Sole Trader Tax Deductions (How to Optimise your Taxes in 2024)

As a sole trader, it’s likely you’ve come across a few issues when it comes to tax deductions:

• You’re not sure which expenses are tax-deductible
• You’re not sure which calculation method works best for certain deductions
• You want to make sure you’re taking advantage of the right deductions and aren’t overpaying on taxes
• You want an easy way to track all your tax-deductible expenses so it’s easier to do your tax return come July

In this article, we’ll go over the different deductions you can claim and the easiest way to calculate them, including:

1. What deductions can I claim as a sole trader?
2. Must-know rules about sole trader tax-deductible expenses in Australia
3. Most common sole trader deductions in Australia
4. Do I need to keep all receipts for my sole trader deductions?
5. How to manage your tax-deductible expenses effortlessly
6. How to use Parpera to optimise your taxes

‍This article isn’t tax advice and is based on information on the ATO website. For personalised tax advice talk to an accountant.

‍Want to make sure you stay on top of your taxes? Parpera offers sole traders the ability to set aside money for taxes, flag tax-deductible expenses and a lot more. Download your 30 day free trial now!

What deductions can I claim as a sole trader?

These are the most common tax deductions you can claim as a sole trader according to the Australian Tax Office (ATO). But if you’re not eligible or don’t have the necessary documentation, the ATO can reject these deductions. 

Must-know rules about sole trader tax-deductible expenses in Australia

A sole trader tax deduction is a purchase your business makes that you’re allowed to deduct from your taxes. But making a necessary business purchase is only the first step.

Here are the must-follow rules according to the ATO for sole trader tax deductions: 

• A business tax deduction must be a business expense, not a personal one.
• You can deduct an expense if you use it for business and personal use. But you’re allowed to deduct only the business portion from your sole trader taxes.
• You must have receipts or invoices for most expenses and a few important records to claim it as a deduction.
• In most cases, you should keep your business expense receipts and records for 5 years.

Let’s say you buy a mobile phone and use it 40% of the time for business and 60% of the time for personal reasons. In this case, you’ll only be able to deduct 40% of the total cost of the phone and its service provider fees. 

You’ll need to keep the receipts for the phone purchase, the service provider fees, and an ATO-authorised proof (more on this later) of your 40% business use if you want to claim the deduction.

Most common sole trader deductions in Australia

Let’s start with the tax-deductible expenses you’re more likely to have. These are deductions you’ll probably have every year.

Tax-deductible home office expenses

As a sole trader, your office is probably in your home or apartment. Take advantage of these ATO-approved home-based business tax deductions to reduce your taxable business income.

Do I have a dedicated home office or workspace?

Here are three easy ways to determine if your home-based business passes the dedicated home office space test. If you can answer “yes” to any of these questions, you can probably deduct occupancy expenses:

• Do you have a sign outside with your business name on it?
• Is your business workspace used almost exclusively for business?
• Do clients come to visit you in this workspace?

‍Here are a few examples to help you understand if your business work area qualifies for occupancy expenses:

• A personal trainer receives clients in a specific room set up for workouts.
• An accountant uses a desk exclusively for client work in her apartment with no client visits.
• A metalworker uses a workshop on his property at home exclusively to create jewellery, furniture, and tools.

Rent or mortgage tax deductions (occupancy expenses)

If you have a dedicated home office or workspace, you can deduct a portion of these home office expenses:

• Mortgage interest or rent
• Land taxes
• Property insurance
• Council rates

How to calculate your occupancy tax deduction

The simplest method is to calculate the percentage your business workspace occupies on your property, or in your home or apartment.

For example, Julie is a freelance designer who has a work area with a desk that takes up 10% of her apartment. She can deduct 10% of her mortgage interest, property insurance, council rates, and land taxes for the tax year from her business revenue.

You can use another method to determine how much space your dedicated home office uses as long as you document your calculation and keep it in your tax records for that tax year.

Electricity, heating, computer, office equipment, and furniture

If you work from home, even if you don’t qualify for occupancy tax deductions, you may be able to deduct part of your electricity, cooling, heating, cleaning costs, computer, furniture, and more. 

