorship
- public relations
- legal expenses, such as those incurred defending future earnings, borrowing money, discharging a mortgage or obtaining tax advice
- tender costs, even if the tender is unsuccessful
- bad debts
- bank fees and charges
- insurance premiums, including accident or disability, fire, burglary, professional indemnity, public risk, motor vehicle, loss of profits insurance, or workers compensation
- interest on money borrowed for
- producing assessable income or purchasing income-producing assets
- income tax obligations, employer super contributions, or late payment or lodgement of tax
- luxury car leases
- small-value mobile phone and tablet accessories
- for example, protective covers and earphones
- costs for running a commercial website
- for example, site maintenance and content updates
- internet service provider fees
- subscription fees for off-the-shelf software
- transport and freight
- waste removal and recycling
- parking fees (but not parking fines)
- union fees
- clothing expenses –including repair and maintenance, protective clothing
- gifts and donations
- operating expenses from employing people
- the cost of managing tax affairs
Contractors can claim a wealth of tax deductions, but it’s best to understand how to claim using the methods that will reap the most tax deductions. If you need more information, a quick chat with an ITP tax professional will help clear up any confusion and get you on your way. Phone 1800 367 487 today.