As a sole trader, you must report all your business and other income in your individual tax return.
This means you have the tax-free threshold of $18,200.
If your business income exceeds $75,000, you need to register for GST.
Keep an eye on important deadlines like the 31 October tax return date.
Key Takeaways
- Sole traders report all income and pay tax on profits at individual rates.
- Register for GST if annual income exceeds $75,000.
- Lodge your tax return by 31 October or get an agent extension.
- Common deductions include vehicle, home office, and accounting expenses.
- Keep records for at least five years to meet ATO requirements.
Key Tax Obligations for Sole Traders
Sole traders pay income tax on their business profits at individual income tax rates. Key aspects include:
- Using your individual tax file number (TFN) when lodging tax returns
- Reporting all business income in your individual tax return
- Paying tax on all income, including business income, at individual tax rates
- Being eligible for the tax-free threshold of $18,200
- Lodging an annual tax return, even if income is below the tax-free threshold.
Sole traders are entitled to an ABN and must use it for all business activities, and must also register for GST once annual turnover is $75,000 or more.
If annual turnover is (or is estimated to be) less than $75,000, a business has the the choice to register for GST or not. That decision should be discussed with your accountant, because voluntary registration has cash flow and reporting consequences.
Sole traders may be required to make PAYG instalments to prepay their income tax (usually on a quarterly basis) if last year’s tax payable exceeds a threshold. The threshold is reviewed by the Tax Office on an annual basis.
You automatically pay instalments if:
- You have estimated (notional) tax of $500 or more; and
- Business and investment income from your latest tax return of $4,000 or more; and
- The tax payable on your latest notice of assessment was $1,000 or more
See here for more information about PAYG instalments system
Record Keeping
In general, business and financial records must be kept for at least 5 years after the transaction is complete.
Records should include all income, expenses, and business transactions
Superannuation
You are not required to pay superannuation for yourself, but can make voluntary contributions.
Superannuation for any eligible employees must be paid, in accordance with the superannuation guarantee rules.
Employee Tax Witholdings
As an employer, you must meet all employer obligations if hiring workers, including PAYG withholding and superannuation
Other obligations to employees
They include:
- correct pay and other entitlements
- occupational health and safety
- fair treatment and non-discrimination
- maintenance and preservation of employee records, and privacy
The States and Territories also administer a payroll tax, which but payroll thresholds apply which generally exclude small employers. There’s more information on payroll tax here.
Information about the above and any other specific requirements or guidance can generally be obtained from the small business office in your State or Territory. Google “small business office” + [name of state/territory].
How to Lodge Your Tax Return
Filing your tax return as a sole trader? You’ve got options! Lodge online via myGov, use a tax agent, or go old-school with paper forms.
The general deadline for individual tax returns is 31 October.
A Tax Agent has a longer period to lodge tax returns, and yours may be included if you sign on to their client list before 31 October (or you are carried over as client from last year).
It is important to remember though, that tax agent time extensions for lodgment are for the benefit of tax agents, so they can manage their work load. It is not a taxpayer perk.
So if you approach a Tax Agent with the idea of delaying the lodgment of your tax return, the Agent is under no obligation.
The Tax Office can also insist on a specific lodgment deadline regardless of the Tax Agent’s situation, if you have a black mark on your record, if, for example, you lodged or paid late in a previous year.
Important Tax Dates and Deadlines
Missing the October 31 deadline for filing your tax return can result in penalties. The penalties comprise a penalty component, and a time based component calculated with respect to the tax outstanding.
There are details here, but without checking you can safely assume it is expensive. Way more expensive than a bank loan, for example.
Sole traders should pay attention to Business Activity Statements (BAS) submission timelines, whether monthly or quarterly. The deadlines can also vary if you use a registered tax agent, so keep in touch with them.
Common Deductions for Sole Traders
Tax deductions available for a sole trader can significantly lower the tax liability.
Expenses directly tied to your business operations are eligible.
Expenses which are only partly related to business activities must be apportioned, and you need to have some evidence of then basis of the apportionment to show the Tax Office if they ask to see it.
Here’s a few of the more common types of claims (not exhaustive):
- Vehicle Expenses: Calculate costs tied to business use, including fuel, maintenance, and depreciation. There are choices of record keeping and calculation methods for the way you calculate vehicle expenses. Details here.
- Office/Home Office Costs: Deduct business related expenses, and internet for your workspace or office, including rent and other attributable occupancy costs. If you work from home, check the details here.
- Office Supplies: Claim expenses for items like stationery and printer ink.
- Professional Fees: Include accounting and legal fees related to business operations. Some legal fees are only partially deductible or not at all, so check with your accountant.
- Asset Depreciation: Deduct the decline in value of business assets, including vehicles and office equipment when appropriate.
- Travel Costs: Business travel expenses, such as accommodation, are often deductible. Can be a tricky area, so run your expense claims past your accountant to be safe. There’s also information here which may help to clarify what is claimable.
- Insurance Premiums: Covering business-related insurance can be claimed as a deduction.
- Bank fees and loan interest
- Communications – phone and internet
Managing Tax Payments
Managing tax payments for a sole trader requires careful cash flow planning.
Using the PAYG system allows for quarterly installments, which goes some way towards smoothing cash flow, but that can still be a strain if not fully planned for.
Regular bookkeeping, paired with the right accounting software, makes this less of a chore, and is something worth investing in.
The major accounting system vendors out there are geared to small business, enabling you to capture every transaction on a convenient electronic record for an affordable monthly fee.
You can then keep a keen eye on your financials and quickly spot potential deductions as well as cash flow gaps.
Consulting with a tax professional, ideally more than once a year, can also help you comply with requirements and avoid unpleasant surprises.
Record Keeping for Sole Traders
Proper documentation is the backbone of managing tax obligations for sole traders. Keeping accurate records is essential.
The ATO mandates a five-year retention period for all documents. These include sales receipts, purchase invoices, bank statements, and employee payment records. A reliable system is key.
Digital tools simplify this task, making data access straightforward and secure. By organizing records diligently, you ensure a smoother tax return process.
Remember, it’s not just about compliance; it’s about making your life easier come tax time. With everything at your fingertips, the process becomes less of a headache.
Summing Up
Navigating all the obligations while running a business is a juggling act. But with a little preparation, it’s manageable.
Understanding your obligations and deadlines helps keep the taxman happy.
Keeping records tidy, and using software as your trusty sidekick can make this task less daunting.
Cash flow is crucial; stay on top of payments with the PAYG system and reach out to pros before problems arise. They can provide valuable insights and likely save you some money as well.