Are you a budding entrepreneur Down Under? If so, you’ll want to get cozy with the ins and outs of sole trader tax in Australia.
Being a sole trader comes with a whole set of perks, like calling the shots and keeping all the profits, but it also means taking the reins when it comes to taxes.
According to recent Australian Taxation Office data, approximately 28.4 million individual income tax returns reported nonfarm sole proprietorship activity, with combined profits totaling $337.2 billion. That’s a significant chunk of Australia’s economy, and you’re part of it!
In this article, we’ll break down the nitty-gritty of sole trader tax in Australia, making it as clear as a summer’s day on Bondi Beach. From understanding your tax obligations to knowing what deductions you can score, we’ve got you covered.
So, whether you’re just dipping your toes into the sole trader waters or you’re a seasoned pro, grab a cuppa, and let’s dive into the fascinating world of sole trader tax in the Land Down Under!
Who Is A Sole Trader?
A sole trader is someone who runs the whole show by themselves.
Even if you hire others to help, you’re the one in charge, and you’re legally responsible for everything the business does. In the eyes of the law, your business and you are like a package deal. You both use the same tax and business numbers.
Plus, any money the business makes or debts it racks up are all on your shoulders; you can’t split that responsibility with anyone else except yourself.
We have already talked about the differences between a sole trader and a company, and we highly suggest you go through that blog. It will give you a fair idea of companies and sole trader operations in the country.
Legalities surrounding a sole trader
Becoming a sole trader Down Under is a breeze, and it won’t break the bank because you won’t be buried in heaps of legal and tax stuff.
As a sole trader, you’ll whip out your Tax File Number (TFN) for your business, and you’ll also snag an Australian Business Number (ABN). When it’s tax season, you won’t have much wiggle room. You will have to secure this from the Australian Taxation Office (ATO), which regulates all tax collection in the country.
But here’s the kicker: If your business rakes in more than $75,000 a year, you’ve got to hop on the goods and services tax (GST) train.
Now, here’s the catch: Your business isn’t a separate legal thingamajig from you. That means you and your business are joined at the hip legally. So, if anything goes south – like debts piling up – you’re the one on the hook for it all.
What Is Sole Trader Tax?
If you’re running your own business as a sole trader in 2024, the amount of tax you owe will be based on how much money you make. This means the profit you earn from your business after subtracting allowable deductions.
As a sole trader, you’re required to pay taxes at your tax rates. These rates can vary, but for the 2023-24 financial year, they look like this:
- If your income is up to $18,200, you won’t have to pay any tax (this is known as the tax-free threshold).
- If your income falls between $18,201 and $45,000, you’ll pay 19 cents for every extra dollar over $18,200.
- If you earn between $45,001 and $120,000, you’ll pay $5,092 plus 32.5 cents for each extra dollar over $45,000.
- For incomes ranging from $120,001 to $180,000, you’ll owe $29,467 plus 37 cents for every additional dollar over $120,000.
- If your income exceeds $180,000, you’ll pay $51,667 plus 45 cents for every extra dollar over $180,000.
Keep in mind that tax laws and rates can change over time, so it’s crucial to stay updated with any revisions.
Additionally, as a sole trader, you might have other taxes to consider. For instance, if your business’s annual turnover reaches $75,000 or more, you’ll need to pay a 10% goods and services tax (GST). There’s also the Medicare Levy, which amounts to 2% of your taxable income.
What Are The Sole Trader Tax Rates?
We have scoured the Australian Taxation Office’s website and found the latest tax rates for sole traders in the country for 2023-24. Below we’ve mentioned the latest sole trader tax rates in a table to make it easy. Take a look!
| Taxable income | Tax Payable On The Income |
|---|---|
| 0 – $18,200 | Not applicable |
| $18,201 – $45,000 | 19c for each $1 over $18,200 |
| $45,001 – $120,000 | $5,092 plus 32.5c for each $1 over $45,000 |
| $120,001 – $180,000 | $29,467 plus 37c for each $1 over $120,000 |
| $180,001 and above | $51,667 plus 45c for each $1 over $180,000 |
Note: The above rates do not include the 2% Medicare levy that the Australian government provides. Also, these tax rates are the income tax that sole traders have to pay. In our blog, ‘What Taxes Do Small Businesses Pay In Australia?‘, we’ve talked in detail about the two different income taxes for companies and sole traders. We recommend you go through this blog to get a better idea of how these different income taxes work.
Paying Individual Tax Using Pay As You Go (PAYG)
Tackling taxes as a sole trader is a breeze, all thanks to the PAYG (Pay-as-you-go) installment system. Instead of dealing with one big tax bill at the end of the year, this system lets you break it down into manageable chunks, paying your taxes every three months.
As a sole trader, you’re enrolled in the PAYG installments system if you meet these criteria:
- Your most recent tax return shows an installment income of $4,000 or higher.
- The tax amount due on your latest assessment notice is $1,000 or greater.
- Your estimated tax for the upcoming period is $500 or more.
Pay as you go (PAYG) form
Here’s how it works when you’re just starting: You’ll need to make a guesstimate of how much money you’re going to rake in as a sole trader. Then, you decide how much you want to send to the tax folks every quarter based on this estimate.
Now, once your business is up and running smoothly, the ATO (Australian Taxation Office) takes a load off your shoulders. They use your previous year’s earnings as a guide to figure out how much tax you should be paying in each PAYG installment.
Due Dates For PAYG Installments
If you go digital and file your stuff online, you’ll spot your activity statement right in your ATO Online services account.
When it’s time to pony up, the deadline is typically 28 days after each quarter ends: think 28 October, 28 February, 28 April, and 28 July. But here’s the twist – if you’ve teamed up with a tax agent, the rules can change a bit.
