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BUSINESS ADVICE •  2 OCTOBER 2022 • 10 MIN READ

Being a sole trader: 8 frequently asked questions

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We know that operating as a sole trader can be confusing, so we’ve put together a list of frequently asked questions to answer the questions you may have. 

1. Can I switch to other business structures in the future?

Yes, it’s relatively easy to switch to other business structures e.g., from sole trader to a company structure. Many people start as sole traders and switch to other business structures when they expand later. However, your decision needs to be well-thought-out. What are the main reasons you want to change your business structure? Have you evaluated the possible disadvantages of the business structure you want to switch to? Do you know the tax implications and the money involved? Have you discussed it with your accountant? You need to have a basic understanding of these questions before deciding. 

2. What’s the difference between a sole trader and a self-employed?

The main difference between a sole trader and a self-employed is that 'sole trader' describes your business structure; 'self-employed' means that you are not employed by somebody else.

In saying that though, there are essentially no differences between self-employed people and sole traders. This is because many people who are self-employed choose to operate their own business under the sole trader structure because it’s easy and cheap to set up. For example, freelancer designers and IT consultants are often sole traders. 

Being a sole trader means that you have complete control over how you run your business and are responsible for everything that happens in it. However, if you run your business under a company structure, you’re not seen as self-employed. Instead, you’re the owner and the employee of your own business. 

3. What are the registration requirements if I run my business as a sole trader?

To set up as a sole trader, you need to:

  • have an Individual Tax File Number (TFN)
  • register a business name
  • apply for an Australian Business Number (ABN)
  • register for Goods and Services Tax (GST) if your annual business activity turnover is over $75,000 annually

Here is how you can get your ABN as a sole trader.  

4. How do I deal with the tax season as a sole trader?

When the tax season comes around, here are some top tips to make life easier for sole traders:

  • Claim business-related expenses
  • Separate your business and personal bank accounts
  • Understand your tax obligations
  • Put money aside to pay for tax
  • Keep good accounting records using cloud-based accounting software (e.g., Xero)
  • Hire a good accountant (e.g., Beany accountants)

5. How much tax does a sole trader pay in Australia?

A sole trader business structure is taxed as part of their own personal income. This means sole traders are taxed at Individual Income Tax Rates and entitled to a tax-free threshold of $18,200. From 1 July 2022, individual tax rates (sole trader tax rates) are below:

au sole trader tax rates

At the end of the financial year, sole traders must lodge an individual tax return by 31 October each year unless you register with a tax agent before the 31 October and then you will have extended lodgment dates (typically 15th May the following year but this can vary based on circumstance).

6. What are the tax obligations for sole traders?

GST

Whether you need to charge GST as a sole trader or not depends on if you’re GST registered. The annual income threshold for registering GST is $75,000 in Australia. This means if your annual business income exceeds $75,000 or you expect to exceed this threshold, you must register for GST. If your annual income doesn’t meet the threshold, registering for GST is optional. 

If you’re GST registered, you’ll need to charge GST at a rate of 10% on goods or services you sell. For example, if your hourly rate is $100, then you need to charge $110 to your customers ($100*1.1). However, you don't include GST in the price if your product or service is GST-free

By the same token, if you pay GST when you incur business costs, the GST gets refunded back to you by the ATO.

You can leave your books to us by using our bookkeeping service and you can focus on growing your business.

Income tax

You’re also required to pay income tax on your taxable income. Rather than paying a lump sum at the end of the year, you can pay your income tax in installments (PAYG). This is calculated by calculating your Installment income, which is your gross business and investment income, excluding GST. 

If you are a business registered for GST, you need to lodge a business activity statement (BAS).

Your BAS will help you report and pay your:

When you register for an Australian business number (ABN) and GST, the ATO will automatically send you a BAS when it is time to lodge.

7. How does superannuation work for sole traders?

If you're self-employed as a sole trader or in a partnership, you don't have to pay super guarantee for yourself

You can choose to make personal super contributions from your after-tax income. For example, you can contribute directly from your bank account to your super fund.

Most people can claim a tax deduction for personal super contributions until they turn 75 years old.

Contributions you make may attract extra tax if they exceed the contribution cap for that year.

8. Can I hire staff when I’m a sole trader?

In short, yes – as a sole trader you are permitted to hire employees. As an employer, you must comply with the legal obligations that any other employer has. This includes ensuring the people you hire are legally able to work in Australia, paying superannuation to their superannuation account, ensuring they receive their entitlements and that your workplace meets the Workplace Health and Safety regulations.

Who are Beany?

We’re an online accounting firm that is always right here for you, your accounting pain relief. The most advanced technology lets us work way more closely with you than a normal accountant would. 

We have a dedicated team of remote accountants to take care of your business no matter where you are, so you can focus on growing your business. We take out the ‘fluff’, break down the barriers and get things done. Looking out for you is what we are all about. Get started for free today.  

Pete, Problem Solver

Got any questions about Beany?

Chat to one of our friendly problem solvers today to get clarity.

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Tori Ma

Performance marketer

Performance marketer at Beany, and into true crime documentaries.

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