Are you a freelancer who has just started providing services in Australia?
Freelancing has become extremely popular in the past decade as it helps people monetise the skills they possess. Also, they get to control their working behaviours and have flexibility in their working patterns, which has attracted a large number of people.
As a freelancer, tax time at the end of the financial year (EOFY) becomes too overwhelming. There are specific rules when it comes to taxes that a freelancer needs to follow. In this guide, you will get to know about your tax obligations as a freelancer in Australia.
What does Australian Government consider to be freelancing?
The Australian Government considers you a freelancer if you are paid on a project basis, you do not get to enjoy paid holiday or are not entitled to any sick leave, and you supply the tools or equipment you work with. Freelancers usually work with multiple clients and on different projects, due to which they do not have regular working hours.
Do freelancers pay tax in Australia?
Like in many countries, the people of Australia must pay taxes on the income earned through freelancing. Freelancers are classed as self-employed people, and all of your freelance income will be treated as business income. Also, you will be entitled to some tax deductions as well, which will be discussed further.
Have you decided on a business structure?
You might think that you would not need to choose a business structure while working as a freelancer. However, that is not the case. The very first thing you have to do when you get started as a freelancer in Australia is decide this. With different structures, you will have to fulfil various tax obligations.
The most popular structure among freelancers is operating as a sole trader because it is the simplest of them all. But you can always choose to operate as a company or in partnership with somebody.
Sole traders handle the complete responsibility of running the business, i.e., all profits and losses are theirs. Especially people or freelancers with in-demand skills choose this business structure. The major reason behind many freelancers choosing this structure is the minimal personal risk involved in the world.
How does a freelancer pay tax to the Australian taxation office (ATO)?
The tax you have to pay is calculated based on your individual marginal tax rate. For those who have their wages income along with their freelance income, both of these are added together.
When your freelance profit is $4,000 or more, or you have a tax bill with the ATO after lodging your return, you will be put on the PAYG Instalment system. Then, you will pay taxes in advance throughout the year. As a result, when you lodge your return, this becomes a credit to your tax deduction.
Most people pay the amount calculated by the Australian Taxation Office quarterly, and the notices are shared on MyGov. So if you are paying tax as a freelancer for the first time, remember that you will be paying taxes for 2 years. How? You will pay the tax bill of the past year and of the current year as well through the instalments.
Do I need an ABN for freelance work?
“Do I need an ABN to do freelance work?” If this is a question you find yourself asking, then here’s the answer. Yes, you need an Australian Business Number if you intend to earn an income through your freelance work.
Anybody who is earning income from the service they provide, they must have an ABN. Having this will ensure that a person or business is taxed the right amount.
Along with this, multiple business activities require you to have an ABN. For instance, issuing B2B invoices demand ABN. If you wish to register for GST (goods and services tax) and Payroll tax, you will also require an Australian Business Number.
In case, no ABN is present on the invoice, a business can legally withhold 46.5% of your payments, according to the Australian taxation office (ATO). What’s more, an Australian Business Number will assist you in declaring and gaining from any tax deductible that you had to incur throughout the financial year.
Do I need to register for GST for freelancing?
Yes, you must register for GST or Goods and services tax when your freelance income exceeds $75,000 in a year. For this, you will need an ABN.
Is TFN also needed for freelance work?
The tax on freelance income also depends upon how the freelancer conducts their business. If you are working on your own, without a partner, you will have to use your ABN to file your tax.
However, if you are doing freelance business in a partnership, you will need two tax numbers to file your taxes. One is your ABN (obviously), and the second is the TFN or Tax File Number. So yes, in some cases, you will need your TFN.
What can you claim on tax as a freelancer?
As a freelancer, you get to claim tax deductions and here is what you need to know about them:
Do you work at home?
A majority (if not all) freelancers work at home. Whether you work full time at home or not, you can claim your expenses for working at home.
Home office expenses are categorised into two types, i.e., Occupancy expenses and Running expenses.
Occupancy expenses are claimed by those who do all of their freelance business from home.
Running expenses are claimed by those who do some of their work at home.
Have you spent money on equipment?
Since you are freelancing, you will likely have purchased some equipment or tools when you started out. Also, with these, you have to incur ongoing equipment costs for equipment, like a laptop, camera, software, accessories or other power tools.
Claiming back your freelance equipment costs:
You can claim equipment and tools up to $1000 in the annual tax return.
You can also claim depreciation over a couple of years on equipment and tools that cost you more than $1000.
Can you claim travel expenses as a freelancer?
When it comes to claiming tax deductions for freelancers, people often wonder if travel expenses related to the freelance business are claimable. Yes, they are, and for the same reason, you need to keep a record of all the travel expenses related to your business and your personal car usage. You may be able to claim tax deductions for car expenses but only for your work-related journeys.
Here’s what you can claim:
- Car expenses for the trips you made for work (in case you have a different place that you go to carry out your work, you can’t claim a deduction for travelling to and from this place and your home)
- Parking expenses
- Taxi fares
- Meals and accommodation but only if you had to stay away from your home
Do you need protective items for your work?
Did you know that as a freelancer, you can claim tax deductions for the cost of protective items? Yes, but as long as they are work-related expenses. Here’s what you can claim:
- Non-slip shoes or steel-capped boots
- Hi-vis safety vest
- Hard hats
- Goggles or visors
- Sunglasses and sunscreen (for those who work outside)
What about mobile phone expenses?
As a freelancer, you can’t possibly work without your phone and internet. From answering client calls to writing emails, a mobile phone is a crucial tool for your freelance business. Due to the same reason, you can claim deductions for the mobile phone expenses that you had to incur.
For this, you need to track the percentage you used your mobile phone (and internet) for work. For example, according to your records, you used your phone 50% of the time for your freelance work. Now you can include this percentage of the cost of your monthly plan in your tax return.
Some other deductions for freelancers
Besides the deductions mentioned above for freelancers, here are a couple more:
Since you have no boss to contribute to your superannuation funds, the whole responsibility of the contribution falls on your shoulders. So, make sure to pay into your super funds. The super contribution is deducted from a person’s taxable income.
So, it is not only for the deduction, but you will also be able to look after your future self!
Personal Services Income (PSI)
The ATO defines freelance income as PSI or Personal services income if more than half or 50 per cent of the income is earned through freelancing from a person’s expertise, skills, knowledge or labour.
PSI is applicable to most freelancing works. Along with this, there are a few other items you get to claim, thanks to it. Examples include:
- Banking and accounting fees
- Advertising and quoting expenses
- Industry license and registration fees
- Relevant insurance and liability fees
Our tips to freelancers
We understand that managing your taxes with your work might be a little overwhelming initially. However, you can start by taking little steps with time. Just ensure that you always keep the records and receipts of your work-related expenses.
You can also keep a separate bank account for your freelance income and work-related expenses. It will make things easier for you in the long run. Also, claim as many deductions as you can.
In case all of this becomes too much for you to handle, talk to a professional like Clear Tax Accountants. At Clear Tax, we will help you with your tax matters so that you can know your tax obligations better.
Disclaimer: The information on this website is for general purposes only and should not be relied upon for making legal or other decisions. The advice provided in this article is general in nature and is not subject to the personal financial situation and needs of any individual. Clear Tax tries to keep the information accurate and up-to-date; however, you should bear in mind with changing circumstances, the accuracy and reliability of the information will not necessarily remain the same. The information is by no means a substitute for financial advice.