Home – New Forums Money matters Sole trader 2nd job and tax

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  • #995080
    Polly5
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    I am currently employed earning 35,000 pa and have started some sold trader cleaning work in my spare time. I will earn around $12,000 pa for this. As this will bump me up to the next tax bracket my question is- can deductions be made against just business income or my income as a total? Thanks for your help

    #1199903
    MyGreatIdea
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    Hi Polly,

    Your earnings as an employee and your earnings as a sole trader will be combined on your tax return. Legitimate business expenses can be deducted, along with any legitimate expenses from your employment. The balance of your total earnings is then taxed.

    Sometimes it’s a good idea to pull out a portion of your sole trader earnings and set it aside in a separate bank account to cover tax for the end of the year. If there’s a surplus then it’s even better!!

    Wendy :)

    #1199904
    Polly5
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    MyGreatIdea, post: 236690, member: 20385 wrote:
    Hi Polly,

    Your earnings as an employee and your earnings as a sole trader will be combined on your tax return. Legitimate business expenses can be deducted, along with any legitimate expenses from your employment. The balance of your total earnings is then taxed.

    Sometimes it’s a good idea to pull out a portion of your sole trader earnings and set it aside in a separate bank account to cover tax for the end of the year. If there’s a surplus then it’s even better!!

    Wendy :)

    So even though I won’t earn much from my business I can claim a legitimate business expense againstr the total income earned from both incomes? My employment is not in the same field as my business…

    #1199905
    MyGreatIdea
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    You’re not claiming a deduction against a specific earnings though Polly, it’s just an amount which is a deduction, because as far as the ATO is concerned you’re just one person, regardless of the source of your income.

    Your tax return isn’t segregated into different income and deduction streams and each one taxed separately. In simple terms, for an individual: total earnings, less total deductions, equals taxable income.

    Wendy :)

    #1199906
    Polly5
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    Wonderful thank you!

    #1199907
    atud1
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    Hi Polly,

    Business expenses is deducted from your business income, not your wage income. Even though they are both on the one tax return, they have separate sections. In short, the answer is no. Business losses must be carried forward unless you meet some exceptional circumstances.

    Regards,
    Alan

    #1199908
    Polly5
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    Oh yes that is what I was wanting to know…thanks for clarifying

    atud1, post: 236695, member: 79973 wrote:
    Hi Polly,

    Business expenses is deducted from your business income, not your wage income. Even though they are both on the one tax return, they have separate sections. In short, the answer is no. Business losses must be carried forward unless you meet some exceptional circumstances.

    Regards,
    Alan

    #1199909
    Paul – FS Concierge
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    Hi [USER=79973]@atud1[/USER] ,

    Can you clarify? Polly was asking about business expenses, not business losses.

    Cheers

    #1199910
    bb1
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    The reason why you should never ask for advise on a forum, the same question, and 2 opposing answers. I wonder what [USER=68601]@Taxopia[/USER] would say. I have a hunch at which is correct.

    #1199911
    atud1
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    Hi Paul,

    Sole trader income and salary income is addressed above as being on the one tax return (single tax bracket for both sources of income combined). With the query of different tax brackets out of the way I address the other reason why you would possibly want to allocate business expense deductions against salary income. To reduce salary taxable income through excess business expense deductions (business losses).

    Whether a business loss or business expense, you cannot deduct it against your other income unless your business meet certain requirements.
    Apologies for the confusion caused.

    Regards

    #1199912
    Polly5
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    So it might not be worth my while until my business generates more income? Because I will be going up a tax bracket and won’t be able to reduce my taxable income much because i won’t get much of a refund for business expenses? Am I understanding the tax system correctly? I am VERY new to this!

    #1199913
    Taxopia
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    OK ‘ll try and clear up any uncertainty here.

    The basic rule for working out an entities taxable income is contained in ITAA 1997 Sect 4-15(1) is that you take assessable income (gross income) less allowable deductions to produce a taxable income figure.

    However this rule is modified by various special sections of the Act. The other note is that the eligibility of a general deduction under Sect 8 is measured against the particular income activity. So if there are many different forms of income that a taxpayer is generating (you could have an individual with a combination of employment income, business income and some investment income) then you need to analyse the deduction against the specific form of income. For example you may struggle to find the deduction nexus between employment income (say you are a bus driver) and a subscription expense to a share trading information platform as a work related deduction. However, if that same person had investment income from shares then they could look at claiming the cost of the subscription against the income from the shares.

    There are modifications to the general calculation rule that effectively quarantine or isolate certain income or loss producing activities. The Sect 35 Non commercial loss rules are one example of this and relevant here. For sole traders business income is measured against related deductions under these provisions. If you make a loss and don’t pass the tests then the loss is quarantined and deferred to future years (and not able to be offset against other assessable income in the current year). That is a departure from the general rule. The capital gains tax regulations are another example of a departure. Capital losses are quarantined and carried forward to offset against future capital gains. Those losses cannot be used to offset against other assessable income.

    There are also sometimes departures in the rate of tax against certain types of income. We currently have the sole trader small business income tax offset which effectively isolates business profits and taxes them differently. So its not always one big pot with a simple rule.

    Its worth noting that if you have great accountants like Taxopia then they will try to claim deductions against other forms of income first if claiming against business income will produce a non commercial loss.

    Cheers
    Alex

    #1199914
    Alan Maddick
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    [USER=82705]@Polly5[/USER] Never let tax be a reason not to earn money. Earn as much as you can, keep receipts for all your expenses and then go and see a good accountant at the end of the year. You will be better off that if you had not earned the extra cash but as mentioned earlier it would not hurt to keep 20-30% aside.

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