Why Is an Individual or Sole Trader Applying for an ABN?

If you regularly engage freelancers, tradies or independent consultants, you’ll often see the question “Why is the individual/sole trader applying for an ABN?” on government forms or hear it during onboarding.

On the surface, it’s a simple prompt. But behind it sits a set of rules about when a person is actually “carrying on an enterprise” and the risks for your business if you misclassify someone as a contractor when they should be an employee.

In this guide, we’ll explain what that ABN question is getting at, when a sole trader genuinely needs an ABN, and how you can protect your business when engaging individuals to do work.

What Does This ABN Question Actually Mean?

When an individual or sole trader applies for an Australian Business Number (ABN), the Australian Business Register asks them to explain why they’re applying. This isn’t a trick question - it’s to confirm they’re starting or running a business (an “enterprise”) rather than just doing a one-off odd job or working as an employee.

Valid reasons usually look like:

• “Starting a new sole trader business providing graphic design services.”
• “Commencing a trade as an electrician.”
• “Freelance marketing consulting on an ongoing basis.”
• “Selling handmade products online as a business.”

The reason helps the Registrar decide if the person is genuinely operating a business. This matters because ABNs are for businesses, not for private hobbies or employment income.

When Should A Sole Trader Apply For An ABN?

In Australia, individuals should apply for an ABN if they are carrying on an enterprise, which generally means running a business with an intention to make a profit, a degree of repetition or continuity, and systems in place (invoicing, marketing, tools, etc.). See the basic factors that indicate a business activity for more detail.

Common triggers include:

• Regularly invoicing clients for services (e.g. design, bookkeeping, trades, coaching).
• Buying and selling goods with the intention to profit (online stores, market stalls, resellers).
• Leasing equipment or vehicles for income.
• Starting a professional practice as a sole trader (consulting, medical allied health, etc.).

If someone is only doing a one-off gig, a hobby sale or working as an employee, they typically wouldn’t need an ABN. In fact, there are both advantages and disadvantages of having an ABN, so the decision should be grounded in whether a business is actually being carried on.

It’s also worth noting that you can’t just “run a business” under the radar. Operating without an ABN can create issues, including your payers having to withhold tax. We cover these risks in more depth here: run a business without an ABN.

Why This Matters For Your Business As The Client Or Hirer

If your business engages an individual who doesn’t quote an ABN, you may be required to withhold tax at the top marginal rate under the “no ABN withholding” rules unless an exception applies. That’s an admin headache and can sour the relationship quickly.

More importantly, pushing someone to “get an ABN” so you can treat them as a contractor can backfire. If the working arrangement looks like employment (regular hours, control over work, integration into your team), you risk sham contracting and associated penalties. If you’re unsure, get timely employee vs contractor advice before you engage.

Where a contractor relationship is genuine, make sure you have a clear, written Contractor Agreement in place. This clarifies scope, rates, IP ownership, confidentiality, GST, insurances and termination - and it’s one of the simplest ways to reduce disputes.

Contractor Or Employee: How Do You Tell The Difference?

There’s no single test, but courts and regulators look at the totality of the relationship. Key indicators include:

• Control: Do you control how, when and where the work is done? Employees tend to be directed; contractors set their own methods.
• Integration: Are they part of your business (company email, roster, uniforms) or operating an independent enterprise?
• Tools and risk: Do they supply their own tools, carry insurance and wear the commercial risk of defects, or do you?
• Ability to delegate: Can they sub-contract the work (typical for contractors) or must they personally perform it?
• Payment: Are they paid per hour or a salary (employee-like) versus per project or milestone (more contractor-like)?

Having or applying for an ABN is relevant, but it’s not decisive. Someone can have an ABN and still be an employee in substance. That’s why we recommend formalising genuine contractor relationships with a tailored Contractor Agreement and seeking legal guidance if the classification is borderline.

Practical Steps For Businesses: ABN Checks, GST And Invoicing

Once you’ve confirmed you’re engaging a genuine contractor, take a few practical steps:

1) Verify The ABN

Before you pay, confirm the ABN exists and is active. It’s quick to check if an ABN is active and helps you avoid paying to a cancelled or incorrect ABN.

2) Confirm GST Status

Ask whether they’re registered for GST (required if their turnover is $75,000+). If they are, their tax invoices should include GST. If not, you shouldn’t be charged GST.

