How tax works for sole traders
For sole traders, tax works very much the same as it does for a personal income tax return. Basically, you will need to work out what your taxable income is and report that to the Australian Tax Office (ATO).
Understanding the tax time lingo
- Taxable Income: Your taxable income is the amount of money you have earned in the financial year that you need to pay tax on. You can work it out by taking your total income (excluding GST if you are registered for GST) minus your business related expenses and that will equal your taxable income. You can check out an ATO calculator if you need some help.
- Tax Tables: The tax tables are used to work out how much tax you need to pay depending on your taxable income. You can read more about the individual income tax rates here.
- GST: In general, businesses that earn over $75,000 in a financial year are required to register for Goods and Services Tax (GST). Being registered for GST has a number of extra requirements such as charging your clients for GST, using a Tax Invoice and paying GST to the ATO via your Business Activity Statements.
- Activity Statements: Once your business has completed it’s first tax return, you will receive Activity Statements either monthly or quarterly from the ATO that have instructions on how and when to pay your tax and report your activity to the tax office.
- PAYGI: Pay As You Go Instalments (PAYGI) are periodic payments made to the ATO that go towards paying off your end of financial year tax bill.
How much tax do I need to pay?
The amount of tax you need to pay is dependent on your taxable income and determined by the ATO tax tables.
Here is a snapshot of the current ATO tax tables:
Resident Tax Rates 2019 – 2020
| Taxable income | Tax on this income |
| 0 – $18,200 | Nil |
| $18,201 – $37,000 | 19c for each $1 over $18,200 |
| $37,001 – $90,000 | $3,572 plus 32.5c for each $1 over $37,000 |
| $90,001 – $180,000 | $20,797 plus 37c for each $1 over $90,000 |
| $180,001 and over | $54,097 plus 45c for each $1 over $180,000 |
The above rates do not include the Medicare Levy of 2%
Source: ATO
When do I need to pay tax?
For self-employed sole traders, your tax is paid to the tax office through Pay As You Go Instalments (PAYGI). These are instalments paid to the tax office at the end of each quarter that go towards paying off your tax bill.
Typically, the ATO will send you out an Activity Statement or Business Activity Statement at the end of the quarter with the details of your estimated quarterly instalment to be paid. Your instalment amount is based on previous years income which the tax office uses to estimate your current years income.
If you are still in your first year of business and you haven’t done a tax return as a sole trader, then you won’t receive an Activity Statement. Don’t forget to hold on to savings to pay for your tax bill because you still owe the tax, the ATO just don’t know how much you need to pay as yet.
Once you submit your tax return at the end of the financial year, you will receive any final amounts of tax owning or if you have over-paid your tax bill you will be refunded your tax credit.
What can I claim as a business expense?
As a sole trader running a business, you are eligible to claim back certain expenses that you pay in the course of running your business. The expenses need to directly relate to your business and the income you are earning.
Business expenses that can be claimed as a tax deduction are taken off your total taxable income which can bring down your tax bill substantially and save you a lot of money.
Here are some of the more common types of business expenses:
- Business establishment costs
- Vehicle expenses that include fuel, maintenance, rego, insurance etc.
- Standard office expenses e.g. stationary
- Insurance
- Subscription services and technology that helps you run your business
- Phones and internet
- Maintenance for tools and equipment
- Accounting costs
Business expenses that are also used for personal use e.g. your car, can be claimed as a tax deduction only for the portion of use that is business related.
Some other considerations?
- Record Keeping: Having accurate records is super important to being able to justify your income and expenses to the tax office. For expenses, make sure you hold on to all of your receipts or invoices and keep them somewhere safe. If you can, use an online app like Solo & Smart to store them somewhere so you can access them if and when you need to.
- COVID-19 updates: Everyone is painfully aware of how much of a spanner COVID-19 threw into everything this year. However, be aware that there may be some changes you need to account for. As an example, if you received Job Keeper payments during the pandemic you will need to include those payments in your taxable income.
- Instant-Asset Write-Off: The government initiative to provide small businesses with an instant asset write-off may provide some tax benefits if you have purchased assets that fit into this category. You can read more about what purchase qualify for the scheme here.
- Superannuation: When you are self-employed superannuation is a voluntary contribution. Often there may be some tax advantages where you do voluntary contributions to your superannuation.
Tax can be a major pain in the bum for most businesses and especially for sole traders who are in-charge of looking after it all. Unfortunately, managing your tax effectively is a major hurdle that makes many individuals in business come un-stuck. Each year, approximately three quarters of all tax debt is from micro businesses, but this number can change. Grab a hold of some of the strategies in this article and you will be able to turn tax time into an enjoyable experience.
