Tax time as a sole trader can be a stressful experience. Luckily, with a little planning and preparation, you won’t need to dread doing your next tax return.
In this blog, you’ll find all the important tax information for sole traders and our eight best tips for minimising your 2022 tax bill.
What is the sole trader tax rate?
Sole traders lodge their sole trader income and expenses as part of their personal income, meaning that personal income tax rates apply. If your annual income is $75,000 or over, you will also need to register for GST.
What is Personal Services Income (PSI) and how does it work?
PSI is income that is predominantly generated through an individuals personal skills, efforts or expertise. This does not apply to employees receiving a salary or wage only, but can apply if you are operating though an entity.
Income is classified as PSI when at least 50% of your earnings is acquired from personal skill and effort rather than through assets or the selling of goods.
As special tax rules apply to Personal Services Income, it is important to understand whether your income falls under this category.
For help understanding the PSI rules and eligibility, get in touch with your accountant or visit this page of the ATO website.
What are our eight best tax tips for sole traders?
1. Keep accurate and detailed financial records
One of the first things you should do as a sole trader is get your business financials in order. This includes keeping strict records of all your business activity such as any expenses, purchases, sales and payments made to your employees.
Online accounting software can be a particularly useful tool when keeping a record of your financial data. Keeping an online record will simplify tracking your profit and loss and will give you easy access to your business finances when you need it.
2. Seperate your business and personal expenses into different accounts
Having separate business and personal accounts is crucial for staying accountable and organised when it comes to your expenditure. Not only will this make life much easier for your accountant at tax time, it will also help you stay on budget and keep clear records of any tax deductible expenses.
One of the biggest mistakes we see sole traders make is getting their business and personal financials mixed in with each other. This makes it much harder to track the performance of your business and effectively manage your cash flow.
To keep your business and personal receipts clearly separated, pay for work expenses on business credit card and keeping accurate logs when using personal items for work.
3. Keep digital copies of your receipts
In order to claim a deduction at time, you legally must have a receipt for your purchase. As the ATO requires you to keep them for at least five years, it’s important that these receipts are organised and stored properly.
Among the online tools now available, the Hubdoc and Xero Expenses apps do a great job of making this process easy and efficient. Collecting digital copies of your receipts will make sure you don’t miss out on tax deductions and have access to these records for as long as its required.
4. Set aside earnings into a tax account
Throughout the year, allocate a portion of your income into a seperate tax account to ensure you are covered when tax time rolls around. This is the most effective way of budgeting for tax and will save you from getting a heart attack when handed a big tax bill.
For guidance on how much you should be setting aside, get in touch with your accountant. We will be able to forecast your tax obligations and calculate how much you need be setting aside for tax (and GST if you’re registered).
5. Know which expenses are tax deductible
As a sole trader, you will be able to claim a deduction for many of the costs involved with keeping your business running. Understanding the rules around these deductions can potentially save you thousands on unnecessary tax costs when doing on your next tax return.
Some common examples of tax deductions can include:
- Software and subscription costs
- Tax accountant costs
- Interest on business loans
- Depreciation on business equipment (items like laptops, furniture etc)
- Business travel expenses
- Marketing costs
- Maintenance costs
- Personal super contributions
For help on which deductions are available, visit the ATO’s tax summary for sole traders.
6. Implement tax planning strategies well before the deadline
Tax planning can go a long way towards minimising your next tax bill and protecting you from a nasty tax bill. Tax reduction methods are most effective when they’re put in place weeks or months in advance, so don’t let procrastination get in the way of tax savings.
Some of potential strategies you might be able to use include:
- Bringing forward or pre-paying regular business expenses
- Pushing back your invoices until after the 30th June
- Making personal super contributions
- Writing off bad debts before June 30
- Utilising temporary full expensing
Getting your tax planning organised early will also relieve stress when its time to do your tax returns, so don’t leave it until the last minute. We’ve outlined a dozen great tax planning strategies to minimise your tax bill in 2022 which you can read here.
7. Utilise online accounting software
Accounting used to involve a lot of sifting through piles of paper and large filing cabinets. Luckily, the emergence of online accounting platforms has made financial management far more straightforward.
If you’re a sole trader, take advantage of online accounting platforms which will help you keep an accurate and up-to-date record your money.
At Elephant Advisory, we used Xero’s cloud-based accounting software because of how easy it is to use and how it allows our clients to access their accounts anywhere, anytime. To get an idea on which platform will suit your business needs, check out our comparison of Xero and Quickbooks Online.
8. Use a trusted accountant
No matter the size of your business, it’s important that you’re getting help and advice from a trusted accountant. An accountant, among other things, will be able to use their expertise to minimise your tax bill and ease the burden of tax time.
Take time with your decision and do appropriate research to make sure the accountant will be suited to meet the individual needs of your business.
If you have any questions about your tax requirements as a sole trader or want to learn about our accounting services, get in touch with us for a free consultation.