This is the simplest and cheapest business structure. It simply refers to an individual running a business. You own the business by yourself, you control and manage the business by yourself, and you alone are legally responsible for all aspects of it.
As a sole trader, you:
- Lodge your income tax return with the Australian Taxation Office (ATO) using your individual tax file number (TFN).
- Pay tax at the same income tax rates as individuals, although you may be eligible for the small business tax offset.
- Have the option to pay your income tax in quarterly pay-as-you-go (PAYG) instalments. Generally, you will need to pay instalments if you reported at least $4,000 or more of business or investment income in your latest tax return, although some exceptions apply.
- Report all your income and expenses on your individual tax return (under the section for business items).
- Can claim tax deductions for any business expenses or personal superannuation contributions you make in the relevant financial year.
You can’t employ yourself, although you can employ other people, with all the attendant employer responsibilities, including paying superannuation.
This means that the amounts you take from the business for yourself are not wages for tax purposes — even if you think of them as wages — and you can’t claim a deduction for them.
However, any wages that you pay your employees will reduce your overall tax bill (as they’re considered to be business expenses).
It’s worth highlighting that if you’re receiving personal services income (PSI) (where you’re paid mostly for your personal efforts, skills, or expertise), your income may be treated differently than for a sole trader.
For example, you can’t claim deductions on any wages that you pay support staff for administrative tasks (like secretarial work), and you’ll have to complete the PSI question in your individual tax return. So, you’re still a sole trader, but there are some additional rules.
Filing your online tax returns is an easy process for sole traders (all things being considered). After digging out your TFN, visit the ATO site, fill in your yearly income and expenses, and claim allowable deductions. Done!