Tax for Barristers: Going solo
Barristers are legally bound to establish as a Sole Trader when offering professional services. The tax office has done this to direct liability, and as such this becomes a key area of focus for budding barristers. While this is important there are several other areas that more often become a pitfall for the orators of law.
Legally, barristers are required to operate as a Sole Trader. As a Sole Trader you will require an Australian Business Number (ABN) to commence practising. If your projected annual turnover is greater than $75,000 then you will be required to register for GST. GST will result in a requirement of quarterly business activity statements (BAS). Claims such as chamber rent and clerking fees are only possible once you are registered for GST.
*Tip – Typically barristers account for GST on a cash basis. When completing your BAS, GST on income and expenses is only reported when it’s physically collected and paid. An apportionment of input tax credits is required on expenses (e.g. mobile phone plan) or assets (e.g. laptop) you purchase that are used for a mixed purpose (e.g. part business and private).
Budgetting is a frequent issue for new businesses, and typically even more so with barristers as new Sole Traders. As a Sole Trader the net profit from your services will be taxed in your personal income tax return at your marginal tax rate. The income tax on the business profit in the first year will only be paid to the ATO upon lodgement of your personal tax return, which can be up to 23 months after you commence business. It is then required to be paid in a lump sum payment. Self evidently the lump sum payment requires money to be put aside as you earn to avoid future financial constraints and risks.
*Tip – A common approach to budget for tax payments is to setup a separate bank account and put money aside towards the GST and income tax liabilities as you earn the income. Alternatively if you have a mortgage with an offset account you could also use that to maximise the benefit. If you liaise with your clerking office they can (if requested) split payments to you between various bank accounts. *Tip – When planning for your tax payments you will need to potentially factor in a HECS repayment, based on the ATO repayment thresholds as well as other levies (e.g. The Medicare levy, Medicare surcharge, Temporary budget repair levy etc.)
Provided set criteria are met, common expenses to consider and claim are;
-Home office expenses; -Motor Vehicle costs; -Mobile phone costs;
Furthermore, the small business asset write-off permits immediate write-off for assets purchased for use in their business that cost below $20,000. Therefore items such wigs, gowns, vests, laptops, mobile phones, books, journals and chamber furniture can be claimed as an immediate tax deduction without the need to depreciate the items over a number of years.
An area commonly confused is admission fees. You cannot claim a deduction for the cost of admission fees. However you can claim a deduction for the cost of renewing your annual practising certificate.
You can claim a deduction for depreciating assets you purchase and use for work. The deduction you can claim is worked out on the effective life of the equipment, and the decline in value of equipment used for work. If you also use the equipment for private purposes, you cannot claim a deduction for that part of the decline in value.
There is a plethora of details around what you can claim as a Barrister, so we have dedicated an article to focusing on this potentially worth reading.
*Tip – One of the larger deductions available to Sole Traders is your superannuation payments. This is often a concern of new barristers when flying solo. Your employer has historically paid superannuation contributions on your behalf and it’s now in your hands to manage. It often is worth collecting your super into one fund, and if this fund exceeds $200,000 it may become more effective and value personalised to have a self managed superannuation fund. We are happy to discuss self managed superannuation funds and can establish these for you, though they are not generally economical until passing $200,000. This is discussed further in detail as well in another article.
Suggested Read: Self Managed Superannuation Funds
*Tip – It’s important to keep good records for your business in order to maximise your tax deductions and ensure you don’t miss any when preparing your income tax return.
We naturally would suggest Xero for record keeping as the current market leader. We do acknowledge that Barbooks and alike often have become frequently used, though the important part is just to ensure you do keep the records. Even a spreadsheet or smartphone app can be adequate to keep track of expenses and retain records. These records must be kept for at least five years, though naturally electronic copies are easy to keep hold of on a server based device (some call a cloud device). Records need to include invoices, receipts, clerking statements and bank statements.
*Tip – We suggest taking a quick photo snap of your receipts and filing it. Otherwise you may consider scanning or photocopying your receipts as they can fade over time.
It is important to have an awareness and put a process in place to meet your ATO obligations. There are numerous lodgements such as the quarterly BAS and your personal tax return due at various times throughout the year. If you are not on top of these deadlines, the ATO can apply penalties and interest for late lodgements and payments which is not ideal.
*Tip – By using an Accountant / Tax Agent they can access extended lodgement and payment dates, up to a month for Business Activity Statements and 7 months for Income tax returns.
Protecting your assets and income – Insurance
Obviously you require professional indemnity insurance to practice, however you should also consider your personal insurance position to ensure you and your family are adequately protected. This is especially important as a sole practitioner due to potential means of seeking liability claims against you. A key focus should be income protection, the ability to generate income. Given the change in your income type from salary and wages to business income, now would be a great time to assess your current personal risk insurance position.
*Tip – Given the change in your personal family circumstances, it may be worth consulting your financial advisor to discuss your goals and objectives to ensure you have adequate personal risk insurance coverage for you and your family such as life, total and permanent disability (TPD), income protection and trauma insurance.
Structural optimisation and budget forecasting
It may be worth asking around budget forecasting and structural optimisation for details around:
Are assets adequately protected within the family group How can I structure my financial affairs to best minimise my tax How can we use surplus funds in the most effective environment When is the right time to start planning for retirement
If you would like any further information or would like to discuss any aspects please contact The Great Bean Counters.
Disclaimer – The contents of this article are in the nature of general comments only, and are not to be used, relied or acted upon without seeking further professional advice. The Great Bean Counters accept no liability for errors or omissions, or for any loss or damage suffered as a result of a person acting without such advice. Liability limited by a scheme approved under Professional Standard Legislation.