It pays to know what the common tax pitfalls are so you can try to avoid them…By Clea Sherman
While working as a self-employed tradesperson has its perks, it’s up to you to stay on top of your tax responsibilities, though this can be challenging.
With life and work being so frantic most of the time, it is easy for the accounting and financial management side of your business to fall through the cracks. However, this will result in a lot of time and money being lost. As we enter the final months of the financial year, take a look at some of the most common tradie tax traps and the best ways to sidestep them.
SPENDING GOVERNMENT MONEY
Like it or not, those of us who earn an income are expected to pay taxes. Therefore, some of the money paid to you by your clients actually belongs to the government. Accounting firm partner Jamie Mobbs explains that one of the main issues he sees with his many tradie clients is they forget to put their GST and tax money aside throughout the year.
“As a contractor, it’s up to you to have an idea of how much tax you’ll need to pay. My recommendation is to put 30 per cent of the income your business generates aside as soon as it comes in. This way, you’ll probably have more than you need come tax time,” says Mobbs, who is a partner at Mobbs & Company in Brisbane, Caboolture and on the Sunshine Coast.
One tip is to ask your accountant to set things up so you pay a quarterly tax contribution along with your GST. This way it won’t hit you all at once as a giant annual tax bill.
GOING OFF THE RECORD
Speaking of income, you need to be able to show how much of the money your business has earned has been kept by you. One way to make this easier is to provide a business bank account for your clients to make deposits into and from which you pay yourself a ‘wage’ each month.
As well as keeping evidence of what you have paid yourself, you need to be clear on what outgoing costs you have for the business. “Use a bank card that is connected to an online accounting platform like MYOB or Xero, or at the very least make sure you hang onto your receipts,” says Mobbs. “Remember that every $100 you spend and fail to declare will end up adding to your tax bill.”
Grab a quick photo of your receipts and either upload them somewhere safe or keep them on your phone until the end of the financial year. You will need to share details including the supplier named on the receipt, the amount you paid and the dates you paid for the items to claim.
Having receipts and up-to-date bank statements to hand at tax time will save money and stress. You may even be able to claim more costs than you anticipated.
As a result of the COVID outbreak in 2020, the Australian Government raised the instant asset write-off threshold to $150,000 (up from $30,000) for the period ending 31 December.
However, Mobbs points out that this doesn’t mean you can purchase a $75,000 ute and write off the entire expense. “The money deducted from your tax bill is only a percentage of this amount,” he clarifies. “It’s worth doing your sums to figure out if the cost of a new vehicle is worth it.”
And while it’s possible to claim the cost of running a vehicle, if it’s not a purpose-built work vehicle like a van or a ute, you may have to keep a logbook of your activity. “This will be the case if you’re driving a station wagon or sedan to get from job to job.”
Don’t forget about all those small expenses which should be claimable in your tax return as a tradie. For example:
- Work-related and protective clothing,
- Tools and equipment purchases,
- Depreciation on tools and equipment,
- The cost of your mobile phone (depending on how much you use it for work),
- Business insurance and income protection costs.
Note that claim amounts differ based on whether you are self-employed or you have a job.
Finally, if clients haven’t paid you due to problems caused by COVID or other issues, you can write off these amounts as bad debts. As a result, your declarable income will be reduced.
DOING TOO MANY CASH JOBS
It seems like an easy win; take cash for a job and keep the transaction off your books. The price for the client is lower and so is your declarable income. You still get money and the ATO is none the wiser.
There are several problems with doing this. Firstly, accepting cash generally means there is no formal agreement about the quality of the job, which leaves both parties open to problems if things go wrong. What’s more, if you decide to take out a loan or apply for income protection insurance, lenders and underwriters can only respond based on your declared income.
At tax time, lodging an income that’s far below average for your industry may also send out warning bells to the ATO, setting you up for an audit.
FAILING TO LODGE
The deadline for lodging your tax declaration rolls around each year. Failing to meet this will eventually result in fines and significant tax bills.
Mobbs has worked with dozens of tradies who have had a rude awakening when it comes to their taxes. “If you don’t lodge a tax return for three or four years, you will probably receive a letter from the ATO. They may decide to tax you based on the average income of your industry if you can’t prove your earnings. And they will definitely issue fines for each year you haven’t been up to date.”
It definitely stings to be asked to pay years’ worth of taxes in one hit and it isn’t easy to get out of. Mobbs explains, “Even if you have a company that ends up being dissolved, you can wind up personally liable for tax debt as the director.”
The silver lining is that it’s possible to speak to the tax department and agree to pay off your bill in instalments. This will incur interest but at least you will begin to get back on track. Although it is tempting to file your taxes yourself, working with a tax expert makes sense. They will ensure your trade business is compliant, check no expenses are left unclaimed and give you advice about how to be better prepared with each coming year. They will also save you a great deal of time so you can focus on your clients.