How to pay tax as a sole trader

As a sole trader, the end of financial year is an important time. Here are some of the most important considerations and common taxes sole traders should be aware of.

Difference between sole trader and company tax

A sole trader has the simplest business structure, with only one owner who has no legal separation between themself and the business. This means that sole traders are required to provide a personal tax return as well as the business’s profit and loss statement at tax time. The net income of the sole trader business is included with any other income of the owner and taxed at the marginal rate of tax.

In contrast, a company has a more complex business structure and is its own separate legal entity. From a tax perspective, companies pay tax on its profits at the corporate tax rate. Profits are distributed to shareholders as dividends, which are subject to individual marginal tax rates.

Tax obligations of a sole trader

As the owner of a sole trader business structure, there are many obligations that you may need to consider at tax time.

Use income tax as the tax rate

Sole traders pay tax at the individual income rate. This is applicable on all income, including your business income, as there is no legal separation between you and the business.

Have an Australian Tax File Number (TFN) and Australian Business Number (ABN)

You must have a TFN regardless of the type of business you’re starting. As a sole trader, you can keep your individual TFN. You can register for a TFN on the Australian Business Register, opens in new window website.

As a sole trader, you may need to register for an ABN, which is a number that identifies your business to others when ordering and invoicing. With an ABN, your business can claim GST credits and avoid pay as you go (PAYG) tax on payments you receive from your customers.

Good and Services Tax (GST)

Once you have registered for an ABN, you will need to register for GST if you expect your business to have an annual turnover of $75,000 or more. There can be significant financial penalties if you do not register for GST and your business’s annual turnover exceeds that threshold.

Business Activity Statement (BAS)

As a sole trader, you will only be required to lodge a BAS to the Australian Taxation Office (ATO) quarterly once you have registered for GST and your annual turnover exceeds $75,000. A BAS keeps record of the amount of GST your business has collected and paid.

Pay As You Go (PAYG) withholding

If you have employees in your business, and you need to withhold tax from wage payments you make to your workers and businesses, you’ll need to register for Pay as you go (PAYG). You can register for an ABN, GST and PAYG through the Australian Business Register, opens in new window website.

Learn more at Hiring and paying your workers, opens in new window.

Record-keeping rules to consider

Meeting your tax obligations as a sole trader is essential. Specific record-keeping rules apply, opens in new window, such as the requirement to maintain records of all income and sales transactions, as well as business expenses, a list of creditors and debtors, and expenses relating to assets or stock. Fortunately, NAB Bookkeeper enables you to easily streamline these tasks to improve workflow and save time while remaining compliant.

It’s also necessary to keep records of certain documents for up to five years, including:

• All records relating to starting, running, changing, and selling or closing your business.
• Payments you've received.
• Expenses related to payments you've received.
• Asset purchase records, such as shares or an investment property.
• Details of any gifts, donations or contributions that may be tax deductible.
• Employee and contractor records, such as payments, super, copies of TFN declarations and any contracts.

What are the sole trader tax rates?

Sole traders pay tax on taxable income, not the total amount you invoice for your services. Your business’s operational expenses and superannuation contributions reduce your taxable income and the tax bill. Therefore, your income minus expenses and superannuation equals your taxable income.

Current tax rates for the 2023-24 financial year include a tax free threshold of $18,200.  This means that individuals and sole traders have a taxable income of up to $18,200 before having to pay tax. Above this you are required to pay tax depending on your income. Additionally, once a sole trader is earning over $75,000 they need to pay GST.

How to lodge a tax return as a sole trader

As a sole trader, you must lodge a tax return, even if your income is below the tax-free threshold. When you lodge your tax return as a sole trader, you’ll need to include all your business income using a separate business schedule. You don’t need to lodge a separate tax return for your business.

Tax returns are due by 31 October for the previous financial year for sole traders who are lodging their own tax return. You can lodge your tax return through a registered tax agent or with myTax, opens in new window through the ATO website.

Tax deductions for sole traders

Tax deductions reduce the amount of income you have to pay taxes on. You can claim a tax deduction for most business-related expenses, if they are directly related to earning your assessable income.

As a sole trader, it’s important to keep a record of business expenses you’ve collected throughout the financial year. Some examples of tax deductions for sole traders include:

• depreciation on business equipment (machinery, laptops, mobile phones etc.)
• software used for your business
• day-to-day expenses
• business finance costs
• business-related travel
• professional memberships
• tax accountant costs
• Interest paid on business loans.

When you claim a tax deduction for a business expense, it’s important to know if it has any private or domestic purpose as that will affect the amount you can deduct.

Learn more at Business tax deductions, opens in new window on the ATO’s website.

Tax deductions for super contributions

As a sole trader, you may be able to claim deductions for your own super contributions in your personal tax return, which are taxed at a rate of 15%. To claim personal super contributions, you must first submit a ‘Notice of intent to claim’ form with your super fund. You must also receive an acknowledgment from your super fund that they have received it.

If you have employees, the super contributions you make for them can be claimed as tax deductable.