Last Updated Sep 14, 2018 · Written by Rob Schneider
If you are a tradie you will know that EOFY 2017/18 is fast approaching, and you need to get your finances in order for tax time.
Do it right and you maximise the claimable expenses you are entitled to, which helps your bottom line. Unfortunately many sole traders and small businesses end up paying too much tax and miss out on hundreds or thousands of dollars worth of claimable expenses. This means your hard earned cash stays with the Australian Tax Office (ATO), when it could be in your pocket.
First let’s take a look at what you can claim, no matter the size of your business.
A common question is what you can legally claim. You can actually claim for a whole range of expenses, but the ATO does have conditions and rules around what qualifies.
The ATO states, “You can claim a deduction for most costs you incur in running your business. This includes buying assets, which you can immediately write-off if they cost less than $20,000 each.” The first step is to see if you answer ‘yes’ to these questions:
If you did, chances are you can claim the expense. Now let’s take a look at some of the most common tax deductions that tradies and small businesses can claim.
Some of the most common tax deduction tradies, sole traders and small businesses can claim for include:
And if you do your paperwork at home, the ATO classes this as a place of business, so you can claim income tax deductions for a portion of the costs of operating a home office. You must however have an area set aside exclusively for this, like a study.
The good news is that the Government chose to keep the $20,000 instant tax deduction for another year. This means that if your business has a turnover of up to $10 million, you can take advantage of the policy, and write off the depreciation on any asset under $20,000 immediately. This applies to your office furniture and fittings, work vehicles, IT hardware such as computers and printers, as well as plant and equipment.
Keeping on top of your finances throughout the year is the best way of making sure you are ready come tax time. Set aside twenty minutes each day to enter all your new sales, payments, purchases and receipts. This will also help you manage your cash flow more efficiently. The ATO requires you keep a record of all your financial records in writing. These can be written or digital receipts. Modern accounting software makes this a lot easier, with automated invoicing and digital records of all your transactions. In terms of specific records you should keep, these include:
While the audit period for small businesses is two years, the ATO recommends keeping your records for the past five years. This includes all your earnings and deductions. As a general rule, you must have receipts for deductions over $300. Receipts for smaller amounts do not need to be kept, but you must be able to show how you arrived at your total. And remember, if you are thinking of pulling a fast one and ‘creating’ some invoices or receipts, it is not worth it! Not only will you be breaking the law, but the ATO can and do, audit sole traders and small businesses.
Often when it comes to your financial records and tax, it is often easier to work with an accountant or tax professional. They can help you make sense of the legislation, ensure you claim as many deductions as possible - and save you a heap of stress and worry. They can also help work out if your current business structure is the most effective when it comes to tax.
The ATO website also has resources to help you with your tax, including Tax Tips for Small Businesses.