Tips for Sole Traders
A sole trader is an individual who runs their own business. It’s the simplest form of business structure. It’s inexpensive to set up with few legal and tax requirements, making it less complex to run than other business structures.
If you’re a sole trader you are not an employee, but you may employ others.
ASSET PROTECTION
A sole trader generally owns the assets used to conduct the business and may claim deductions in their income tax return for the decline in value of the assets. This is called depreciation. A sole trader takes all profits, suffers all losses and is personally liable for all debts incurred by the business.
This unlimited liability means that the sole trader’s personal assets can potentially be seized to recover a debt. A sole trader can be held legally responsible for anything they do. They can also be held liable for the actions or inactions of any of their employees.
TAKING MONEY OUT OF THE BUSINESS
As a sole trader you can employ workers in your business, but you can’t employ yourself. To pay yourself you simply withdraw money from your business. These personal withdrawals or ‘drawings’ are not wages. Your business records need to reflect the amount you withdraw, the date you made the withdrawal, and list it as a personal withdrawal.
Personal withdrawals from your business are reported in your end of year tax return and you will pay tax on them at the individual rate. You can’t claim personal deductions for money ‘drawn’ from the business.
TAX REPORTING AND TAX RATES
If you’re a sole trader, you will use your own individual tax file number when lodging your income tax return. You report all your income in the one tax return using the section for business items to show your business income and expenses. There is no separate business income tax return.
A sole trader pays tax at the ordinary individual tax rates and can apply the tax-free threshold. This means you won’t have to pay tax on the first $18,200 earned. This is on all earnings including any non-business income.
Special rules apply to the income earned by individuals under 18. Certain types of this income may be taxed at higher rates.
TAX TIME TIPS FOR SOLE TRADERS
When you’re busy running a business, understanding the tax rules can take a backseat to other priorities you have. We know that small businesses work hard to get things right; however we understand that mistakes happen, when:
- Reporting income, such as income earned outside of their business. This includes non-monetary payments or payments in kind
- Claiming expenses, including
- claiming for the part of an expense related to personal use
- overstating the cost of goods sold and other business expenses
- Calculating business losses
- Applying non-commercial loss rules to offset the loss against other income
- Claiming PAYG withholding refunds
- Reporting or failing to report personal services income (PSI)
FIVE RULES FOR RECORD KEEPING
- Keep all records
- Don’t change your records
- Keep most records for five years
- Show the ATO your records if they ask for them
- Record in English
CHOOSING RECORD KEEPING SOFTWARE
You should choose record-keeping software that:
- you can understand and operate easily
- enables you to meet your record-keeping requirements
- enables you to report digitally to the ATO
- is Standard Business Reporting (SBR) compatible.
If you are thinking of working as a Sole Trader you are best to speak to your accountant for advice so you know exactly how it works and are prepared from the beginning.
Source: The ATO