What can you claim on tax? A guide for freelancers

Whether you are 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.

What are tax deductions?

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:

• The expense must directly relate to operating your business and not be for personal use.

• If the expense is for both business and personal use, you can only claim the portion of the cost that is used for your business.

• You must have records to prove it. Note that having a ‘record’ doesn’t always mean you need a receipt. We’ll cover this in more detail in ‘What can I claim on tax without a receipt?’ below.

How do you claim tax deductions?

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.

Sole trader tax-deductible expenses

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.

Home office expenses

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:

Running expenses

This covers the equipment, tools, and other physical goods you need to run your business.

• Home office equipment, including computers, printers, phones and home office furniture.

• Utilities, including phone, internet, electricity and gas.

• Cleaning costs.

• Repair costs, including the cost of repairs to home office furniture or fittings.

• General home office costs, including stationery, printer paper and ink.
  

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:

• Work-related phone and internet expenses

• Stationery

• Decline in value on computers or other equipment

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.

Occupancy expenses

This covers the non-tangible fees and costs of running a business out of your own home.

• Rent

• Mortgage interest

• Property insurance

• Land taxes

• Council rates

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.

*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.

Vehicle and travel expenses

If you use a car or other vehicle for work purposes, you can claim the following vehicle expenses:

• Fuel and oil

• Repairs and servicing

• Interest on a motor vehicle loan

• Lease payments

• Insurance cover premiums

• Registration costs

• Depreciation (decline in value)

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:

• Airfares

• Public transport or taxi fares

• Car hire fees and related costs such as fuel, tolls and car parking

• Accommodation costs

• Meal costs, if you are away overnight

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.

General business operating expenses

Common operating expenses that can be claimed as a tax deduction include:

• Advertising and marketing costs

• Legal expenses

• Accounting and tax lodgement fees

• Bank fees

• Insurance premiums

• Interest on business loans

• Software subscription fees

• Uniform fees

See the full list of deductible operating expenses here.

Repair and maintenance expenses

If you need to pay for work-related repairs and maintenance, you can claim these costs as deductions. This includes:

• Computer or other equipment repairs

• Machinery repairs

• Painting

• Plumbing work

• Repairing electrical appliances

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.

Depreciating assets

A depreciating asset is an asset that declines in value over time. This includes:

• Computers

• Cars and vehicles

• Office equipment and machinery

• Furniture, carpet and curtains
  

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.

What can’t you claim on tax?

Although most legitimate business expenses are tax-deductible, there are some costs you can’t claim:

• Entertainment expenses.

• Traffic or parking fines.

• Personal expenses, such as childcare fees.

• Expenses relating to income separate to your main business. For example, if you’re a freelance designer but you make extra income selling jewellery on the side, you can’t claim deductions on expenses relating to your jewellery-making hobby.

• The GST portion of an expense, if you can claim it as a GST credit on your business activity statement.

Tax deductions on personal services income (PSI)

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.

What can I claim on tax without a receipt?

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:

• Vehicle expenses. You can claim 68 cents per kilometre for every kilometre travelled throughout the year, up to 5,000 kilometres, instead of keeping records or receipts.

• Home office running expenses. You can calculate a fixed-rate deduction of 52 cents for each hour you work from home instead of relying on receipts or records.

• Uniform expenses. You can claim up to $150 for work-related clothing expenses without a receipt. This includes branded uniforms, protective gear and high-vis clothing. You’ll need a receipt for any deductions over $150.

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:

• Drag and drop or snap photos of your receipts via the mobile app, and they'll be safe and sound in the cloud.

• Import your purchases from over 130 Australian banks to make expense tracking a breeze.

• Quickly and easily log recurring expenses like phone and utility bills.

• Pull up clean and organised expense records whenever you need them.