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.)

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 $50,000 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.

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 $6000 earned.
The following are the tax rates for the 2006-07 financial year. For up-to-date rates see the ATO website here.

• $0-$6,000 Nil
• $6,001-$25,000 - 15% of amount over $6,000
• $25,001-$75,000 - $2,850 plus 30% of amount over $25,000
• $75,001-$150,000 - $17,850 plus 40% of amount over $75,000
• Over $150,000-$47,850 plus 45% of amount over $150,000

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.