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.
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. This you will have to secure 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 individual 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) installments 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.
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
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 personal income. But for companies, there’s no tax-free threshold – they’re on the hook for taxes on every dollar they earn.
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 own 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 individual 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, 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 indexation method conditions, then that method must be used to calculate your capital gain.
In conclusion, understanding sole trader tax in Australia is essential if you’re running your own 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.
With the right knowledge and support, you can navigate the world of sole trader tax successfully. The Australian tax system is designed to accommodate small businesses and sole traders, so with determination and good financial practices, the road ahead looks bright for those venturing into the exciting world of sole proprietorship Down Under.