This article was first published on www.myob.com.au
If you’re a sole trader and haven’t lodged your tax return, there is still time. Just make sure you read these expert tips for maximising your return – as well as how to get ahead easily for next time.
End of financial year can be stressful for any business owner, especially when it comes to completing your tax return. But rest assured, with a little pre-planning and expert help, you can easily reduce your tax time stress while maximising your return.
To help make tax time less, well, taxing, we chatted to Chartered Accountant and small and solo accounting practice coach, Amanda Gascoigne.
Here are her top tax time tips for sole traders – and some common mistakes to avoid. Remember: you have until 31 October to lodge your tax return for the last Financial Year, so now is the time to act.
- Organising your records and setting up good recordkeeping practices now will save you time in future
- Don’t leave tax planning to the very last minute if you want to be thorough, reducing the risk of an audit and maximising your deductions
- There are tech tools to help streamline the process
- Seek professional advice from a certified tax agent near you
Separate business and personal expenses
It might seem simpler as a sole trader to have a single bank account and credit card, but it’s a mistake that could impact your tax return. According to Gascoigne, if you don’t already have a business account set up, you should make this a priority.
“Pay all of your business expenses through a business bank account and a dedicated credit card as this will ensure you don’t miss out on any tax deductions,” she said.
And if you do have to pay for something business-related with cash, or from a personal account? Reimburse yourself from your business bank account so you will have a record.
Know the rules around expense claims
“If you are spending money on things that help you make money in your business, it will be either fully deductible or partially deductible,” said Gascoigne.
However, it’s important you only claim the portion that is used for your business. For example, if you have one mobile phone for both work and personal use, you can only claim a certain percentage of your bill as a business deduction.
According to Gascoigne, an expense that’s regularly overlooked is the use of a privately-owned vehicle. “Often it could be this vehicle that is used for quotes, banking and collecting mail or business supplies,” she said.
If this is the case, a logbook should be maintained as proof of business use or business kilometres.
For other expenses such as mobile phone and home internet, Gascoigne advised keeping a diary for a representative four-week period to show your usual pattern of use, which can then be applied to the full year.
To learn what can – and can’t – be deducted, head to the ATO website’s business tax deductions summary.
Keep digital copies of work-related receipts
There’s a lot of confusion around the need for receipts, said Gascoigne.
“Many business owners believe that they don’t need a receipt if an expense is less than $82.50, however that is for GST purposes only, not tax purposes.
“You cannot claim a tax deduction for an expense if you do not have a receipt.”
You are required to keep these records for a minimum of five years. And, as paper receipts fade and are easily misplaced, it’s best to have a backup in case of an audit.
Don’t leave tax planning and returns to the last minute
According to Gascoigne, it’s always best to undertake tax planning strategies prior to 30 June. This enables you access to a range of tax reduction strategies you may not be able to put in place at a later date.
A good accountant is invaluable during the tax planning stage of your financial year.
Instead of leaving completing tax returns until the last minute, Gascoigne recommends sole traders compete their returns well before the due date, even if a tax bill is anticipated.
“This way they can start setting aside money for that year and the current year.
“Sometimes the bill is less than anticipated and they could be losing sleep unnecessarily,” she said.
And if you do have a tax debt and do not have the funds available? You can apply to the ATO for a payment arrangement.
Don’t go it alone
Whether you’re yet to submit last year’s tax return or planning for the new year, consider seeking some outside help.
Enlisting an accountant can save you time and money, and provide valuable insight into the health of your business.
According to Gascoigne, having an accountant produce your profit and loss statement and tax return is the best way to ensure your tax is minimised.
Additionally, a good accountant can help you achieve your business and personal goals.
“Accountants will be able to comment on how your results compare to other clients in the same industry, can help you set budgets and charge rates and so much more,” she said.
“An accountant is integral part of your business team – see them as an investment and not a cost.”
Avoid these common sole trader tax-time errors
According to Gascoigne, some of the most common mistakes made by sole traders at tax time are:
- Not declaring all income received
- Claiming expenses that are not business related
- Not taking into account the private proportion of expenses
- Not keeping a logbook which can limit their motor vehicle claim
- Not claiming interest on motor vehicle loans and business loans
- Incorrectly claiming loan repayments as leases
- Not claiming expenses that were paid for personally
Some final tax time tips for sole traders
Gascoigne recommends the following steps be taken to remove the stress from tax time:
- Keep good records, preferably with online accounting software. This will ensure you can keep your eyes on your numbers throughout the year.
- Set aside tax (and GST if registered) throughout the year to avoid a nasty surprise at tax time. Your accountant will be able to help you calculate the amount to set aside.
- Hire a good accountant. Someone you can relate to, speak openly with, and who will consider all options to legitimately reduce your tax.