3) Align On Invoicing Method

Most contractors issue their own invoices, but in some industries it’s more efficient for the payer to issue a Recipient Created Tax Invoice (RCTI). If that’s your plan, make sure the arrangement meets ATO criteria and is set out in writing - here’s a helpful overview of RCTIs.

4) Avoid “ABN-Only” Shortcuts

Some businesses assume that if an individual has an ABN, they’re automatically a contractor. Not so. Understanding working under an ABN is key to avoiding sham contracting risk.

Common Reasons An Individual Will Give On The ABN Application

If you’re helping a new contractor get set up - or you’re just curious about what a valid reason looks like - these are common, acceptable descriptions aligned with “carrying on an enterprise”:

• “Commencing sole trader business as a carpenter and joining local trade directories.”
• “Providing ongoing freelance copywriting services to multiple clients.”
• “Launching an online store selling handmade jewellery with intention to profit.”
• “Starting a personal training business with recurring client sessions.”
• “Operating a rideshare and delivery services business as an independent contractor.”

The key themes are ongoing activity, commercial intention and independence. If someone’s reasoning is “my hirer told me to get an ABN so they don’t have to put me on payroll,” that’s a red flag for your business.

What If The Individual Doesn’t Need An ABN?

If the person isn’t carrying on a business (for example, they’re helping with a one-off task, or the role reflects an employment arrangement), they shouldn’t apply for an ABN.

As the payer, if they don’t provide a valid ABN when required, you may need to withhold tax at the top marginal rate from the payment. In cases where the engagement actually looks like employment, the safer path is to hire the individual on an appropriate Employment Contract and meet your Fair Work and payroll obligations.

Key Legal Documents When Engaging Sole Traders

Once you’ve confirmed the status and ABN, get your paperwork in order. The right documents set expectations, protect your IP and reduce disputes.

• Contractor Agreement: Covers scope, rates, invoicing, IP ownership, confidentiality, GST and termination. A well-drafted Contractor Agreement is essential for genuine independent engagements.
• Non-Disclosure Agreement (NDA): Use a Non-Disclosure Agreement before sharing sensitive information or proposals.
• IP Assignment or Licence: If the contractor creates materials, software or designs for you, confirm ownership in an IP Assignment or licence clause.
• Terms of Trade / Services Terms: If you’re a service business regularly engaging contractors to deliver work to your customers, standard Terms of Trade can keep your customer relationships consistent.
• Privacy Policy: If you collect personal information in the course of the engagement (for example, contractors accessing your systems or client data), ensure your Privacy Policy and internal processes are up to date.

Not every business will need all of these. But most will benefit from a tailored contractor agreement and basic protections around confidentiality and IP at a minimum.

How To Onboard Contractors The Right Way

An easy onboarding process protects both parties and sets the tone for a successful relationship. Consider this quick checklist:

1. Confirm they are a genuine contractor (not an employee in disguise).
2. Collect and verify their ABN and GST status.
3. Exchange signed copies of your Contractor Agreement and any NDAs.
4. Confirm invoicing cadence (weekly, monthly, per milestone) and method (standard tax invoice or RCTI).
5. Set up access to systems with least-necessary permissions, and brief on confidentiality and privacy expectations.
6. Note any insurances they must hold (e.g. public liability, professional indemnity) and request certificates of currency.

Clear documentation keeps everyone on the same page and avoids scope creep or billing surprises.

Key Takeaways

• “Why is the individual/sole trader applying for an ABN?” is designed to confirm the person is starting or running a business, not doing a one-off task or employment.
• Individuals should apply for an ABN when they are carrying on an enterprise - factors that indicate a business activity include continuity, systems and a profit motive.
• For payers, no ABN can trigger withholding at the top marginal rate and suggests you should reassess whether the role is actually employment.
• ABN possession doesn’t settle contractor vs employee status - look at control, integration, risk and delegation, and get advice if in doubt.
• Verify the ABN, confirm GST status, and agree on invoicing (including whether an RCTI is appropriate) before work starts.
• Protect your business with a Contractor Agreement, NDA and clear IP terms - these reduce disputes and clarify ownership.

If you’d like a consultation on engaging sole traders and setting up the right contracts, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.