Nothing is certain but death and taxes. Or so the saying goes. Many of us find that taxes drain-away our hard-earned money. For sole traders who juggle to manage business and personal expenses, payment of taxes can be a factor why they experience cash flow deficit. That should not be the case. While payment of taxes is an obligation, governments also ensure that the taxes they impose do not kill their lifeblood. Taxes are inevitable, but, with proper management, they can improve a business’s cash flow.
What is a sole trader?
There are different business structures in Australia: sole trader, partnership, and corporation. A sole trader is one who owns and controls his or her business. Consequently, you are the only person legally responsible for all the liabilities and losses your business may incur. When things go wrong with your business, your assets may be at risk.
The sole trader structure is very easy to set up, which is why the majority (62%) of businesses in Australia are sole traders with no employees. In fact, the Australian small business ombudsman refers to sole traders as the “engine room” of the country.
For taxes, sole traders enjoy certain tax incentives not enjoyed by partnerships and corporations. Sole traders need to file all the income in individual tax returns under the section for business items. Sole traders are also required to apply for an Australian Business Number (“ABN”) and use the ABN for all business dealings.Here are our 5 tips on how sole traders can maximize tax payments to improve cash flow:
5 Tips for Strategic Tax Planning for Sole Traders to Improve Cash Flow
1. Keep records
Strategic tax planning starts with record keeping. Sole traders can file taxes online via my Tax or through a registered tax agent, you should be mainly responsible for keeping your business records for at least five years as required by Australian tax law.
Important business records to keep include sales receipts, expense invoices, bank statements, payroll for employees, superannuation payments for workers, lists of debtors and creditors, and asset purchases.There are many ways to make record-keeping easy and accessible, such as scanning and saving copies in cloud-based storage.
Businesses often stumble when asked by the Australian Tax Office (“ATO”) to verify transactions by providing supporting records, with the consequence that even “innocent” businesses can find themselves struggling to unable to provide the requested evidence.
Besides keeping records as compliance, keeping records also help sole traders improve their accounting and bookkeeping. After all, records are the bases for all the tax concessions available to sole traders.
2. Avail of tax concessions
There are tax concessions meant for sole traders and individuals, foremost of which is the tax-free threshold for individuals which is $18,200 applicable for the 2019-20 financial year Because a sole trader’s business structure is taxed as part of the individual’s income, it follows that the tax-free threshold is also $18,200. Meanwhile, companies pay tax on every dollar it earns.
To illustrate, resident tax rates for 2020-21 are as follows:
|$0 – $18,200||Nil|
|$18,201 – $37,000||19c for each $1 over $18,200|
|$37,001 – $90,000||$3,572 plus 32.5c for each $1 over $37,000|
|$90,000 – $180,000||$20,797 plus 37c for each $1 over $90,000|
|$180,0001 and over||$54,097 plus 45c for each $1 over $180,000|
Aside from the tax-free threshold, sole traders can register for Goods and Services Tax (“GST”) if the annual turnover is $75,000 or more. You can also register for GST if you provide taxi or limousine travel for passengers, including ride-sourcing, regardless of your GST turnover or if you want to claim fuel tax credits for your business.
Another way of saving through capital gains when you dispose of an asset you owned for at least 12 months and you made a capital gain from the disposal. You can reduce the capital gain through either the discount method, the indexation method, or one or more of the four capital gains tax (“CGT”) concessions available for small businesses.
Other tax concessions include trading stock tax concession if the trading stock did not change in value over the tax year by more than $5,000.
Further, tax deductions, which are also tax concessions, are available for any business structure, including sole trader. The tax deductions relevant to a sole trader include:
- advertising and sponsorship
- bad debts
- legal costs, registration fees, and valuation costs
- business travel expenses
- vehicle leasing expenses
- fringe benefits expenses
- work-from-home expenses
- workers compensation insurance premiums
- depreciation of plant and equipment
- repairs, replacement, and maintenance
- superannuation contributions made to own super fund
- salary and wages paid to employees
- tax management expenses
- phone expenses
- losses incurred by theft or stealing by an employee
There are also some deductions for professional expenses for start-ups, including fees for relevant professional advice, or government fees, taxes, and charges.