Here are the different methods to calculate these deductions:

Most sole traders will find the Fixed-Rate Method the simplest and best fit for their deductible running costs, but each business is unique. Choose the running expense calculation method that works best for your situation.

Check out the ATO for more details

Phone and internet deductions for sole traders

You probably use your landline phone, mobile phone, and internet for business and personal use. If you use a landline or mobile phone 100% for business, you can fully deduct your service provider fees and the cost of your phone.

Here are a few ways you can calculate the tax-deductible business use for each:

Mobile phone or internet

If you have a non-itemised bill from your internet or mobile phone provider, keep a simple diary for one month of business internet or mobile phone use.

For example, John writes down the number of hours he uses his home internet every day for his business in May. He keeps this record as proof of his typical monthly business internet use for the entire year for tax purposes. He’ll need to do this every year to claim the deduction.

Landline phone

If your landline phone has an itemised bill, use it to calculate the percentage of business use for one month. You can then use it as proof of your regular landline phone business use.

For example, Joanne uses a landline phone at home for work and personal use. When she adds up the number of business calls in her April phone bill, 55% of her phone calls were for business. She can use this calculation for this year to deduct 55% of her landline phone bill for the entire year. 

To claim the deduction, she must keep this calculation and her phone service invoices in her business tax records. Next year, she’ll have to repeat the process to claim her landline phone use as a business expense.

Motor vehicle expense deductions

If you need and use a motor vehicle in your sole trader business, you can deduct the business portion of these costs: 

• Petrol Repairs and regular maintenance
• Vehicle leasing, loan interest, and insurance payments
• Registration fees
• Depreciating value

How to calculate your vehicle’s business use

For home-based business owners, any trip with a business purpose qualifies as a motor vehicle expense for your business according to the ATO.

Use one of these three methods to figure out your business’s tax-deductible vehicle expenses

The simplest way to calculate your motor vehicle expenses for most sole traders is the Cents Per Kilometre Method, unless you need to claim more than 5000 km per car per year. Use the method that works best for your business.

Travel expenses for your business

As a sole trader, you can deduct the following expenses when you travel for business:

• airfare, train, bus, and taxi
• car hire fees
• accommodation
• meals (overnight stays only)

How to calculate your business travel expenses?

A simple way to keep track of business travel expenses when mixing business with sightseeing is a travel diary. Here’s a fast and easy way to do it:

Maria goes to a 5-day conference in San Francisco, California. She takes along her husband Rick who doesn’t work in her business. They stay for a total of 8 days with a mix of business and holiday time. She keeps a simple diary of what she does each day as proof of her business use. 

She keeps receipts for her airfare, hotel, meals, taxi, any conference fees, or other tax-deductible business travel expenses. Her husband’s expenses and the 3-day holiday expenses aren’t deductible.

Office supplies, computer software, subscriptions, and memberships

Almost anything you buy exclusively and use for business is tax deductible. Keep receipts for business purchases like:

• Computer tool subscriptions like Adobe, Google Workspace, or Microsoft Office
• Business publications, paid newsletters, associations, and memberships
• Online trainings and workshops to improve your expertise
• Networking groups and mastermind groups
• Business cards, website, office supplies
• Union dues
• Insurance premiums related to your business
• Money management or invoicing tools like Parpera

What are the exceptions? 

Food and drink usually fall under the entertainment or private use category, which isn’t an accepted tax deduction for sole traders. Coffee, drinks, and small meals during client meetings in restaurants and cafes rarely get a pass as tax deductions for sole traders.

Clothing is an accepted tax deduction if it’s a required uniform or clothing that protects you while working. Clothes like protective eyewear, non-slip shoes, nurse scrubs, or chef uniforms are tax-deductible clothing expenses.

Repairs and maintenance deductions

If your workspace, business tools, or equipment need repairs, regular maintenance or replacement parts, you can deduct the costs. If the repairs are for a tool with both personal and business use, you can only deduct the business portion. 

