Published on 2 Aug, 2023

Sole Trader | All you need to know

Written by:
Thomas S Phabmixay
General Manager

Page Contents

What is a Sole Trader?

A sole trader is an individual who operates and manages their own business and is considered self-employed. Operating as a sole trader is the simplest and cheapest business structure you can set up.

As a sole trader, you are responsible for all aspects of the business, including making business decisions, managing finances, and assuming legal liability. The income earned by the business is considered taxable income for the individual, and must be reported on the individual’s tax return each year.

As a sole trader you can control and manage the business, and although you ‘trade’ on your own, you can still employ people to work for you.

How to be a Sole Trader?

To set up as a sole trader, you need to: register a business name and apply for a individual tax number also known as Australian Business Number (ABN) to acquire individual tax file number, this is required for sole traders in order to register for taxes and conduct business transactions.

You should also apply for GST Credit to help you effectively reduce the cost of running your business, as you are able to recoup a portion of the GST paid on your business expenses. This can help to improve cash flow, and ultimately increase profitability for your business.

To know more about GST Credits, read our article GST Credits | How to claim it?

Differences between sole trader tax rate and company tax rate

A sole trader business structure is where an individual operates and manages the business. As a sole trader, the individual is considered self-employed and is responsible for paying taxes on their business income at the individual income tax rate based on a progressive tax system.

On the other hand, a company is a separate legal entity from its owners, paying tax on its income at the company tax rate, which is currently 25% for small companies, and 30% for other companies.

In addition, companies are subject to a range of compliance requirements, such as lodging financial statements and company tax returns. In contrast, if you are a sole trader, you may only need to lodge an individual tax return each year.

Another difference to consider is that dividends paid to shareholders from a company are also subject to the personal tax rate and are not tax deductible for the company. At the same time, the income of the sole trader is subject to the individual income tax rate, and the deductions can be taken on the same income.

Tax deductions available for sole traders

As a sole trader in Australia, you may be eligible for a range of tax deductions that can help to reduce your taxable income and lower the amount of tax you need to settle. Some of the most common tax deductions for sole traders include:

Business assets expenses: You can claim deductions for expenses directly related to your business, such as office expenses, advertising, and travel.
Home office expenses: If you operate your business from home, you can claim a proportion of your home office expenses, such as electricity, internet, and mortgage interest.
Motor vehicle expenses: If you use your car for business purposes, you can claim a percentage of your car expenses, such as fuel and maintenance costs.
Depreciation of assets: If you have purchased assets for your business, such as equipment or tools, you may be able to claim deductions for the depreciation of these assets over time.
Professional development: If you have undertaken any courses or training directly related to your business, you may be able to claim these expenses as deductions.

Remember that you are personally liable for financial or tax debts in a sole trader business structure. There is no division between business assets or personal assets (including your share of joint assets such as houses or cars). Assets in your name can be used to pay business debts. The company is generally liable for all business debts.

Impact of GST on sole traders

For a sole trader, GST registration is optional if your annual turnover is below a certain threshold, currently $75,000. If your turnover is above this threshold, you must register for Goods and Services Tax (GST), charge it on your sales, and claim GST credits on your purchases.

GST-registered sole traders, you must report GST on your sales and purchases in your Business Activity Statement (BAS) every quarter or annually. The BAS also includes other taxes such as PAYG withholding tax and PAYG instalments.

When you report GST on your sales, you are required to charge your customers 10% GST on top of the price of the goods or services you sell to them. When you purchase goods or services subject to GST, you can claim the GST as a credit, which can help offset the GST that you are required to pay on your sales.

Filing and payment deadlines for sole trader taxes

As a sole trader business in Australia, it is important to know the deadlines for filing and paying your taxes. These deadlines vary depending on the type of tax and the frequency of your reporting.

Income Tax return

As a sole trader, you need to lodge an income tax return annually; the deadline for lodgment is 31st of October. The deadline may be extended if you use a tax agent.

Business Activity Statement (BAS)

If you are registered for GST, you must lodge a BAS every quarter or annually if you have been granted a variation. BAS lodgement and payment deadlines are usually due on the 28th of the month following the end of the quarter.

Pay as you go (PAYG) withholding tax

If you have employees, you will be required to withhold tax from their wages, usually monthly or quarterly. The payment deadlines for PAYG withholding vary depending on your reporting frequency but are generally due on the 21st of the month following the end of the quarter.

Pay as you go (PAYG) instalments

A Sole trader may also be required to make instalment payments towards their expected income tax liability throughout the year. The payment deadlines for PAYG instalments are the same as the BAS lodgement.

Who are TMS Financials?

TMS Financials provides you with a team of experienced professionals that help you achieve your financial goals through smart tax structures and financial planning. We’re a one-stop shop for all financial needs and pride ourselves on building strong partnerships with our clients.

Book a free financial health review to see the difference we can make in your financial future.

Book a free accountant consultation with TMS CPA Accountants your specialists in Sydney Australia.

Disclaimer

This outline is for general information only and not as legal, tax or accounting advice. It may not be accurate, complete or current. It is not official and not from a government institution. Always consult a qualified professional for specific advice tailored to your unique circumstances.