If you’re a sole trader running your own small business in Australia, then you’re lucky enough to have the flexibility and freedom to do things your way. But unfortunately, at tax time, you have to fall in line like everybody else. Only you have the additional burden of a sole trader tax.
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’s a 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.
Understanding 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).
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.
But, what about the sole trader tax?
The sole trader tax is a tax that any sole trader must pay. This type of taxation is handled on an individual tax return, with business income being entered as individual income. The tax rates will align with those of individual rates.
But, this taxation isn’t uniform. Businesses above a certain threshold need to pay different taxes. This is where the GST comes in.
Goods and Services Tax
If your business breaks the $75,000 mark, you will have to register for the previously mentioned GST. This can impact your taxes in a big way, as your sales may be eligible for taxation if you fall under GST territory.
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 GST, while the remainder of the purchase can be claimed as a tax deductible purchase if it’s made for work. This allows your business to get the best tax return possible, but it does require in-depth bookkeeping.
This is where the 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 business 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.
4 tips for sole proprietorship taxes
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.
Assess for 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.
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 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
- 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 things like 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.
Be a strict record keeper
To make things simpler for yourself come tax time, make sure you’re keeping detailed financial records throughout the year. 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.)
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.
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 hefty 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.
Being a sole survivor of tax season
Running a business, especially a one-person show, is no walk in the park. You’ve brainstormed, you’ve dreamed, and you’ve made your business a reality. Compared to all of that, taxes are nothing.
With the right knowledge, and maybe a little help from an accountant, tax season is nothing to worry about. By the time tax season hits, you’ll be ready to maximise your tax return, which can help you invest further in your business and achieve the growth you deserve.