One of the perks of being a sole trader or freelancer is the ability to reduce your tax bill by claiming business expenses as a tax deduction.
Whether you’re set up as a sole trader or a company in Australia, many costs you incur that relate to running your business can be claimed as a tax deduction
Note: This article is a general guide only. For advice on your specific situation, talk to an accountant, registered tax agent or the ATO.
But what exactly can you claim on tax as a freelancer? In this guide, we cover some of the most common deductions for freelancers and sole traders in Australia. First, though, let’s look at what tax deductions are and how to claim them at tax time.
A tax deduction is an expense subtracted from your taxable income. Tax deductions reduce the amount you pay taxes on.
For example, let’s say you made $75,000 in income during the financial year and incurred business-related expenses worth a total of $10,000. In this case, your taxable income would be $65,000 instead of $75,000, reducing the amount of tax you owe for that year.
In Australia, most expenses related to running your business can be claimed as tax deductions.
According to the Australian Taxation Office (ATO), a business expense must meet three criteria to be claimable as a tax deduction:
Tax deductions can be claimed on your annual tax return. If you’re set up as a sole trader, you can claim deductions in the ‘Business and professional items’ section of your individual tax return. You can either do this yourself by lodging online with MyTax, or by using an accountant or tax agent.
If you’re set up as a company, you’ll need to claim deductions in your company tax return.
If you have an ABN and are operating as a sole trader business in Australia, here are some of the most common tax-deductible business expenses to be aware of.
If you work from home some or all of the time, you may be able to claim tax deductions for home-based business expenses. This includes:
This covers the equipment, tools, and other physical goods you need to run your business.
Using the fixed-rate calculation
To make calculating the cost of running expenses easier, the ATO allows sole traders to deduct a fixed rate of 52 cents for each hour you work from home.
For example, if you work 38 hours from home during a week, your allowable running expenses deduction for that week would be:
38 x .052 = $19.76
This calculation covers the cost of heating, cooling, lighting, cleaning and the decline in value of furniture.
If you use this method, you’ll still need to separately work out all other home office expenses, such as:
Alternatively, you can manually calculate and deduct all running expenses, but you’ll need to maintain records—such as a diary of the number of hours you work from home for the year—to prove your claim is reasonable.
This covers the non-tangible fees and costs of running a business out of your own home.
Calculating occupancy expenses
If you work from home and can claim occupancy expenses, you’ll need to work out the portion of your home that you use for work purposes. You can do this by calculating:
Total expenses x the percentage of your home’s floor area you use for work x the percentage of the year that part of your home was used exclusively for work
For example, if the floor area you use for work takes up 20% of your home, and you worked from home all year, you can claim 20% of your total occupancy expenses as a tax deduction.
You can also use the ATO’s home office expenses calculator to work out your allowable deductions for the year.
ExpenseIf your home is your main workplace and has a dedicated work area (e.g. a study)If your home is not your main workplace but has a dedicated work areaIf you work from home but don’t have a dedicated work areaRunning expensesYesYesNoWork-related phone & internet expensesYesYesYesDecline in value of a computer (work-related portion)*YesYesYesDecline in value of office equipmentYesYesYesOccupancy expensesYesNoNo
*Note that if you are instantly writing off the cost of assets, you don’t need to claim a decline in value of computers or other office equipment. See ‘Depreciating assets’ below for more information.
If you use a car or other vehicle for work purposes, you can claim the following vehicle expenses:
Keep in mind that you can only claim vehicle expenses that relate to your business. For example, if 50% of your car use is for work, you can claim 50% of the expenses above as a business deduction.
The ATO suggests using a logbook or diary to record your business versus personal vehicle usage.
Alternatively, you can also use the simplified ‘cents per kilometre method’ to calculate your vehicle deductions for the year. Using this method, you can claim 72 cents per kilometre for every kilometre travelled throughout the year, up to 5,000 kilometres.
Additionally, if you travel for work purposes, you can claim business-related expenses including:
The ATO’s small business travel expenses guide covers what you can and can’t claim, and how to record your expenses, in more detail.
Common operating expenses that can be claimed as a tax deduction include:
See the full list of deductible operating expenses here.
If you need to pay for work-related repairs and maintenance, you can claim these costs as deductions. This includes:
You don’t need to own the property or item that is being repaired or maintained to claim a deduction. However, the repairs or maintenance must relate to your business.
A depreciating asset is an asset that declines in value over time. This includes:
Sole traders and freelancers with an annual turnover of less than $500 million can claim an instant deduction on assets worth less than $150,000 in the year they are purchased.
For example, if you buy $10,000 worth of office equipment during the financial year, you can claim the full $10,000 deduction in your tax return for the year.
This threshold was recently increased to help businesses withstand and recover from the economic impact of COVID-19.
See the government’s guide to the instant asset write-off for more information.
Note: These are general deductions only. For advice on which deductions apply to your business, talk to an accountant, registered tax agent or the ATO.
Although most legitimate business expenses are tax-deductible, there are some costs you can’t claim:
In Australia, some freelancers and sole traders earn what’s known as personal services income (PSI).
If your work is based on your skills and expertise (rather than, say, supplying finished products), the income you receive may be classified as personal services income (PSI).
The ATO uses several criteria to determine if a business earns PSI. Even if the majority of your work is based on your skills and expertise, your income still may not be classified as PSI if you don’t meet all the criteria.
The easiest way to work out if you earn PSI is by using the ATO’s personal services income (PSI) decision tool.
If you do earn PSI, there are some business tax deductions you can’t claim. This includes rent, mortgage interest, rates and land tax.
Find out more about deductions that can't be claimed on PSI here.
As mentioned above, the ATO requires freelancers (and other businesses) to keep ‘records’ for all expenses they claim at tax time.
However, you don’t need to keep receipts for all business expenses. Some allowable receipt-free deductions include:
For all work-related expenses, you can generally claim up to $300 in total without needing a receipt or proof of your claim. However, this may not be the case in your circumstances, so it’s best to consult with a registered tax professional.
It’s a good idea to get into the habit of keeping receipts and records for all your business expenses. The better your record-keeping, the more you can legitimately claim and save at tax time.
Rounded makes expense-tracking simple for freelancers and sole traders. Here’s how it works:
Curious to see how it works? Try Rounded free for 14 days. No credit card required.
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