When you’re self-employed, reducing your taxes can be a significant way to save money and keep more of your hard-earned income. Tax planning is essential, as it can help you lower your taxable income and minimise your overall tax liability. If you want to learn how to manage your taxes more effectively, check out this site for more strategies.
In this guide, we will walk you through some of the best tips to reduce taxes when self-employed in Australia.
Claim Tax Deductions For Business Expenses
Home Office Expenses
If you work from home, you can claim a portion of your household expenses, which include:
- Rent or mortgage interest: You can claim a percentage of your rent or mortgage interest based on the size of the area used exclusively for business.
- Utilities: A portion of your electricity, gas, and water bills can be claimed.
- Internet and phone bills: If these are used for business purposes, you can claim a deduction for the business-related portion.
Equipment And Supplies
- Office supplies: Any stationery or office equipment that is necessary for running your business can be deducted.
- Computers and software: If you buy computers, printers, or any software needed for your work, these costs can be written off as business expenses.
- Furniture: Desks, chairs, and other office furniture may also be deductible if they are used for business purposes.
Travel And Vehicle Expenses
- Business-related travel: Costs such as flights, accommodation, and meals during business trips can be deducted.
- Vehicle expenses: If you use your car for business, you can claim a deduction for the business-related portion of fuel, maintenance, and insurance costs.
Other Business Expenses
Other deductible expenses include:
- Professional fees: Fees paid to accountants, lawyers, and other consultants necessary for your business.
- Advertising and marketing: Money spent on promoting your business, whether online or offline, is generally tax-deductible.
Deduct Superannuation Contributions
Personal Superannuation Contributions
One way to reduce taxes as a self-employed individual is to contribute to your superannuation fund. These contributions are tax-deductible, which means they reduce your taxable income.
- Concessional contributions: These are contributions made before tax, such as the contributions you make to your superannuation. The ATO allows you to contribute up to $27,500 per year in concessional contributions.
- Personal contributions: These contributions can be made to your super fund, and the money is deducted from your taxable income. The more you contribute, the lower your tax bill will be.
Tax Benefits Of Superannuation Contributions
- Tax deductions: Contributions to superannuation lower your taxable income, which reduces your tax liability for the current financial year.
- Compounding growth: Contributions to super are taxed at a lower rate within the fund, meaning your money grows more efficiently than in regular investments.
Take Advantage Of Small Business Tax Concessions
Instant Asset Write-Off
If you run a small business and purchase assets, you may be able to claim the cost immediately, rather than depreciating them over several years.
- Eligibility: The asset must be used primarily for business purposes.
- Threshold: For businesses with a turnover under $50 million, the instant asset write-off is available for purchases up to $30,000.
Small Business Tax Offset
If you’re a sole trader or in a partnership, you may qualify for the small business tax offset, which is a 16% reduction in tax for businesses with an aggregated turnover of less than $5 million.
- Offset limits: The maximum offset you can claim is $1,000 per year.
Depreciation Of Assets
If an asset exceeds the $30,000 threshold for instant write-off, you can still claim depreciation over time, which reduces your taxable income each year.
Keep Accurate And Detailed Records
Importance Of Record-Keeping
The ATO requires accurate records to support your tax deductions. Failing to maintain detailed records may result in missed deductions or penalties in the event of an audit.
- Use accounting software: Tools like Xero or QuickBooks can help you track income and expenses automatically, making it easier to prepare your tax return.
- Keep receipts: Ensure that you keep all receipts, both digital and physical, for any business expenses. You’ll need these to back up your claims.
Record-Keeping Best Practices
- Organise your records: Create separate files or folders for different types of expenses (e.g., office supplies, travel costs, etc.).
- Track mileage: Keep a log of all business trips if you use your vehicle for work. This will help ensure you claim the correct deduction.
Hire A Tax Professional
Benefits Of Hiring A Tax Professional
While managing your own taxes is possible, hiring a tax professional can help you reduce your tax bill by identifying opportunities you might miss on your own.
- Expertise: Tax professionals are knowledgeable about the latest tax laws and can advise you on the most effective strategies for reducing your tax liability.
- Tax planning: They can help you plan for the future and ensure you’re optimising deductions throughout the year.
Reducing The Risk Of Errors
A tax professional can also ensure that your tax return is filed accurately, reducing the risk of mistakes that could lead to audits or penalties.
- Avoid penalties: Professional advice helps ensure you comply with all relevant laws and regulations, reducing the risk of penalties.
Utilise Tax-Effective Investments
Negative Gearing
Negative gearing is a strategy where you borrow money to invest in an asset, such as property, and the cost of owning the asset exceeds the income it generates.
- Interest deductions: The loss you make can be used to reduce your taxable income.
- Long-term gains: While negative gearing can reduce your tax bill now, it’s important to consider the long-term viability of the investment.
Managed Funds And Shares
Investing in managed funds or shares can offer tax advantages. Some managed funds are structured to provide capital gains tax concessions, which can help reduce your tax bill.
- Tax offsets: Some investment funds offer tax-effective income, which may be offset against other income.
- Dividend imputation: If you receive dividends from Australian companies, they may come with a franking credit, which can reduce your tax liability.
Pay Your Taxes In Instalments
Pay-As-You-Go Instalments
The ATO allows you to make quarterly payments towards your tax bill through the Pay-As-You-Go (PAYG) instalment system. This system helps you spread out your tax payments and avoid large lump sums at the end of the year.
- Estimate your tax: You’ll receive an estimate from the ATO based on your income. If your income fluctuates, you can adjust your instalments.
- Voluntary instalments: If you want to pay more than the required instalment to avoid a large end-of-year tax bill, you can choose to pay extra.
Managing Cash Flow
Paying your tax in instalments can help you better manage your business’s cash flow by spreading the payments throughout the year.
- Avoid end-of-year shock: Paying in smaller instalments prevents a large tax bill from impacting your business in one go.
Tax Planning And Timing
Deferring Income And Accelerating Expenses
Tax planning allows you to manage your income and expenses in a way that reduces your taxable income. You can defer income to the following year or accelerate expenses to claim them in the current year.
- Deferring income: If your income is higher than expected this year, consider delaying payments to the next financial year.
- Accelerating expenses: If you anticipate a lower income next year, you might want to pay for business expenses now to maximise deductions.
Conclusion
Reducing taxes when self-employed is essential for maximising your income. By claiming business expenses, contributing to your superannuation, taking advantage of small business tax concessions, and keeping accurate records, you can significantly lower your tax bill.
Hiring a tax professional, using tax-effective investments, and paying your taxes in instalments are also excellent strategies for reducing your liability. Implementing these tips will help ensure you’re paying as little tax as legally possible, allowing you to keep more of what you earn.
Frequently Asked Questions
How Do I Know Which Business Expenses I Can Claim?
To determine which business expenses are tax-deductible, it’s important to keep detailed records of your business activities. Any expense related to running your business, such as office supplies, business-related travel, and equipment purchases, can typically be claimed. However, personal expenses cannot be claimed as deductions.
What Is The Instant Asset Write-Off?
The instant asset write-off allows small businesses to immediately deduct the cost of assets purchased for business use. The threshold for eligibility is $30,000 per asset, and it must be used primarily for business purposes. This concession is available for new and second-hand assets.
Can I Reduce My Taxable Income By Contributing To My Superannuation?
Yes, contributing to your superannuation fund can reduce your taxable income. Personal contributions to super are tax-deductible, but there are annual caps on concessional contributions. The current cap is $27,500 per year.