There are over a million Aussies running a registered business as a sole trader. This suits people who like to be their own boss and keep all the profits from their hard work. But tax-wise, doing everything yourself comes with a big trade-off โ youโre not a separate legal entity, so the ATO will treat you and the business as the same โtaxable personโ for tax purposes.
Sole trader tax basics
A sole trader business structure has no separate legal entity. Your business income is included in your personal income and you report it in your own individual tax return. You donโt lodge a separate tax return just for the business like you would with a company tax return. That also means youโre personally on the hook for the businessโs outcomes:
- If you make a profit, itโs your income.
- If you make a loss, itโs your loss.
- Youโre also responsible for all the businessโs tax obligations.
Youโll deal with the Australian Taxation Office (ATO) yourself, unless you use a registered tax agent.
Income tax for sole traders
At the end of the financial year, youโll work out your net income from the business using the following equation:
Business income โ Business expenses = Taxable income
Your taxable income then gets added to your other income (e.g. employment income, investment income, bank interest, other assessable income) to pull together your total income for the year.
From a tax perspective, sole traders pay tax at individual marginal tax rates, not a flat company rate. Australia also has a tax-free threshold, so you donโt pay tax on the first part of your personal taxable income. Just keep an eye on these amounts as every few years there are changes to the personal income tax rates and thresholds that apply.
What counts as assessable income?
- Sales and fees from clients (i.e. business income).
- Bank interest.
- Some lump sum payments, depending on what they relate to.
- Some capital gains if you sold assets at a profit.
Claiming legitimate deductions
During tax time, you need to know exactly what you can and canโt claim. In general, legitimate business expenses are those you incur in order to earn your income. That might include tools and software, subscriptions, insurance, phone/internet (business-use portion), travel, and professional fees.
A tax deduction cuts down how much you pay tax on because it reduces your taxable income base (your taxable income amount). The goal isnโt to claim everything, but rather to claim whatโs reasonable and supported by your records.
Lodging your tax return as a sole trader
As a sole trader, you will lodge your tax return as an individual. You’ll need to lodge a tax return even if your business is small โโ even if youโre under the tax-free threshold โโ because your return still has to report income.
When you lodge your tax return, you must include a separate business schedule that covers all your business income and deductions. So youโre still lodging a personal tax return, but with extra details about the business itself.
Most sole traders lodge online through the ATOโs online services or through a registered tax agent. If you use a tax agent, you will enjoy extended lodgment dates under the agent lodgment program, so your deadline will depend on your circumstances.
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Sole trader registration requirements
When you register as a sole trader, there are a few requirements to get you started and keep your business compliant.
ABN: Your business identifier
If youโre running a business, youโll have to apply for an Australian Business Number (ABN). This is what you use on invoices and when dealing with other businesses and the government.
GST: Goods and services tax
You will need to register for GST when your turnover hits the ATO’s mandated threshold of $75,000. Be aware that you need an ABN to register for GST.
Once youโre registered for GST, you will need to:
- Charge GST on taxable sales (goods and services tax on your invoices).\
- Issue a tax invoice that meets the proper requirements.
- Track all GST collected and GST paid.
- Lodge a business activity statement (BAS).
BAS and other tax registrations
If youโre GST-registered, BAS becomes part of running your business. Depending on your situation, you might also have other tax obligations, like PAYG withholding if you hire staff.
You can also register multiple things at once (i.e. ABN, GST and other business registrations) through online registration services.
PAYG instalments
Sole traders can pay their taxes using the Pay As You Go (PAYG) system. This is a way to prepay your income tax during the year so that you donโt end up with a massive tax bill after you lodge. Not everyone starts on PAYG instalments immediately. The ATO will notify you if and when you enter the system.
Record-keeping as a sole trader
Keeping records as a sole trader is an essential business practice and will save you a few headaches come tax time. That means you should:
- Keep invoices issued and received.
- Keep receipts for deductibles.
- Track income and expenses in the same place.
- Reconcile your bank account.
- Keep notes on any โgrey areasโ (i.e. mixed personal/business use)
Capital gains tax and other income
Your sole trader return can include more than just business trading income. It might also cover:
- Capital gains tax could apply if you sell certain assets at a gain.
- Bank interest and investment income still count as other assessable income.
- If you earn partnership income because youโre also in a partnership, that can affect your overall total income.
Bottom line
Sole traders need a complete picture of their finances to be successful, and understanding their tax obligations is part of that. Knowing what you owe the ATO and keeping records to track it are part of running a business. With dedicated accounting software, you will be able to maintain and report all of your records so that you aren’t caught off guard during tax time.
