Tax deductible expenses for the self employed

Being self-employed, you must first understand the nature of your expenses.

What deductions can I claim as a sole trader? 

You can claim expenses that are directly related to earning your taxable income. Private and personal expenses, such as after-school care or home loan interest payments, cannot be claimed. 

The expenses you can claim — and when you claim them — depends on the type of asset purchased or service engaged. 

Operating expenses can usually be claimed in the year they occur, while capital expenses must be claimed over time. 

Business vs personal expenses
Expenses that are usually not deductible 

• Entertainment expenses
• Traffic fines
• Private or domestic expenses, such as childcare fees or clothes for your family
• Expenses relating to earning income that is not assessable, such as money you earn from a hobby
• The GST component of a purchase if you can claim it as a GST credit on your business activity statement

Expenses that may be deductible 

• Wages
• Office stationery
• Computer or laptop that is used for business
• Machinery and equipment
• Motor vehicle expenses
• Advertising
• Business travel
• Bills, like insurance and phone 

How can a sole trader pay less tax? 

1. Claim operating expenses when you incur them

Operating expenses are also called revenue expenses because they help generate income, and they can be claimed in the financial year you incur them. Examples of claims that can be made in the year they are incurred include: 

• Salaries, wages, overtime payments, allowances and bonuses
• Advertising and promotional expenses
• Electricity, phones, gas and stationery
• Business travel costs
• Asset maintenance and repair costs
• Parking fees (but not fines) 

2. Prepay some expenses this year to reduce taxes

Pay in advance and bring the deduction forward to this year. If you have a healthy cashflow, you can prepay your: 

• Business loans (prepay on fixed rates 12 months in advance)
• Office and equipment lease payments
• Business insurance
• Business related subscriptions
• Business travel, seminars and conference bookings
• Telephone and IT services 

Tip: Two birds with one stone — See if you can combine the benefit of bringing forward the tax deduction and getting a discount for paying your supplier in advance.  

For every small business looking for a tax deduction, there will most likely be a service provider or salesperson looking to boost their sales results before June 30. 

3. Consider capital expenses (asset purchases)

It’s important to mention that a small business that purchases an asset costing less than $6500 can still claim 100 percent of the cost in the actual year the expense is incurred. 

Even if you have not paid for the item yet, you can still claim as long as you are invoiced before 30 June. 

Larger capital acquisitions that have an expected life longer than one year, such as IT servers, vehicles and expensive plant and equipment, must be claimed over a number of years. 

These items are claimed via accelerated depreciation of the capital value, with 15 percent claimed in the first year (even if purchased in the last month of the year) and 30 percent each year thereafter. 

Examples of capital expense assets that must be depreciated over time include: 

• Motor vehicles
• Computers, servers, printers and copiers
• Office and warehouse fixtures and fittings
• Plant and equipment

4. Claim the instant asset write-off 

Sole traders are eligible to claim the instant asset writeoff, which allows small businesses to claim immediate deductions for new or second-hand plant and equipment asset purchases like cars, office equipment and tools.  

Before making any big purchases, check the instant asset write-off eligibility criteria and threshold, because these can change. Check your business’s eligibility and apply the correct threshold amount depending on when the asset was purchased, first used or installed ready for use. 

Check the ATO website for the latest information on thresholds. 

5. Bite the bullet and write off any bad debts

A bad debt is a taxable sale you made that has been unpaid for 12 months or more, with no chance of it being recovered. 

You must keep written notes that the debt has been written off and why. Discuss this with your accountant, as there may be GST consequences. 

6. Use concessional contributions to superannuation

Make sure to use your own superannuation allowance of up to $25,000 for those under 60, and $35,000 for those over 60. 

Remember that if your spouse works in the business even part-time then you can still contribute up to their limit, but make sure to allow for any employer contributions from other jobs. 

If you have employees, pay their employee superannuation guarantee contributions before 25 June to ensure it gets to their superannuation fund account on time, as it must hit their account for the payment to be tax deductible this year. 

7. Do a stocktake

It might be time to call in the kids, parents and friends to help you identify damaged and/or obsolete stock items that can be written down in value or written off completely. 

This reduces the value of your trading stock and, as a result, lowers your taxable business profit. 

8. Be sensible

Your focus should be on managing your tax and not looking at measures that will put your business under cash flow pressures in the coming years, just to achieve a short-term tax advantage. 

Buying unnecessary assets, upgrading cars or paying higher super contributions are pointless if it means your business will face cash flow issues. 

As you enter a new financial year, consider seeking advice from your accountant on whether you should be moving to a corporate structure going forward.