Sole Trader Tax Return: Guide and Tax Tips

If you’re not up to speed, filing your annual return can be a little daunting. What rules apply? What deductions can you claim? What paperwork do you have to do? What is sole trader tax and is it optional?

There are a lot of perks to the sole trader business structure, but taxes are still an inevitability. To ensure you’re the sole champion of taxes this season, we’ve collected tips to help you understand the sole trader tax, get as many tax deductions as possible, and be one of the most tax-wise business owners around. 

Sole Trader Tax Obligations

As a sole trader, you’re required to pay tax like any other business or individual. The rate you’ll pay is the same as a personal income tax return. Exactly what you pay depends on how much you earn each year and is worked out by the Australian Taxation Office (ATO).

Report in your tax return: 

• your business income less the business deductions you can claim
• Your other income such as salary/wages (as listed on payment summary or income statement), dividends, and rental income, with deductions subtracted from it.

You are not required to calculate the amount of tax you owe. Instead, the ATO will determine your tax liability and issue an assessment that will indicate the amount you owe or the refund you will receive. In the assessment, any PAYG instalments you made during the year will be automatically credited to you.

What is Sole Trader Tax? 

Sole trader tax is a tax that any sole trader must pay, however, it’s important to remember that your sole trader business structure is taxed as part of your personal income because it is owned by you. As such, the tax rates will align with individual rates. 

It’s also important to keep in mind that businesses above a certain threshold need to pay different tax rates. This is where the Goods and Services Tax (GST) comes in.

ABN for sole traders

No matter how much you earn as a sole trader, you will still need a tax file number (TFN) and an Australian business number (ABN), and you’ll have to submit an annual income tax return. If you earn $75,000 or more each year, you’ll also need to register for goods and services tax (GST) and submit a business activity statement (BAS) either monthly or quarterly.

Sole trader tax rates

Sole traders are subject to the same tax rates as individual taxpayers. Individual tax returns must be submitted by both sole traders and company directors/employees, but companies must also submit a business tax return each year.

Sole traders must apply the same tax rates as personal taxes to their income after deducting business expenses, such as rent, accounting fees, travel expenses, vehicle expenses, working-from-home expenses (if applicable), and instant asset write off.

Read more with our tax rate guide in Australia.

Goods and Services Tax

If your business as a sole trader breaks the $75,000 mark ($150,000 or more for a non-profit organisation), you will have to register for and pay GST. This can impact your taxes in a big way, as your sales may be eligible for taxation if you qualify for GST.

You will also be required to maintain tax invoices for your sales and consider the impact of GST credits, which can help your tax return.

These GST credits can be claimed for the amount of the sole trader GST, while the remainder of the purchase can be claimed as a tax-deductible purchase if it’s for work. This allows your business to get the best tax return possible, but it does require in-depth bookkeeping.

This is where BAS comes into play. These activity statements should summarise your business activity for the period, down to every business purchase and sale made.

If your small business income is below the $75,000 profit mark, the sole trader tax is, for all intents and purposes, very much like paying your individual taxes and you don’t need to concern yourself with the GST.

Key dates for tax lodgment and payment

If you're a sole trader, you must lodge your tax return by 31 October, unless you choose to use a registered tax agent.

Ensure you never miss important tax dates by using QuickBooks tax software or feel free to browse through our ProAdvisor directory to find an advisor near you. 

4 tips for sole trader tax return

The stress that comes when it’s time to file taxes can be immense. But, it doesn’t have to be. You’ve worked hard for your business profits and with the right knowledge, you can help your own business get the best return possible.

The following tips will help you grow your business (and bank account) in a number of ways.

 1. Assess for Personal Services Income (PSI) 

If you’re predominantly paid for your personal efforts, skills or expertise, you could be receiving what’s called personal services income (PSI). If you’re a copywriter, legal advisor, management consultant, or similar, it’s likely you are receiving this type of income.

It could be that some of your income is PSI and some aren’t. To work this out, you need to look at each job or contract. If the service you provided is more than 50% based on your efforts, skills, or expertise, it’s classified as PSI.

If you run a business that sells products made by other people, you’re not generating PSI. But, if you’re being hired by a company to make one of your products, that could technically be PSI as your skills and expertise are essentially the product.

If you’re receiving PSI from clients outside Australia, your income may need to be taxed via the rules of the other party’s country of origin. This scenario is especially likely for independent contractors that work online, as it’s easy to have clients around the globe.

Determining what counts as PSI and what doesn’t can be difficult, but it’s essential for understanding your tax burden. If you’re still unsure, consult with your accountant or contact a tax or financial advisor.

2. Don’t miss out on deductions

As a sole trader, you can claim certain business tax deductions for most expenses you incur running your business — as long as they directly relate to your assessable income. Deductions can potentially save you thousands each year, especially as you and your business move up in the tax brackets.

Some of these deductions include:

• Business travel expenses such as bus, train, and taxi fares
• Vehicle expenses including fuel and oil, servicing and maintenance, loan interest or lease payments, insurance and registration
• Maintenance costs of machinery, tools or premises
• Working from home / home office expenses, including occupancy (mortgage interest, insurance, council rates) and operating expenses (electricity, phone, cleaning)
• Other expenses including stationery, advertising, banking and accounting, work uniforms, relevant courses and subscriptions
• Personal super contributions for yourself and any employees, as well as health insurance premiums
• Depreciation of furniture (sole traders can use the simplified depreciation rule to work this out)
• Bad debts or invoices that aren’t going to be paid
• Prepaid expenses on items or services delivered in the following tax year

It’s important to note that if you use something, such as your home or car, for both business and private use, you can only claim the business-related portion of the expense.

