Setting up a new business is an exciting, but it is critical to consider how you structure your business correctly to gain the maximum tax benefits. Many Australians initially set up the small business as a sole trader. This article looks at what your tax obligations are when choosing this structure. Before we examine the tax issue, let’s review this entity.

Sole Trader – Advantages

First, let’s consider the simplest of the various business structures, starting a business as a sole trader or as part of a partnership (which is treated for tax purposes as basically a collection of individuals).

The main advantage of this structure is its simplicity and some of the benefits include:

  • less red tape to negotiate to start your business
  • the associated legal and professional costs are minimal
  • you simply record the business’s income and expenses in your own personal tax return
  • any tax losses incurred in the early years of trading can usually (subject to some anti-avoidance rules) be applied at the individual level, against all your other forms of assessable income.

This may include income such as salary and wages, and income from other business activities. Alternatively, if there is no other source of current year income, the losses can be carried forward and applied against income generated in future years.

Therefore, for those with relatively simple tax affairs, the easy access to loss relief can make operating as a sole trader very attractive. In addition, the availability of the 50% Capital Gains Tax discount  when you ultimately sell can also make this a desirable way to invest.

There are however some disadvantages of this structure. Once you start trading at a profit, you’ll pay income tax at your applicable marginal tax rate (which could be up to 47% for those earning more than $180,000). The potential to split income between family members, which is often available where a trust is used as the business vehicle, does not exist. There is also no form of asset protection from creditors or protection in the event of family break-ups.

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, as it’s the simplest and cheapest business structure and the process of filing taxes as a sole trader is straightforward. However, if your business is larger to begin with or grows after opening, then you might want to instead register it as a company.

Sole Trader versus Company Structure | Tax Free Thresholds and 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. 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 27.5% and 30% (depending on the company) whereas sole traders pay an individual tax rate

Sole traders also need to lodge individual tax returns, whilst a company must file a business tax return each year in addition to individual tax returns for company directors and employees.

There are benefits to both set ups and it is worth discussing your situation in detail with your accountant to make sure you choose the best one for your business. When you create a company, you are able to bring on shareholders and investors, which can be beneficial to the growth of the business. You are also able to limit personal liability.

However if your business as a sole trader turns over more than $75,000 in a year, you are required to register for GST and lodge a quarterly Business Activity Statement (BAS). The good news is that your BAS covers both GST and your PAYG instalments, so you won’t have to worry about doing both.

What are Sole Trader tax rates?

As noted above, sole traders need to file an individual tax return. So after deducting any business expenses, they 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 brief summary of the tax rates for 2021-22. 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

How do you pay tax as a Sole Trader? – PAYG

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 of your current tax information. It’s also possible to pre-pay instalments into a tax bill account and to pay using BPay.

How can we help?

If you have any questions or would like further information, please feel free to give our office on 08 9221 5522 or via email –  or arrange a time for a meeting so we can discuss your requirements in more detail.

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