The simple tax guide for barristers (Australia)

18 Mar 2020

Here’s a line I’ve never heard from a barrister: “I’ve got so much spare time, I don’t know what to do with it”.

Between court deadlines, demanding clients, impatient judges and the general pressure of being a sole trader, life at the bar is very busy.  As well as professional pressures, the requirement for a barrister to be a sole trader means you have the additional headaches of paying your own tax and GST each quarter which an employee lawyer doesn’t have to deal with.

But the extra tax compliance doesn’t need to be a headache.  In fact, being a sole trader has some unique advantages.  Like possibly reducing your mortgage interest rate to 1.86%, which I’ll explain below.

Basically, if you want to reduce the time you spend on financial admin, and avoid paying more than is necessary, then this article is for you.

The basic tips are:

  • Know the expenses you can claim as a deduction
  • Set your bank accounts up properly
  • Let software do the hard work for you
  • Make the most of superannuation
  • Know the smartest ways to lodge your BAS

There is also a cheeky credit card points hack at the end, if you’re into bonus points.

What expenses can a barrister claim?

Rather than make a list, I’ve prepared a profit and loss template in excel: click here.

This covers most of the common deductions you can claim, along with notes explaining what you can and cannot include as an expense.

Keeping track of business expenses

You can simply and easily keep track of your business income and expenses by doing two things:

  1. Pay 100% of your business expenses from dedicated business accounts.  Mixing personal and business transaction accounts is one of the worst admin mistakes you can make.

  2. Link your business accounts to bookkeeping software.

Anything more involved than this is over-complicating it.

If you can do this, the software will capture all of your income and expenses.  If set up correctly, much of this can be automated.

Once you’ve set it up, all you need to do is make sure you use your business card for business purchases, and your private card for private purchases.

As well as making BAS and tax time much simpler, you have “live” accounts, which is helpful when you need interim financial statements for loan applications or re-finance.

You should still keep your receipts for the unlikely event of an audit.  But you don’t need to filter through piles of receipts in order to work out your tax and BAS figures.

Super contributions

Contributing to super is an ideal way of minimising your tax liability.

You can contribute nothing to super, or you could contribute $25,000 per year.  More super is great for tax, but lousy for cashflow, and vice versa.

Plus, from 2019-20, you have the option of adding even more than $25,000 if you didn’t use the full $25,000 cap from last year.  You can read more about this on the ATO website.

Carrying forward contributions only applies if you have a total superannuation balance under $500,000. 

Let’s say you contributed $10,000 of the maximum $25,000 in 2018-19.  That leaves you with $15,000 unused.  Your super contributions cap for 2019-20 would be $40,000 ($15k plus $25k).

You can use this to your advantage by making sure you use the available contributions in the year where the contributions are most beneficial.  There isn’t room for detailed examples here – just know that the new law gives you options, and that we can help you choose the best timing option.

Cut your mortgage interest in half

You can achieve this through debt recycling or maximising good debt.  Good debt is tax deductible debt.  Let’s assume you’re on the 47% tax rate ($180,000k and above).  You are entitled to 47% tax back on the deductible interest.

A deductible loan with an interest rate of 3.5% is only 1.86% after tax.

Your home loan is not deductible. A business loan is deductible.  The key to debt recycling is to turn non-deductible debt into tax deductible debt.  You do this by:

  • Splitting your loan into two parts: one purely for business, the other purely for private use
  • Instead of paying your expenses from your fee income, use the loan and a business credit card to pay the expenses

Over time, your whole mortgage could technically be tax deductible, saving you thousands of dollars.

You just need to set up three accounts, used exclusively for business:

Operating accountUse this account for your fees and to transfer funds to your personal spending account.

Credit cardAll your small expenses or online purchases are paid from this account.  Pay it off using your loan.  
Loan accountPay your large expenses from this account (e.g. chambers rent, ATO payments).  Pay off your business credit card.

Do not pay your superannuation contributions, donations or income protection insurance from this account as these are not strictly business expenses, albeit they are deductible.

If you’re not sure how to set this up, don’t worry, we can handle that, including re-financing your current loan if a lower interest rate is available.

Once you have a system set up, it’s “set and forget”.

Lodge your BAS in two minutes

As a GST-registered sole trader, you need to pay both GST and income tax each quarter.  However, you don’t need to necessarily go to the trouble of calculating all your income and expenses each quarter.

In the first quarter of each financial year (Jul-Sep quarter) you can choose to change your BAS method.

One of the options is to pay your BAS (GST and PAYG) by instalments.

The instalment method is the quickest way to deal with your quarterly obligations.  All you do is:

  • Log in to MyGov
  • Click on your BAS
  • Press “accept” and “lodge”
  • Schedule a BPay to pay the amount owing on the due date

The downside of this method is that the instalments are based on last year’s figures, so you can find you pay too much or not enough GST and tax, which you adjust for at the end of the year.  But it’s a big time saver.

The other way to quickly lodge your BAS is to get us to do it for you.  We’ll need you to explain what some of the transactions are, but this shouldn’t take much of your time.

Either way, spending any more than 15 minutes per quarter on tax admin is a poor use of your limited time.

Collecting credit card points from the ATO

I’ve left this to the end, as it’s only a minor advantage.

At the time of writing (Feb 2020) the ATO’s credit card surcharge for tax payments was: 1.45% for American Express payments, 0.70% for Mastercard credit payments and 0.78% for Visa credit payments.  You can view the current rates at: https://www.governmenteasypay.gov.au/payato

This is a low surcharge compared to most providers.  On certain cards (usually platinum cards) there may be a margin between the value of your points and the card surcharge.  That is, the points you’ll gain are worth more than the surcharge you’ll pay.

A barrister will typically make a BAS payment of tens of thousands per quarter.  If there is a margin between the points gained and surcharge paid, the benefits can add up.

You need to work out the dollar value of the points you earn per $1, which can be hard, and it’s possibly more trouble than it’s worth.  Also, some cards don’t give you points for all transactions, and tax might be one of the excluded items. 

Bear in mind this quote I heard from a financial planner: “I’ve met a lot of millionaires, but none of them has ever said to me ‘I made my money in bonus points’.”.

Other issues

There are other issues that we don’t have the space to cover here, like:

  • Home office deductions, is home a “place of business”, and what does this mean for the capital gains tax on my home?
  • Is it worth keeping a log book for my vehicle, or should I just claim per km?
  • Using debt to buy investments (e.g. negative gearing on property or shares)

Our services

We have a few service options depending on how much of the work you need us to do, and how much you prefer to do yourself.

Tax return preparation and review of GST figures              $440 per annum

Full service incl software subscription – you lodge your BAS   $99 per month

  • Tax return preparation, including meeting if required
  • Tax planning meeting in June (you can include your financial planner in this meeting)
  • Software costs

Full service incl software and we lodge your BAS                $132 per month

  • Tax return preparation, including meeting if required
  • Tax planning meeting in June (you can include your financial planner in this meeting)
  • Software costs
  • 4 x BAS lodgments

For further assistance, please get in touch via our contact page or on 1300 823 011.  We are located a few minutes’ walk from Melbourne’s legal district, and we offer Australia-wide service via online appointments. You can book an appointment here: https://beyondaccountancy.gettimely.com/book