To keep track of these expenses, make sure you’re following bookkeeping best practices, regularly updating your invoices and activity statements and using software to help you stay organised. Even a simple spreadsheet on Google Sheets or in Excel can go a long way toward helping you stay on track and capture as many deductions as possible come tax time. 

If you work from home, expenses you can claim may include the following:

• Work-related phone and internet expenses
• Electricity and gas
• Stationery, printer paper and ink
• Rent
• Mortgage interest
• Property insurance
• Land taxes
• Council rates
• Office equipment and machinery
• Furniture, carpet and curtains
• Meal expenses
• Travel expenses

If you use your vehicle for work, you may be able to claim:

• Fuel and oil
• Repairs and servicing
• Interest on a motor vehicle loan
• Lease payments
• Insurance cover premiums
• Registration costs
• Depreciation (decline in value)

General business operating expenses you might also be able to claim include:

• Advertising and marketing costs
• Legal expenses
• Accounting and tax lodgement fees
• Bank fees
• Insurance premiums
• Interest on business loans
• Software subscription fees
• Uniform fees

Repair and maintenance expenses you may be able to claim include:

• Computer or other equipment repairs
• Machinery repairs
• Painting
• Plumbing work
• Repairing electrical appliances
• Computers
• Cars and vehicles

Unfortunately you cannot claim:

• 100% of all these expenses. Only the proportion you use for work. An accountant can help you determine this.
• Car expenses without a logbook. 
• Meals and snacks unless they are incurred on business-related overnight travel; or potentially as part of a work meeting, though the rules with this vary. Always keep receipts.
• Travel expenses for anyone other than yourself.

3. Be a dedicated record keeper

To make things simpler for yourself in the lead-up to tax time, make sure you’re keeping detailed financial records throughout the year. It’s also the law, as required by the Australian Tax Office. According to the ATO, when paying tax as a sole trader:

• Your records must be in English, or easily converted to English
• Your records should be stored in a way they cannot be damaged or changed
• You need to keep records for five years
• You must be able to show the ATO your records if asked

Things you should be keeping track of include sales records, purchase and expense records, bank records, and payments to employees or contractors (That is, once you’ve transitioned from sole trader to small business with employees). It should also include GST paid and received. And of course, you want to keep track of any PAYG instalments you have paid over the financial year.

You’ll also need to show details of your debtors (accounts receivable), creditors (accounts payable), and current inventory, and make sure any asset purchases or sales are properly accounted for. While spreadsheets work, cloud-based accounting software makes documenting and recording all your tax data far easier. Using an app, you can scan and store receipts, create and send invoices, and even track your vehicle mileage.

4. Understand the basics

The fastest way to prepare and lodge your tax return is online with myTax. The other options are to do it via a registered tax agent or by filling out a paper form and mailing it. When completing your return, use the allocated section for business items to show your income and expenses – there isn’t a separate form for sole traders so you’ll simply use the individual return form.

If PSI rules apply to you, you’ll have to fill in that section, too. The deadline to lodge your return is 31 October, so don’t miss it or you could be hit with a fine. Doing your taxes may not be your favourite business activity, but it is a legal requirement. Understanding the basics is the best way to get through the various tax forms with ease and maximise your return.

For additional help with filling out the appropriate sections and filing, be sure to explore the sole trader section of the ATO site.

One of the most important factors of lodging your tax return as a sole trader is having the right systems in place.

• QuickBooks Online provides great value for small businesses and sole traders, with features including income and expense tracking, as well as reporting features, such as monthly financial statements (profit and loss statement, balance sheet, and statement of cash flow). You can also manage your b bills (accounts payable), invoicing (accounts receivable), inventory tracking, and sales reporting.
• If you are a sole trader who is also registered as an employee, QuickBooks Payroll powered by Employment Hero is the most efficient way for you to manage your sole trader tax deductions. Find out more about how QuickBooks Payroll powered by Employment Hero can help you become more efficient in managing your sole trader tax return.

QuickBooks Online, and our Payroll solution, are designed to ensure you are compliant with GST, gives you the correct sole trader tax rate Australia for all your calculations, and is Single Touch Payroll compliant. 

How QuickBooks Can Help You Save Time

QuickBooks Online provides great value for small businesses and sole traders, with features including income and expense tracking, as well as reporting features, such as monthly financial statements (profit and loss statement, balance sheet, and statement of cash flow). You can also manage your bills (accounts payable), invoicing (accounts receivable), inventory tracking, and sales reporting. QuickBooks helps sole traders stay organised and prepared for tax time - you can track your GST, and snap and save receipts from our mobile app to maximise deductions and stay compliant.

QuickBooks Online, and our Payroll solution, are designed to ensure you are compliant with GST and is Single Touch Payroll compliant.

Stay with QuickBooks to be a sole survivor of tax season

Tax season is nothing to worry about. Maximise your tax returns effortlessly this tax season with QuickBooks Tax Software, which enables automatic tax rate calculations, eliminating the need for worry. With the time saved, you can channel your focus into achieving business growth through investment. 

By the time tax season hits, you’ll be ready to maximise your tax returns, which can help you invest further in your business and achieve the growth you deserve. 

Get started now and unlock the potential of your business with QuickBooks.