A sole trader business is the easiest to set up out of all the business structures available in Australia. You can be your own boss and take control of your business. It does come with a lot of freedom and perks.
However, like any other business structure, a sole trader should also pay the relevant taxes to the government. As a single businessman, you would have to focus on the business’s daily operations and maintain the books to file for taxes at the yearend by yourself.
This article will help you understand the taxes a sole trader is liable to pay and why hiring a third-party tax agent is better.
What taxes should you pay as a sole trader?
A sole trader business has fewer legal formalities, yet it still has to pay the due taxes. These businesses are mainly liable to pay income tax and goods and services tax (GST).
Income tax will be paid on the business’s taxable income in a given financial year, whereas the GST is imposed on goods and services.
Apart from these main taxes, a sole trader might have to pay the payroll and capital gains taxes under certain circumstances.
Is there a threshold to get registered for taxes
Income tax
Another benefit of a sole trader business is its income threshold to pay the taxes. Unlike companies, sole traders don’t have to pay taxes on every dollar earned by the business.
According to the Australian Taxation Office (ATO), a sole trader business doesn’t have to pay income tax if the taxable income is less than $18,200 for the financial year 2022-2023.
GST
The threshold to register for GST is that the net turnover (gross income from sales minus GST) should be $75,000 or more per year. There are various benefits of getting registered for GST even before this threshold. If you want to learn more about it, then check out our article on GST for small businesses.
On the other hand, you should also register for GST;
- If you want to claim the fuel tax credit
- If you provide a taxi or limousine service for passengers
What are the tax rates for a sole trader?
A sole trader business has progressive tax rates depending on different levels of taxable incomes. The sole traders would have to pay taxes based on the individual tax rate.
Accordingly, such businesses have to pay the following rates as income tax for the financial year 2022-2023.
| Taxable income | Tax 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 above | $51,667 plus 45 cents for each $1 over $180,000 |
Source: ATO
When should sole traders file for taxes?
You must lodge your tax returns annually if you continue as a sole trader. However, when you pay the taxes at the end of each year, always be prepared to pay a lump sum as taxes.
This is not always the case, but there can be situations where the tax liability could accumulate over twelve months.
To overcome such hard situations, you can follow the pay-as-you-go (PAYG) scheme to pay the taxes quarterly. This will reduce the tax burden at the end of the financial year.
How to pay taxes as a sole trader
A sole trader can follow the individual tax return system. You can use your individual tax file number when lodging the income tax returns of your business.
You might have to submit a business activity statement (BAS) every quarter if you are registered for GST or follow the PAYG scheme.
If you plan to manage your taxes by yourself, then mygov can help you manage your tax obligations and PAYG payments easily. Further, use a recognized accounting software like Xero to maintain your books, prepare the BAS, and comprehensive financial statements, etc. This would help to calculate the tax liability accurately.
Why should you hire a tax agent?
As a sole trader, you must focus on managing the business’s daily operations. Therefore it might be tough for you to find time to maintain the books and handle the accounting function of the business.
You should keep in mind that bookkeeping and accounting are crucial for any business to make critical decisions that could decide the fate of the business. Therefore, it is crucial to maintain a proper system and implement controls to handle your business’s accounting function from the beginning itself.
As a small business, you might have a tight budget to hire a separate employee to handle the accounts. It might even be unnecessary to have a full-time employee and pay them a salary just to handle the books every once in a while.
This is where an external agent would come in handy. They should only be paid for the services provided. Further, they know the taxation laws well which would help you to get certain concessions and tax deductions.
Likewise, SPS business consultants are experts in bookkeeping and tax accounting. We have tailor-made packages to suit your business regardless of its size. We can help you to plan your taxes and pay only what you are liable to. Don’t hesitate to contact us today to schedule a consultation session.