Tax returns for sole traders
Compared to corporations and other organisations, the amount of paperwork you need to submit as a sole trader is negligible, but there's still a lot you need to know.
What defines a sole trader for tax purposes?
The person running the business - i.e. the sole trader - controls and runs the business by using their individual Tax File Number (TFN), and can apply for an Australian Business Number (ABN) for their business dealings. You can apply for an ABN for free at abr.gov.au.
As a sole trader, you alone are responsible for any tax your business must pay. You must include all your business income, and report it on yaour individual tax return. Naturally, you may deduct any expenses incurred which were for the purpose of your business.
Come tax time you need to report your taxable income (or loss). This is basically your assessable business income, minus your allowable business deductions, as well as any other assessable income, such as salary or wages (those shown on a payment summary), plus dividends and rental income. Once again, your can minus any deductions against this income. (To see what is allowed to be deducted, as well as a more thorough guide to submitting your tax return, see the ATO's income tax and deductions for small business guide here.)
Why become a sole trader?
If you are setting up a new business, becoming a sole trader is the easiest and cheapest option when compared to other structures such as partnerships. There are usually no set-up costs and only simple tools such as a bookkeeping program are required.
Points of note for sole traders
There are several factors affecting sole traders which should be noted.
GST: Sole Traders may apply for GST registration, which can be done on the ABN application form. You are required to register for GST if your annual turnover is $75,000 or more.
Drawings: You cannot claim a deduction for money drawn from your business. Amounts taken from a sole trader business are not wages for tax purposes and are not tax deductible.
PAYG: Sole traders generally pay PAYG instalments (Pay As You Go) towards their expected end-of-year tax liability. This should be lodged before your income tax return is lodged.
Main risks associated with being a sole trader
There are some risks associated with operating as a sole trader, firstly as a sole trader you, not just the business, are also legally liable for any costs associated with claims made against the business. This means that your own personal assets, such as your home, can be taken to pay for damages awarded against your business. Of course there are insurance options available, but keep in mind these may not always cover the amount of damages that could be awarded.
In this same way, creditors can come after your personal assets, if your business fails to pay debts to suppliers.
Another risk is injury, or accidents which occur while working. WorkCover does not cover sole traders, as a sole trader cannot employ himself. Therefore a sole trader would have to take out insurance against this.
Also keep in mind, as a sole trader, you are responsible for your own superannuation. You are not obliged to set up or pay into a superannuation fund as a sole trader, so you could instead invest in other ways, such as buying property, to provide for your retirement.
How much tax do sole traders pay?
As for the amount of tax sole traders must pay, this depends on marginal tax rates. Being a sole trader means you pay the same tax as individual taxpayers, but if your business hasn't had a particularly successful year - or you never planned to earn that much anyway - you may well avoid tax altogether if you earn less than the tax-free threshold - currently the first $18,200 earned.
The following are the tax rates for the 2013-14 financial year. (2012-2013 are the same rates)
- $1 – $18,200 - Nil
- $18,201 – $37,000 - 19c for each $1 over $18,200
- $37,001 – $80,000 - $3,572 plus 32.5c for each $1 over $37,000
- $80,001 – $180,000 - $17,547 plus 37c for each $1 over $80,000
- $180,001 and over - $54,547 plus 45c for each $1 over $180,000
Medicare levy (1.5% of taxable income) and Medicare levy surcharge (an additional 1% of taxable income) may have to be paid on top of these rates.