Congratulations on your recent appointment, if you have recently been appointed as a barrister, from a business structure perspective you will be operating as a sole trader. You will therefore need to apply to obtain an ABN (Australian Business Number).
During your time spent in previous roles of employment you have been operating as a sole trader for example; if you worked as a lawyer in an incorporated legal practice or in a partnership and therefore been registered as a sole trader. Even if this is the case it is important for you to be aware of all the financial implications that come along with being registered as a sole trader.
Registering for GST
When you register for GST you will be able to claim the GST you pay for your business expenses as “input tax credits” on your quarterly Business Activity Statement (BAS). You will be required to lodge your Business Activity Statement every quarter via the Australian Tax Office (ATO).
Accounting for the GST on your income and your expenses on a cash basis is the most effective way. This means that you have to: report GST income on your BAS whenever you receive client payments (not on the date you send your invoice), and also report the GST portion of your expenses when you pay them (not when you receive invoices with future payment dates).
How to budget for your first tax bill
Upon commencing employment as a sole trader, you will need to declare your income on your personal tax return at the end of the first financial year in which you start working as a sole trader. This income will be taxed at your marginal rate and you’ll need to pay the tax you owe in a lump sum on the die date listed on your tax return.
Your lump sum tax bill could be a substantial amount, especially if: you start working as a sole-trading barrister early in the financial year; and/or you were previously working as an employee for an incorporated legal practice and are used to having your income taxed fortnightly or monthly by your employer under the pay-as-you-go (PAYG) system.
It is crucial for you to budget for your first annual tax bill as a barrister. This can be done by approximating what your likely income and the affiliated tax obligations might be. You should then frequently divert an appropriate amount of funds into a separate bank account.
You also need to keep in mind that your first tax bill as a barrister/sole trader will more than likely be quite high as it will be for all the taxable income you have earned for up to a 12-month period. After lodging your first annual tax return, budgeting for your tax will be much easier because the ATO will send you a quarterly bill based on your first year’s taxable income.
Claim all of your eligible business expenses
It is important to claim all of your available business expenses. These expenses consist of;
- business assets under the instant asset write-scheme.
- home office expenses if you regularly work from home.
- your mobile phone plan.
- professional association expenses.
- your specific clothing such as wigs, vests and gowns.
- professional indemnity and income protection insurance premiums.
- legal book and journal subscriptions.
As a legal practitioner, you will recognise that tax minimisation is legal and sensible, while tax avoidance is illegal and carries significant penalties.
Make sure you keep good records
Keeping good records has two key benefits: it makes preparing your quarterly business activity statements and annual tax returns much less difficult. It also makes it easier for you to prove your expenses claims if you are ever audited by the ATO. It is a legal obligation to keep expense records (such as bills and invoices) for a minimum of five years after you lodge each BAS or tax return. If you get paper receipts, scan them so they won’t fade over time.
Engage an accountant and tax agent
Acquiring a great accountant and tax agent has many benefits; including;
- ensuring your legal compliance with ATO requirements.
- saving you tax by making sure you maximise all of your eligible deductions.
- saving you time and allowing you to focus on what you do best.
- extending the deadlines for submitting BAS and tax return lodgements to the ATO (the ATO imposes penalties for late lodgements and payments).
- helping you to implement effective record-keeping systems and processes.
Make tax-deductible super contributions
If you have previously worked in an incorporated legal practice, your employer would’ve been paying you the 9.5% superannuation guarantee on your behalf. Upon becoming a sole trader, you need to choose if you want to make super contributions. There are two major reasons to do so. Firstly, you can claim up to an excess of $25,000 worth of super contributions that you have made as a tax deduction every yea. This amount is called the concessional contributions cap. Secondly, super contributions and earns in Australia are taxed at a concessional rate of only 15% which is much lower than even the lowest marginal tax rate. Superannuation can be a tax-effective way of making a nest egg for retirement.
Taking out the right insurance coverage
To practice as a barrister, you would be aware that you need professional indemnity insurance. You should consider taking out a reasonable amount of income protection insurance. This type of insurance will protect you if you are unable to practice as a barrister for an extended period of time as a result of injury or illness. Any business-related insurance cover is furthermore tax-deductible.
Developing a financial plan
It is recommended that you seek professional advice from an independent source to support you with making intelligent financial decisions both personally and professionally. It is never too late or too early to begin planning your financial future. Developing a financial plan is essential for building, maintaining and protecting your wealth.