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Sole Trader Deductions: 5 Deductions You Can Claim (Example Included)

  • November 30, 2021
  • 6 min read
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Sole Trader Deductions: 5 Deductions You Can Claim (Example Included)

According to the Australian Tax Office(ATO), there are over 220 business expenses that can be claimed as deductions against your small business income or expenses.

There is one common theme with the majority of these deductions: they must have been used to earn assessable (or taxable) income and they must not already have been included in another calculation (which basically means you cannot double-dip).

Below is a list of deductions for sole traders to consider:

Operating Expenses

By definition operating expenses are expenses that are reasonably incurred by a business through its normal operations and can be claimed as either an immediate deduction or as a capital expense (not immediate).

This list is extensive and we recommend seeking the advice of your tax accountant if you intend to claim any of these deductions. These expenses include, but not limited to:

  • Office expenses such as office consumables, e.g, stationery, toner, books, etc.
  • Office equipment such as computers, printers, phones, and furnishings.
  • Utilities such as electricity and water.
  • Cleaning costs such as cleaning of office and business property.
  • Repair costs such as the cost of repairs, installations and maintenance.

For expenses that you incur for items that you use for both business and private, you can only claim that portion of the cost that relates to the business use.

For example, if you purchase a new printer for your home office which you use solely for business purposes, the total cost can be claimed as a deduction.

However, if your printer is also used for private purposes (e.g. for printing personal documents, etc.), the private portion of the cost can only be claimed as a deduction to the extent that it relates to your business.

Occupancy Expenses

In an event that you work from home, you may claim occupancy expenses as a deduction. This includes:

  • Any interest expense for the business (e.g. loans, hire purchase)
  • Rental expenses such as rent and rates.
  • Council Rates.
  • Land taxes.
  • Property insurance.

Qualifying to claim a deduction for your business expenses must meet the following 3 criteria:

  • The expense was made in connection with your business.  
  • The expense is not private or domestic in nature.
  • You have a record of incurring these types of expenses (e.g receipts).

Additionally, the ATO proposes that:

  • The portion of the area where you operate is sorely dedicated to business purposes.
  • There is signage with your business name stating that it is a place of business.
  • Your clients make regular visits to your business premises, if applicable.
  • The area can’t be converted to private use in between your business operations.

To calculate the portion of your home expenses, the ATO has clearly indicated that deductions can only be claimed on a maximum of two-thirds of the area or floor space used for business purposes. You cannot claim any part of your home office if it is less than 8m².

Prepaid Expenses

Prepaid expenses include expenses that have been paid in advance, which you don’t have to worry about paying for in the following year and you can claim them as an immediate deduction.

The deductions are claimed against the current year, thus reducing your current income tax liability to offset it against the previous year’s income.

Pre-paid expenses include:

  • Travel expenses.
  • Rent.
  • Insurance.
  • Office equipment rentals.
  • Interest expenses for business loans (but not private or domestic interest expenses).
  • Capital Expenses.

For more information on claiming prepaid expenses, see the following prepayment rules from ATO.

Superannuation Fund Contributions

While it’s not mandatory to contribute to a superannuation fund as a sole trader, it’s advisable not only for tax benefits but also for your financial future.

Since the concessional tax rate of 15% for super contributions is lower than the most marginal tax rates, you can lower your tax burden while saving for the future.

To take advantage of all SMSF deductions, you may need to get in touch with SMSF experts to assist you with your contributions.

Client’s Bad Debts

When a client fails to pay the invoice, you can claim the amount as a deduction too.

The downside is that you may need to negotiate and write off their debt for it to be tax-deductible (unfortunately).

For this to happen:

  • You must prove that you have done all reasonable attempts to recover the debt.
  • You must keep a detailed record of all correspondence and phone calls made with the client, which will be submitted with your tax return.
  • Sent notices for payment or reminders.
  • Receipt of payments.
  • Invoice numbers (so that the ATO can match up the records with your bank statements).
  • The time frame for this is limited to 12 months. But, it is recommended you keep all records for 7 years (after which they are destroyed), in order to claim any outstanding debts.

After you have exhausted all efforts to recover the debt, you must prove that you have been unsuccessful.

If owed money from a deceased estate, you need to claim it as soon as possible because there is a time limit on how long can be claimed.

Case Study: Tax Return Example

Richard is a sole trader and operates his business as an electrician.

He has one employee, who he pays $24,000 per annum.

His total income for the year was $100,000 which includes that of his personal wage of $25,000.

After meeting with his Tax accountant, Richard’s business expenses were calculated as follows:

  • Travel expenses (tolls, fuel, etc) = $500
  • Car repairs and maintenance =$200
  • Salary of employee = $24,000
  • Depreciation on work vehicles = $500
  • Rent for a portion of his home meant for business (6m²) = $1000

Without claiming any of his expenses for deductions, Richard would pay $22 967 in taxes. However, if Richard through the help of a tax accountant claims the above expenses his taxable income will now be $73 800 instead of $100 000. This then means Richard will now only pay $15 979.5, which is 30% less tax.

As you see from the example above, sole trader tax deductions are a simple way to reduce the taxable income, which means a reduced tax rate.

The main thing to remember when claiming sole trader tax deductions is that you need to keep track of everything because the ATO will ask for proof.

Therefore, keeping all records organized can save you time in preparing your tax return at the end of each financial year.

If you need help, you can always speak with a tax accountant who will guide and support you to make the right claims.