Are you fully educated on your tax rights and responsibilities?
Not being up to date could mean missing out on benefits, and putting yourself in trouble too.
At times navigating tax obligations for being self-employed can be confusing.
It doesn’t have to be.
Knowing your responsibilities is the first step to making your obligations feel less of a burden, and will allow you to focus on your business more instead of a spreadsheet.
Tax was never meant to be fun, but it can be easier to understand with the right guidance and the right approach.
So if you’re a self-employed entrepreneur looking to take control of your own tax at the end of the financial year, here’s what you need to know.
Your Tax Responsibilities Will Depend on Your Business Structure
How you pay tax as a business will depend on how your business is structured.
● SOLE TRADER
As a sole trader, there’s no difference between your business assets and your personal ones. Your tax liabilities are therefore the same. Any income earned is subject to the same tax brackets as if you were a regular employee, including the tax-free threshold.
For this reason, it’s a good idea to make a habit of putting some funds away for your tax payments which will increase due to income gained through your business activities.
Remember to keep your business and personal expenses separate though as this causes less confusion.
The other main business structure the Australian Taxation Office (ATO) recognises is that of a company. This is important to recognise as a company is taxed separately to that of a sole trader.
Deductions are allowable for companies, but this form of business structure has many levels.
As a result, taxation for companies is more complex, with many happily relying on approved tax agents to help them navigate the obstacles that come with corporate tax rules.
Ultimately, it pays to know where you fit in. Choosing a business structure is like choosing a property, there are many pros and cons so it pays to think ahead. In terms of your taxation responsibilities, it is important to understand your obligations to ensure you don’t find yourself in trouble come tax time.
Understanding your full deduction rights can help you save money come the end of the financial year.
According to the team at Northern Rivers Demolition, sole traders may be missing out on potential deductions, saying “just like an employee, as a sole trader can claim a range of deductions for expenses incurred whilst running your business. As long as these deductions are a true reflection of expenses incurred for the running of your enterprise, the amount of tax you pay can be reduced.”
One point to keep in mind is that any money drawn from the company cannot be seen as a deduction.
The ATO explains this, saying “amounts taken from the business are not wages for tax purposes, even if you think of them as wages”.
Personal Service Income (PIS) and the “gig economy” is here to stay. PSI is defined as the income from a contract where you’ve earned as a result of skills, knowledge, or expertise.
Freelance writers, copywriters, consultants or specialist trainers can be considered PSI income earners for taxation purposes.
The ATO ruling is now quite specific, stating, “If you’re paid mostly for your personal efforts, skills or expertise, you might be receiving personal services income (PSI) and you may have to treat deductions in relation to this income differently”.
Understanding the GST
Both sole traders and companies are required to pay GST on earnings over $75,000 per year.
Generally, GST is paid quarterly, so it makes sense to plan for the inevitable. Making regular payments into a bank account is the simplest way to ensure you do not fall behind.
It is worthy of mentioning the obligation for those with alternative employment. One example of a new industry in question is the increasing presence of Uber or other ride-sharing drivers.
The GST laws for a regular business earning over $75,000 do not apply to these types of business. So if this is you, it would be beneficial to get some advice from a professional tax advisor.
Get into a habit of tracking your expenses and income. Keeping records and receipts is as important as the understanding of what you can and cannot claim.
Don’t forget to split your personal and business expenses. How you do this is up to you, but the days of shoeboxes filled with random pieces of fading paper are over.
According to the finance experts at Empowered Finance, electronic record keeping is central to staying out of trouble at tax time, explaining “storing your financial data electronically protects your business by centralising tax records and necessary figures. Even better, these solutions are more cost-effective than traditional paperwork storage so you end up saving money too.”
If you are old school, a decent ledger book will suffice, however, it is recommended that you make a move to a program designed specifically to help you. If you’re not software savvy, there is plenty of help online available a few clicks away.
According to personal finance experts Maxiron Capital, “while staying informed may be the last thing on your list of tax do’s and don’ts, keeping aware of the latest tax changes and rules in your industry it just as important as any other tool. New and proposed changes to legislature and policy can affect the independent contractor and any self-employed person’s financial future.”
As we move through changing economies, this type of important taxation information allows you to make plans for your business.
While very few business owners set out to land on the wrong side of the taxation laws, ignorance is no excuse so it’s worth your while to stay on top of the changes in your industry.
Where Can I Find Help?
There are many avenues for help for the self-employed business owners of Australia
While initial tax obligations may seem daunting, with the right education and experience you can make sure you stay on the right side of the law and maximise your returns come tax time.
Fiona White is an Australian freelance writer and Sydney-based university student. As an Accounting student, she has a passion for learning about global changes in business culture and specialises in entrepreneurship and innovation-related topics. When Fiona isn’t at his desk, you’ll find her exploring National Parks.