Freelance tax shouldn’t be too hard to understand but often, freelancers do not fully understand what tax deductions they are entitled to as a sole-trader. This guide will help you with the following:
What are tax deductions?
Tax deductions help lower how much you need to pay in taxes. They are expenses you made within the financial year while running your business. When filing your yearly tax return, these expenses are subtracted from your taxable income so that you have less to pay. You are responsible for keeping records of these expenses should the tax office ever ask you about them.
Which expenses qualify for tax deductions?
Any expenses you incurred whilst running your business can be a tax deduction but the government may have some rules in how your records can be kept or how much you can claim without records. Also, some expenses may be partly a personal expense which means you can only claim for the business portion of it.
Yes! Costs you incur for managing your tax can be deductible, including going to a professional accountant to lodge your tax, software you paid for lodging your tax, or going to a professional for tax advice.
As a freelancer, your phone and internet are your essentials in the business. However these are also used personally, especially if you are running your business at home. If you are claiming for more than $50, then you need to meet the record keeping requirements. The easiest is to keep a record of your bills. Working out how much exactly was used for business can vary depending on how your bill is calculated. If your bill is itemized then you calculate the items that are towards your business. If it is not itemized, then you can work out what percentage of your bills are used for business.
Sometimes you might need to travel to operate and these can also be deducted. Just like the other tax deductions, you would need to keep records of these as well. This can be in the form of receipts or a travel diary. The more detailed the record, the more helpful it is in working out your claim. Travel expenses can include fuel, vehicle hiring costs, flights, meals, and even accommodation but they must be on the days you had to work or go to a work conference. It is important to remember that you cannot claim for the personal aspect of your travel which is why a travel diary is extremely useful.
Having a home office is essential for most freelancers and the government allows for deductions for these as well. Just as the other tax deductions require, you need to work out how much is used for your business, but first you need to know what you can claim. The table below can help.
|Expenses||Home is principal workplace with dedicated work area||Home not principal workplace but has dedicated work area||You work at home but no dedicated work area|
|Work-related phone & internet expenses||Yes||Yes||Yes|
|Decline in value of a computer (work related portion)||Yes||Yes||Yes|
|Decline in value of office equipment||Yes||Yes||Yes|
Running expenses - running expenses refer to items you purchase to run your business. This includes office furniture, equipment, consumables, cooling/heating/lighting, cleaning, and even office repairs.
There are two ways of calculating your running expenses.
Fixed rate is calculated at 52 cents per hour of work. This rate is based on average energy costs and the value of common furniture items used in home business areas. To calculate by this method, you need to keep a record of your work hours.
The actual expense is calculated from the percentage you use for business and can only be used if you have a dedicated working area. For this you must keep records of all your running expenses (like internet or electricity bills) and work out the portion of your home office in relation to the rest of your home.
For example: Your office is in a 3mx3m room (9 square metre room) and your apartment is a two bedroom with a total of 36 square metre floor space. You can claim for ¼ (or 25%) of your bills.
Probably the most important item that you can deduct is your tools and equipment. For items less than $300, you can claim an immediate deduction. Items above this value need to be claimed vi their depreciation value.
Generally speaking, digital freelancers do not have work-related clothing which they can deduct. However, if you are required to purchase a work-specific clothing (like protective gear or uniforms), you can claim for these expenses. You can even claim for the cost of doing your laundry! Just make sure to keep records of your expenses as you would need this if you are claiming an amount greater than $150.
Yes that is right! You can deduct donations that you make but this needs to be to an organisation that is a ‘deductible gift recipient’ (DGR). There is a list of DGRs here.
This is also claimable in which the ATO mentions:
“If you want to claim (or vary) a tax deduction for personal contributions, you must provide a valid notice of intent to your super fund or retirement savings account (RSA) provider. You must have this notice acknowledged (in writing) by your fund.”
There may be other tax deductions that have not been covered in this article. If you are unsure about your deductions, always seek professional advice; ask the accountant and they will probably answer! For further information about tax deductions, visit the ATO website.