According to the ABS, almost 140,000 sole traders entered the marketplace in FY 2020-21, demonstrating that there are a huge number of people who want to be in charge of their own destiny when it comes to their careers.
At present, sole traders represent a staggering 10.6% of the country’s workforce (around 1.4 million people), working as owner-managers of enterprises with no employees across numerous industries, from construction and professional services to IT and agriculture.
But being a sole trader comes with a few extra obligations, especially in the form of financial admin. In this guide, we’ll help you get confidence and peace of mind that you’re ready to take on those obligations.
Let’s get started!
Setting Up The Right Business Structure
Setting up your business correctly in the first place is critical to ensuring you can maximise your income and claim the most tax deductions.
Whether you plan to work for yourself and source your own clients, or contract a recruitment consultant, there are generally two ways to set up your business. Each has pros and cons, and it’s worth considering the structure that will be most beneficial for you.
A company structure is setting yourself up as “Proprietary Limited”(Pty Ltd). A Pty Ltd is excellent if you have employees or want to take on investors. But if you are a sole trader, a Pty Ltd structure adds unnecessary complexity and makes it more challenging for you to reduce your taxable income sufficiently through legitimate deductions.
Setting up a company (Pty Ltd) is also more expensive than setting up as a sole trader. You will need to register a company name and open separate business accounts, and there are restrictions on accessing funds – money can only be withdrawn as a formal distribution of the profits or as salary. You are also liable for compulsory superannuation payments and insurances.
There’s also a much higher level of financial admin required – you will need to lodge a company tax return in addition to a personal tax return.
A sole trader (ABN) structure is by far the simplest way to set up your small business. It allows you to earn income from several clients and is also very workable if you contract through one (or several) recruiters.
You can take advantage of claiming tax deductions you couldn’t get as a contractor (see below) and only need to lodge a single tax return at the financial year’s end, unlike a company structure.
As a sole trader, you will be liable for any insurances that may be required, but these are tax-deductible, and you will also be responsible for Superannuation (although Australian sole traders are not required to pay mandatory super). With the growth of sole traders as a significant part of Australia’s economy, there are plenty of insurance and superannuation funds geared to your chosen style of business.
Sorting Your Taxes As You Go
It is critical to set aside your tax as you go. Failing to do so can cause cash flow problems for your business.
Whenever you get paid, you will need to set aside the right amount of tax, Medicare levies, GST, student loan repayments, and Superannuation (if you are paying it).
Most accounting software won’t help you deduct and pay your taxes as you earn. They’re designed for SMEs, require training to use correctly, and are most commonly used alongside a traditional accountant, who don’t come cheap.
Unlike SME accounting software, Hnry is a new tax and accounting service designed for sole traders.
Hnry takes the headache out of all those calculations by automatically paying your tax and other critical expenses as you go, and then depositing your net income into your account. What’s more, with the backing of human accountants behind the scenes, Hnry will automatically lodge your quarterly activity statement and EOFY tax return as part of the package. You can also seek tax advice about what you can legitimately claim as a deduction – all at no extra charge.
Maximising Your Deductions
One of the most significant advantages to being a sole trader is the ability to reduce your taxable income through legitimate tax deductions, thus reducing the overall tax payable at the end of the year.
Examples of what you can claim include:
- Equipment to undertake your work – this could be computers, phones (and work-related calls) and stationery for office-based roles, uniforms or safety equipment (PPE), tools and materials if you are a tradesperson or travel in the course of your business.
- Vehicle cost and work-related running expenses – if you use your vehicle for work, you can deduct the costs of running that vehicle from your taxable income (Note that this usually applies to tradespeople.)
- Marketing and advertising costs – Any costs incurred to promote your business, whether that’s signage, social media advertising, employing a public relations agency, SEM or other directory listings, can all be claimed as an expense.
- Superannuation – Any superannuation payments you make can be claimed as an expense and are taxed at a flat rate of 15%, provided they come from your before-tax income. You will need to file an intention to claim a deduction with your super fund after 30 June.
- Insurance and accounting advice – You can deduct the cost of your accounting software and accounting advice, as well as any insurance premiums you are required to pay in the course of your business.
- Mortgage interest, rent, rates, utilities, renovations for a home office – You can claim back a portion of your mortgage interest, rent, and utilities (including internet) for the work-related portion. There are two calculations based on floor space used for your business, or cents per hour you work from home. Be mindful that renovations such as building a home office or mortgage payments could have a knock-on effect if you come to sell your home. You may be subject to capital gains tax for the percentage of business usage.
- Flights and accommodation for work-related business trips (important as we emerge from travel restrictions)
The list above is by no means exhaustive, and it is worth talking to your accountant or registered tax agent about possible deductions you could make.
One of the benefits of using a service like Hnry is that you can raise expenses as you go and get your tax relief straight away, rather than having to wait until the end of the tax year to get your tax savings.
Key Tax Dates And Deadlines
As a sole trader, it’s crucial that you’re aware of all the key tax dates and deadlines that apply to you.
If your business is earning more than $75,000, you will be required to lodge activity statements quarterly. You may also be required to pay income tax quarterly, which ensures you aren’t hit with a massive lump sum at the end of the year. After 30 June, you will also be required to lodge your annual tax return.
Due dates for Business Activity Statement (BAS) and your annual tax return:
- July – September quarter – 28 October
- October – December quarter – 28 February
- January – March quarter – 28 April
- April – June quarter – 28 July
- Annual tax return – Lodged by 31 October
Tax reporting time is where a good accounting and tax platform pays for itself and takes most of the hassle out of lodging activity statements and end of year returns. Many new sole traders try to save money by setting up an excel spreadsheet and yet are still paying an accountant to make sense of it (quarterly and annually) anyway.
By far, the best thing to do is get excellent financial systems and accounting/tax software in place from the outset, allowing you to get on with the business of growing your profit.
Whenever you get paid, Hnry automatically calculates, deducts, and pays all of your taxes – income tax, GST, Medicare, and any higher education repayments – before passing the rest to your personal bank account.
In the Hnry app you can easily raise expenses and send unlimited invoices; Hnry’s accountants review your expenses immediately to get you instant tax relief.
Finally, as part of the service, Hnry will lodge your BAS and end of year returns whenever they’re due.
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