Here’s the cool part: if you’re all about the online game and you’re swift with your statement filing, you might score an extra two weeks to hit that deadline. But wait, there’s more! If you’re rocking with a tax agent, they can work their magic and buy you up to three extra weeks to get everything squared away.
Major Differences Between Company and Sole Trader Tax
Tax-Free Threshold:
In the 2019–20 financial year, the tax-free threshold for individuals is set at $18,200. If you’re a sole trader, your business income is taxed as part of your income. But for companies, there’s no tax-free threshold – they’re on the hook for taxes on every dollar they earn.
Tax Rates:
Sole traders get taxed at the same rates as individual income taxpayers, whereas companies face a flat 30% company tax rate. However, different tax rates come into play for companies classified as base rate entities. Stay updated on company tax rates by checking the Australian Taxation Office website.
Lodging Tax Returns:
If you’re operating as a sole trader, you’re required to file an individual tax return each year. Meanwhile, companies operating under a corporate structure must lodge their company tax return annually. These returns should include details of the company’s income, deductions, and the income tax it owes. Don’t forget that even if you’re a director or employee of your company, you still need to file your tax return.
Capital Gains Tax (CGT):
Capital gains or losses represent the difference between the acquisition and disposal costs of an asset. If you, as a sole trader or company, make a capital gain by selling an asset held for at least 12 months, there are ways to potentially reduce that gain. These include the discount method, the indexation method, or one of the four CGT concessions designed for small businesses.
Generally, companies don’t benefit from the discount method when calculating capital gains, except for some specific cases like life insurance companies. If your company meets the indexation method conditions, then that method must be used to calculate your capital gain.
How ProfitBooks Can Help Sole Traders Manage Their Taxes
From my decade of experience working with Australian small businesses, I’ve seen firsthand how proper accounting software can dramatically reduce the stress of tax management. This is exactly why we developed ProfitBooks with features specifically designed for sole traders.
Here’s how our solution helps:
- Automatic Tax Category Tracking: Every transaction you record is automatically categorized for tax purposes, making it easy to identify deductible expenses.
- Real-Time Tax Estimates: See your estimated tax liability at any time, helping you set aside the right amount for quarterly PAYG installments.
- GST Compliance: Generate GST-compliant invoices automatically and track input and output tax for easy BAS filing. This is crucial if your business exceeds the $75,000 threshold.
- Simple Receipt Capture: Take photos of receipts with your phone and attach them directly to expenses, ensuring your deductions are always backed by proper documentation.
- Customizable Reports: Generate detailed reports that provide instant insights into your business’s financial health, helping you make strategic decisions to minimize tax liability.
One of our sole trader clients in Sydney recently told me, “Before using ProfitBooks, I spent entire weekends trying to sort through receipts and calculate my tax obligations. Now it takes me less than an hour per month to keep everything updated.”
Frequently Asked Questions About Sole Trader Tax
- What’s the difference between a sole trader and being self-employed?
“Sole trader” refers to your business structure where you alone own and run the business, while “self-employed” refers to your employment status. All sole traders are self-employed, but not all self-employed people are sole traders – some might operate through partnerships or limited companies instead.
- How much tax does a sole trader pay in Australia?
Tax rates depend on your income level. In Australia, sole traders pay no tax on income up to $18,200, then 19% on income between $18,201-$45,000, 32.5% on $45,001-$120,000, 37% on $120,001-$180,000, and 45% above $180,000, plus the 2% Medicare levy.
- When should I register for GST as a sole trader?
You must register for GST when your annual turnover reaches or exceeds $75,000. You can register voluntarily before reaching this threshold if it benefits your business.
- What expenses can I claim as a sole trader?
You can claim expenses that are “wholly and exclusively” for business purposes, including office costs, travel, marketing, professional services, and a portion of home-related expenses if you work from home.
- Can I be both employed and a sole trader?
Yes, you can be both employed and self-employed simultaneously. You’ll need to pay tax on your combined income from all sources and file a self-assessment tax return to declare your self-employment income.
- How do sole traders pay themselves?
Sole traders don’t pay themselves a formal salary. Instead, they make “drawings” or “owner’s withdrawals” from the business as needed. These aren’t considered business expenses for tax purposes.
- At what point should I consider becoming a limited company?
Consider forming a limited company when: your profits exceed the higher tax bands, you need limited liability protection, you want to appear more professional, or you plan to seek external investment.
- What records do I need to keep as a sole trader?
You need to keep records of all business income and expenses, including invoices, receipts, bank statements, and details of any personal money used for business purposes. Most countries require records to be kept for several years – in Australia, it’s generally five years.
Conclusion
In conclusion, understanding sole trader tax in Australia is essential if you’re running your show. It’s not as complicated as it may seem, but it’s important to grasp the basics.
Sole trader tax is all about paying your fair share of taxes based on the money you earn. The rates can vary depending on your income, but it’s important to stay updated because they can change over time.
One of the advantages of being a sole trader is the flexibility and simplicity of the Pay-as-you-go (PAYG) installments system, which lets you manage your taxes in manageable chunks throughout the year.
As for the future, being a sole trader in Australia holds promise.
I designed ProfitBooks to help sole traders manage these complexities without needing an accounting degree.
Our platform automates tax calculations, tracks expenses, and provides the reports you need for quarterly and annual tax filings.
Why not try our free Startup plan designed specifically for solo entrepreneurs?
It takes less than a minute to sign up, and you’ll immediately see how much easier managing your sole trader finances can be with the right tools.
Also Read:
Sole Trader vs Company: What Are The Key Differences?
