How to Manage Taxes as a Sole Trader

9 min read
Starting a new business is exciting but it’s important to make sure you structure it correctly to get the maximum tax benefits. If you’re starting small, you could consider registering as a sole trader, which is essentially an individual running a business.

This means you are the only owner of the business and fully control and manage it yourself. You’re legally responsible for all aspects of the business and any profit or losses sit 100% with you and nobody else. You can hire employees to work in your business but you can’t employ yourself, and you’re fully responsible for paying super for any workers and for yourself.

There are many benefits to this set up if your business is relatively small but if your business is larger to begin with or grows after opening, then you might want to set it up as a different business structure.


Business Structures in Australia

  • Sole Trader: Simplest form where one person runs the business and is personally liable for debts. From a tax perspective, the net income of the business is included with any other income of the owner and taxed at the marginal rate of tax. 
  • Partnership: Unlike a sole trader business structure, a partnership business structure is operated by two or more people where each partner is personally liable for debts. From a tax perspective, partners split the net income of the partnership as agreed and pay taxes individually on their share of the partnership's income.
  • Trust: Managed by a trustee, with income distributed to beneficiaries based on the rules in the trust deed. From a tax perspective, a key advantage of this business structure is the ability to decide who would best benefit from the distribution of profits.
  • Company: Owned by shareholders and operated by directors, a company offers limited liability to protect personal assets. From a tax perspective, companies enjoy lower tax rates and profits are distributed to shareholders as dividends, which are subject to individual marginal tax rates.
Each of these business structures has its unique advantages and considerations. Please refer to the table below for an overview of the key differences between them.
 
Component Sole Trader Partnership Company Trust
Separate legal entity No No Yes Yes
Complexity of business structure Simple Moderate Complex Highly complex
Cost Low Medium Medium to High High
Tax benefits Enjoys tax-free threshold and receives other tax benefits only when profits are low Receives tax benefits especially if partners are in the same family Receives tax benefits but does not enjoy tax-free threshold Receives tax benefits but does not enjoy tax-free threshold
Tax obligations Low Low Medium High
Legal obligations Low Low to medium High Medium
Liability Unlimited Unlimited Limited Limited (with a corporate trustee)
Owner You You and your partners Company shareholders Trustee
Can hire staff Yes Yes Yes Yes
Responsibility for business decisions You You and your partners share The director(s) Trustee
Responsibility for debts or losses You You and your partners share The company in general Trustee
 


What are tax obligations of a sole trader?

If you operate as a sole trader, or plan to structure your business as one, your main obligations include:
  1. Use your own TFN (Tax File Number)^.
  2. You have the right to obtain an Australian Business Number (ABN) and should use it for all your business-related activities.
  3. Report all business income and expenses in your individual tax return.
  4. Register for GST if your annual turnover is $75,000 or more, or if you provide specific services.
  5. You may need to lodge business activity statements if registered for GST, have PAYG obligations, or make PAYG instalments.
  6. Pay tax on all income, including business income, at your individual tax rate.
  7. You might use PAYG instalments to prepay income tax.
  8. Claim deductions for personal super contributions.
  9. Meet employer and super obligations when hiring workers.
^When establishing a different entity like a trust, partnership, or company, that entity will require its unique TFN, obtainable through the Australian Business Register (ABR) website. 


What are Sole Trader tax rates?

If you choose to work as a sole trader then you benefit from a tax-free threshold of $18,200 – so if you’re running your business as a small side hustle, then this is a smart way to go. On the other hand, companies do not benefit from a tax-free threshold, so every dollar of profit is taxed.

However, if the annual turnover of your business is substantial then a company set up is worth considering, as companies pay a set tax rate of between 25% and 30% (depending on the company) whereas sole traders pay an individual tax rate.

This means that after deducting any business expenses, sole traders must apply the same rates as personal taxes to their income. Potential deductions for a sole trader include operating expenses such as rent, accounting fees and travel expenses; vehicle expenses; working from home expenses (if this is relevant) and instant asset write off.

Below is a summary of the tax rates for 2022-23 and 2023-24. Bear in mind that this does not include the 2% Medicare levy, so this might also need to be factored in.
 
Taxable Income Tax payable on this income
0-$18,200 Nil
$18,201 – $45,000 19 cents for each $1 over $18,200
$45,001 – $120,000 $5,092 plus 32.5 cents for each $1 over $45,000
$120,001 – $180,000 $29,467 plus 37 cents for each $1 over $120,000
$180,001 and over $51,667 plus 45 cents for each $1 over $180,000

Sole traders also need to lodge individual tax returns, whilst a company must lodge a business tax return each year in addition to individual tax returns for company directors and employees. H&R Block Tax Experts can help you lodge your tax return online, over the phone, or with your nearest H&R Block office.

Operating a sole trader business structure is cheaper and easier than other business structures. Moreover, you are eligible for capital gains tax discounts and you can offset any tax losses.


How do you pay tax as a Sole Trader?

Paying taxes as a sole trader is easy, thanks to the PAYG (Pay-as-you-go) instalments system. This process allows you to pay your taxes quarterly, so you don’t end up with a hefty tax bill at the end of the financial year.

When you’re first starting out, you need to estimate how much income you expect to receive as a sole trader and nominate an instalment amount to pay every three months based on this. Once your business is established, the ATO will simply use your previous year’s income to estimate the amount of tax that needs to be paid in each PAYG instalment.

Your PAYG instalments can be paid directly through the myGov website via your personal account, where you can view all your current tax information. It’s also possible to pre-pay instalments into a tax bill account and to pay using BPay.

However, if you're registered for GST, have PAYG obligations, or make PAYG instalments, you may need to lodge a BAS. A BAS helps you report and pay taxes like GST and PAYG withholding. Depending on the complexity of your business and taxes, you can either lodge it yourself or seek professional guidance.

If you work with a registered tax agent like H&R Block you are automatically given an extension on your BAS due date. Plus, at H&R Block, we are offering a FREE BAS* to all first time H&R Block BAS clients and 20% off* your tax return if you lodge all BAS with us in the same financial year.
 

Contact one of our offices to get help with your tax lodgement this season.


Frequently Asked Questions

Sole traders need to lodge individual tax returns and follow the personal tax rates – including the tax-free threshold. So if your turnover is less than $18,200 then you still need to lodge a tax return but you won’t have to pay any tax.

Yes – a sole trader still needs to lodge an individual tax return each year. Any taxes owing on income is paid using the Pay-as-you-go (PAYG) system of quarterly payments.

Sole traders need to lodge a tax return every year, including the first year of business. If your business profit is more than the tax-free threshold of $18,200 then you need to pay tax on this.

The tax-free threshold for sole traders is $18,200 so you need to pay tax on any amount over this. If you earn $20,000 in a year as a sole trader, and this is your only income, then you pay tax on the $1,800 of profit over the tax-free threshold.

Sole traders pay tax on any business profits over the tax-free threshold of $18,200. Business profit is calculated by deducting any legitimate business expenses from total income.

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