Examples of repairs and maintenance:

• Replacing your computer battery
• Repainting your office space
• Electrical repairs in your workspace

Superannuation contributions and salaries

As a sole trader, any remaining revenue in your business after expenses is your personal taxable income, so you can’t pay yourself a tax-deductible salary. But you can make tax-deductible contributions to your superannuation. 

Be careful of your business cash flow when considering a large super contribution. You don’t want to find yourself low on cash when surprise expenses pop up. 

Before making a substantial contribution:

• Create a budget for next year
• Set aside money in a savings account or sub-account
• Use a sole trader money management tool like Parpera where you can receive client payments easily and set aside money in saving wallets.

Additional tax deductions for sole traders

Here are some less common tax deductions for sole traders you might have. 

• Bad debts (unpaid after 12 months)
• Bank fee charges
• Legal fees
• Marketing and advertising costs
• Business loan interest
• Bookkeeper or accountant

Here’s a complete list to make sure you claim all the tax deductions available.

Do I need to keep all receipts for my sole trader deductions?

If you receive a receipt for a tax-deductible purchase you plan to claim, keep it for at least 5 years. Most of your tax deductions will have invoices or receipts and you should keep them in case you’re asked to show proof of them.

Rent, mortgage interest, vehicle, and other mixed personal and business running expenses may not always have invoices, but you should keep your logbook or simple diary as proof of your business use.

How to manage your tax-deductible expenses effortlessly 

You can organise your tax deductions in different ways. Choose the one best for your sole trader business. Here are a few ways to stay more organised:

• Use Parpera’s all-in-one money management App, which includes a Wise business account. You can keep track of and categorise your business purchases in seconds. Tag tax-deductible expenses with a click, and store electronic and paper receipts easily with your phone. Before tax time arrives, you’ll know how much business revenue and tax deductions your business has.
• Scan and add your receipts to a digital storage system, like Dropbox or Sync, so they’re easy to save and send to your accountant. 
• Add your expenses to an Excel or Google spreadsheet, so you know the total you can deduct when it’s time to lodge your sole trader taxes.

How to use Parpera to optimise your taxes

Parpera is an all-in-one money management tool that helps sole traders make payments, create invoices and manage their money to stay on top of their business. 

We’re specifically built for freelancers and sole traders, which means we have features made specifically to make it easier to manage your taxes as a one-person business. 

1. Flag certain expenses as tax deductible so you never miss them

You might find yourself forgetting whether an expense is tax deductible or not – and that means you’re missing out on potential tax savings.

With Parpera, you can flag your expenses as tax deductible on the app. That means that when tax time comes around and you need to complete your tax return, it’s a lot easier to gather all these expenses and deduct them from your taxes.

You can also add a tax invoice, a photo of a receipt and a note, so you don’t forget what the expense was for. With these categorisations, you’ll be able to quickly tell how much you’ve spent on marketing, travel and other expenses. 

‍2. Set aside your taxes in a separate wallet

Like many sole traders, you can forget to set aside money for taxes and then get caught out when the tax deadline comes round.

With Parpera’s Earn wallet, setting aside money for taxes is as easy as a simple transfer.  Don’t let your business funds sit idle in a traditional business bank; let them work harder for you, earning a 3.60% p.a. (variable) return*. If you’re registered for GST, you can also flag your income and expenses and transfer that to a separate GST Saver wallet as part of Parpera Pro.

*Variable return as of 08/11/2023. See our disclaimer and terms below to consider whether it’s right for you. Target returns are not guaranteed.

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3. Receive an estimate on how much tax is due

You can also use Parpera to estimate how much tax you need to save up for and pay when tax time is due.

When you input your expected annual income into the app, we’ll use this number to calculate your expected income tax brackets. These brackets are used to calculate your Blended Tax Rate, which is the percentage of tax you will pay if your taxable income for the tax year meets your estimate.

We use the following formula to calculate your tax estimate: Blended Tax Rate x (Income - Tax Deductible Expenses)

You can read more about the tax estimate feature in this support article: How is my tax estimate calculated?

We hope this article has given you a good summary of what you can deduct from your taxes as a sole trader. Take advantage of these sole trader tax deductions, lower your taxable income, and keep your tax payments as low as possible.