Everything Freelancers Need to Know About Lodging a Tax Return

Everything Freelancers Need to Know About Lodging a Tax Return
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It’s nearly that time again: tax time. If you’re a freelancer, sorting out your tax return can come with an extra set of challenges. You need to keep track of all the different jobs you’ve done and which deductions you can claim for each.

To help make that all easier we’ve consulted the Australian Taxation Office (ATO) for some advice on how freelancers can best manage their tax returns.

Tax return tips for freelancers

On a very basic level, if you’re working as a freelancer it means you are in business and meet obligations that are different to that of an employee.

As a freelancer, you may be operating as a sole trader or you may have your own business. Regardless, you’ll need to report your own income to the ATO come tax time.

An ATO spokesperson explained over email:

“Freelancers need to include their income in their tax return and to consider whether their income is classified as personal services income (PSI).

“Income is classified as PSI when more than 50% of the income you’ve received is a reward for your personal efforts and skills, rather than being generated by the use of assets, the sale of goods or by a business structure.

“If the PSI rules apply certain expenses will not be deductible.”

You can find out whether the PSI rules apply to you on the ATO’s website.

Some general tips for freelancers that the ATO provided us with are:

  • Keep good digital records. You can even use the ATO app to take photos and store receipts on the go.
  • Make sure you keep lodging even if you can’t pay – the ATO can work with you to establish a payment plan if you need one.
  • If you are going to lodge your own tax return, don’t rush! Take your time to ensure you have declared all of your income correctly and also claimed what you’re entitled to.
  • If you think you might need a helping hand, ask a registered tax professional. By getting on the books of a registered tax professional, you have more time to lodge your tax return.

Can I claim working from home tax deductions?

If you are a sole trader or partnership home-based business you may be able to claim deductions at tax time for working from home expenses.

These expenses are split into running and occupancy categories.

Occupancy expenses

As defined by the ATO’s website, occupancy expenses are “those you pay to own, rent of use your home.”

They include mortgage interest or rent, council rates, land taxes and house and contents insurance premiums.

In order to claim occupancy expenses, you need to pass the interest deductibility test.

To do that, the area you’ve set aside for business at home must clearly resemble a place of business. For example, it must be identifiable as a place of business (you may have a sign at your door or out the front of your house), must be used exclusively as a place for carrying out business and may be used regularly for visits by clients.

If you pass the test you can claim a percentage of the occupancy expenses that relate to the area you use for business. A common way to figure this out is to work out the floor area that you use for business as a percentage of the total floor area of your home. If that number is say 5%, that’s how much of the occupancy expenses you can claim.

Running expenses

The ATO defines running expenses as “the increased costs of using your home’s facilities for your business activities.”

Running expenses may apply to areas you do business from at home, such as a separate desk or study, and it doesn’t have the character of a place of business.

Some examples of running expenses include electricity costs, phone and internet service costs, cleaning costs and the cost of repairs to equipment.

The ATO says you can use any method to calculate these expenses as long as its reasonable to your circumstances, excludes the percentage of costs that are normal living costs and you have records of how you calculated these expenses.

Using the floor area is another common way of doing these calculations. The ATO has some other methods here.

How to claim expenses as a freelancer

As a freelancer, you may incur costs for equipment you’ve bought or phone and travel expenses.

To claim any work-related expense it must meet these three rules:

  • You must have spent the money and weren’t reimbursed for your purchase
  • The expense must relate directly to your income
  • You must have a record to prove it (like a receipt)

Travel expenses

Travel expenses can be claimed when you stay away from your home overnight for work purposes.

Expenses you may be able to claim include accommodation costs, meals and incidentals (like parking fees).

You’ll need to keep records such as receipts or written evidence.

If you’ve been given a travel allowance by an employer for your trip, you may not be able to claim deductions. You can read more about it on the ATO’s website.

Phone and internet

If you use your phone and internet for both work and personal use, in order to claim a deduction you’ll need to work out the amount that is work-related. You’ll need to keep records to show your work-related use if you’re claiming over $50 of phone or internet expenses. This can be in the form of bills or electronic records.

In terms of claimable deductions, this includes things like your mobile device, data and internet expenses, phone plans or bundles. You can’t claim set-up or installation costs.

The ATO has a guide for breaking down phone and internet expenses here.

Equipment costs

If you use tools or other equipment for your work duties you may be able to claim them.

If the tool costs you $300 or less, you can claim a deduction for the full amount in the year you buy it, provided it’s mainly used for work purposes. You can claim a deduction for the cost over the life of the item if it is over $300.

Examples of claimable equipment include calculators, computers and software, desks, chairs, shelves, hand tools, protective and safety equipment.

Other tax return deductions for freelancers

If you’re wondering what else you can claim as a freelancer, you may be surprised (like certain travel expenses and clothing items).

The ATO has a guide to some of the common deductions in each industry which you can find here.

What happens when you forget to file your tax return?

As a reminder the tax return deadline this year is Monday, October 31, 2022.

This is the last date for self-lodgers, otherwise, you may incur a late lodgement penalty. This penalty increases over time so make sure you get your return in sooner rather than later.

If you’re lodging through a tax agent or accountant they get a little bit longer, usually up until May of the following year.

Lodging your tax return

Lodging your own tax return isn’t as scary as it seems. We’ve put together a quick and simple guide that will help you lodge your tax return if you’re still new to it all.

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