If you run a business, you may be able to claim tax deductions for salaries, wages, and super contributions paid to employees. To qualify, the payments must be for genuine work and meet your tax and super obligations.
Tax Deductions by Business Structure
Sole Trader
As a sole trader, you’re not considered an employee of your own business. You can’t pay yourself a salary or claim a deduction for the “wages” you draw. Instead, these are treated as personal withdrawals from business profits.
Partnership
In a partnership, the same rule applies—partners can’t be paid a wage and can’t claim deductions for drawings taken from the partnership’s earnings.
Company or Trust
Companies and trusts can generally claim deductions for salaries and wages paid to employees, including directors, provided PAYG withholding obligations are met.
Contractors
Payments made to genuine contractors may be deductible, but it’s essential to correctly determine their status. Misclassifying an employee as a contractor can lead to compliance issues. You also need to meet PAYG withholding requirements when applicable.
PAYG Withholding & Reporting Obligations for Small Businesses
To claim a deduction for wages or salaries, you must have:
- Withheld the correct amount of PAYG tax from the payments.
- Reported the payments and amounts withheld to the ATO via Single Touch Payroll (STP).
- Paid the withheld amounts to the ATO by the due date.
If these steps aren’t completed, you may lose your entitlement to claim a deduction.
Super Deductions for Employers
You can claim a deduction for super contributions you make for your employees or eligible contractors, as long as the contributions:
- Are paid to a complying super fund.
- Are paid on time (i.e. by the quarterly due dates).
- Are reported correctly through Single Touch Payroll (STP) and super clearing houses.
To determine if a contractor is eligible for super contributions, you’ll need to assess whether they are considered employees for super purposes under the ATO’s rules.
If your business income is primarily from your own personal services (known as personal services income or PSI), different rules may limit your deductions.
Personal Super Contributions for Sole Traders & Individuals
Self-employed individuals and sole traders may be eligible to claim a tax deduction for personal super contributions made to their own fund. To be eligible, the contribution must be made to a complying super fund, a notice of intent to claim the deduction must be submitted, and the fund must acknowledge it. This notice must be lodged before your tax return is submitted or by 30th of June of the following financial year—whichever comes first.
Contribution Caps and Tax Considerations
If you’re a sole trader or self-employed, keep in mind the concessional contributions cap is $30,000 from 1 July 2024. Going over this limit could result in additional tax. You’ll also need to meet certain age-related conditions to claim a deduction.
Depending on your income, you might benefit more from government incentives like the Low Income Super Tax Offset (LISTO) or super co-contributions, so it’s worth comparing your options.
Practical Tips & Pitfalls
- Misclassifying Workers: Make sure you correctly identify contractors vs employees.
- Late Super Payments: Super contributions paid after the due date aren’t deductible.
- Monitor Your Caps: Stay within concessional caps to avoid excess contributions tax.
- Assess Deductions vs Offsets: Low-income earners may benefit more from offsets or government contributions than tax deductions.
About Chan & Naylor
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Disclaimer
This article serves as general information only and may not account for the unique circumstances of individual readers. For personalised and strategic solutions tailored to your specific situation, we invite you to seek professional advice from Chan & Naylor. Our highly experienced team is dedicated to helping you navigate the complexities of Australian taxation, ensuring that your financial strategies align with the latest regulations. Contact us today to embark on a path of informed and customised tax planning for your property investments.