3. Pay for retirement
You cannot employ yourself in a sole trader business structure. However, as a sole trader where you are providing personal services, such as when you are a copywriter or a financial advisor, you may be receiving personal service income (“PSI”). It is PSI when more than 50% of the amount you received for a contract was for the service you provided. You may avail of deductions for PSI in another manner.
If you are employing workers in your sole trader business, you are required to make superannuation contributions for them and can avail of tax deductions for those contributions. Moreover, if you are making a personal super contribution, that contribution is also eligible for tax deductions.
Aside from the tax deductions, you can avail of when you pay your and your employees’ super contributions, paying for retirement will also benefit you once your capacity to earn or do business is reduced by age or physical limitations.
4. Instant asset write-off
One of the advantages of the sole trader business structure is the instant asset write off. In March this year, the ATO increased the instant asset write-off threshold amount for each asset to $150,000 applicable until 31 December 2020. Items you could claim include cash registers and POS devices, utility vehicles, computers, security systems, and accounting software.
To make the most of instant asset write-offs, you must be aware that eligibility of businesses is in terms of aggregated turnover and this has changed in different periods in the past years. Moreover, as a sole trader, you should also be aware of the varying threshold amount for each asset and when the asset was first used or installed for use because these are subject to changes.
Second-hand assets are included in the instant asset write-off for as long as the asset is used in the business.
5. Contribute to eligible charitable organizations
Do good and get tax deductions. Consider looking for an eligible charitable organization whose objective resonates with you or your business’s personality. Not only can you do good for your community, but you can also avail of tax deductions for any contributions made to an eligible charitable organization.
There are certain things to remember though before making that contribution. You have to make certain that the eligible charitable organization is a deductible gifts recipients (“DGR”), and you must also not receive anything in exchange for such donation. Crowdfunding has become increasingly popular over the past couple of years, but before you hit that “Donate” button and think that the contribution you will be making is tax-deductible, do prior diligence first.
Align tax payments with business strategies
Tax liabilities do not end; they die when the taxpayer dies. They are indeed certain. Each year, it is certain that you have taxes to pay.Tax management experts suggest having as much revenue come into the business as possible and deferring tax payments on that revenue for as long as possible.One way to let revenue come into the business is to be efficient in collecting unpaid debts. Being a sole trader does not preclude you from creating a tax plan that is sensitive to your financial resources. Tax time to give companies and individuals, including sole traders, ample time to prepare and pay. You can map out the tax payments for the whole year in as early as January.
In creating a tax plan, take into consideration the nature of the industry where your business belongs. There are years when revenue is good but now, in 2020, we learned to be more circumspect with our business expenses. If you are a sole trader, you can offset and claim the loss in the current year or carry forward the loss and claim a deduction for it later. While loss as a tax-deductible may sound like a good thing, a loss is still a loss, which means your expenses exceeded your income or total revenue.
Seek professional tax guidance
Recognizing the significant contribution of sole traders to the economy of the country, the ATO provides several services that assist sole traders in their tax and super affairs. The ATO website, for one, is a treasure trove of resource for sole traders. Moreover, there are different online platforms that sole traders can use to prepare and file their taxes easily. For tax disputes, the ATO conducts a small business independent review of tax audit until the end of this year to resolve tax disputes especially for unrepresented individuals and sole traders.
Aside from the ATO, other government-funded services help sole traders facilitate tax preparation and tax disputes. There are national tax clinics all over the country. The small business agency also has a Small Business Concierge Service that guides sole traders through the Tribunal process.
Further, there are other professionals, such as bookkeepers, accountants, tax agents, and tax lawyers that can guide you on your tax obligations. Tax matters can be complicated, depending on the nature of your business or the industry where your business belongs. Tax obligations also vary from one state to another. It is best to get a professional to help you with your tax obligations and maximize the tax concessions available to you to help you maximize your wealth.