Tax & GST for sole traders – everything you need to know.
If you’ve seen any of my social media posts this week you’ll notice there’s a been a focus on Goods and Services Tax (GST), lodgement dates for Business Activity Statements (BAS) and general tax reminders.
I know, I know, they’re not the most exciting of social media themes, but I’m trying to keep sole traders on top of their tax obligations with the Australian Taxation Office (ATO), and October is a busy month for all things taxation in Australia.
Before I dive in I should declare:
- I’m not an accountant.
- I’m not a registered BAS agent.
- I’m not a qualified bookkeeper.
WHAT DO I KNOW & WHY DO I CARE?
I have supported myself as a sole trader for the majority of my working life.
I have fine tuned the systems I use to manage my bookkeeping and keep up to date with my tax obligations because it is part and parcel of running a business.
It also means I know where I stand financially at all times.
Having a handle on this stuff might not seem sexy, but it is empowering.
It means I can make informed decisions about continuing to grow a sustainable and profitable business, which in turn contributes directly to the goals I have for my life.
THE PEOPLE I MEET
A lot of the work I do is helping sole traders with their business systems.
In particular, bookkeeping systems because it’s something a lot of sole traders fail to prioritise and it’s something that can easily trip them up.
At some point in their life a sole trader made a decision to back themselves and take control of generating their own income.
They left a job.
The stopped being an employee.
They took a punt on themselves.
That deserves a round of applause in my book, and I want those people to succeed.
THAT’S WHY I CARE ABOUT MAKING SURE SOLE TRADERS GET THIS STUFF RIGHT
Also, if you let your bookkeeping get the better of you, there’s a risk of becoming overwhelmed by it.
In turn you lose touch with your financial position and perhaps finds yourself entertaining the idea of going back and getting a job.
No sole trader wants that, right?
I regularly meet sole traders who don’t have a handle on their tax obligations.
Some haven’t lodged a tax return for years.
Many are confused about whether they are registered for GST, or not.
Some are actually charging GST without being registered to do so.
Others should be charging GST but they’re not.
It’s all pretty messy, and can be time consuming to sort out.
BACK TO BASICS
So, this week I thought it would be timely to write a few words about tax and GST for all the sole traders out there who are still a little confused.
Anyone reading this who already has their heads around this enthralling topic, well done!
For those who are still a little rattled, read on.
AUSTRALIAN FINANCIAL YEAR
The Australian ‘financial year’ is a 12 month period used for tax purposes.
It begins on the 1st of July every year, and ends on the 30th June the following year.
The ‘financial year’ is obviously different to the ‘calendar year’ (which runs from 1st January to 31st December).
At the end of the financial year (EOFY) most folks around the country wrap up their bookkeeping for the preceding 12 months in order to finalise their financial records so it can all be submitted to the ATO.
In turn, the ATO will determine if they owe you money or you owe them money.
QUARTERLY TAX DATES
The financial year is further divided into quarterly periods: Q1, Q2, Q3 and Q4.
- Q1: JUL-AUG-SEP I.e. from 1st July up to and including 30th September.
- Q2: OCT-NOV-DEC. I.e. from 1st October up to and including 31st December.
- Q3: JAN-FEB-MAR. I.e. from 1st January up to and including 31st March.
- Q4: APR-MAY-JUN. I.e. from 1st April up to and including 30th June.
If you’re in business in Australia, these dates are kinda important because they are the generally accepted reporting periods throughout the financial year.
If you want a quick reference summary of important quarterly tax dates in Australia you can download my cheat sheet here.
WHAT IS A SOLE TRADER ?
A ‘sole trader’ is the simplest business structure for someone who works for themselves in Australia.
The term sole trader usually describes an individual or self-employed freelancer who sells products and services.
As a sole trader the individual and the business are one entity, and that one entity is legally responsible for all aspects of the business, including taxes.
As a sole trader you:
- must have an Australian Business Number (ABN) to conduct business.
- use your individual Tax File Number (TFN) to lodge your income tax return.
- don’t need to generate a group certificate for yourself.
- all of your income is reported on your individual tax return.
- are taxed at the same income tax rate as individual taxpayers (more on that below).
- are responsible for paying any income tax directly to the ATO.
- you must register for GST if your annual turnover is $75,000 or more (more on that below too).
TAX OBLIGATIONS FOR SOLE TRADERS
There are basically two taxes that apply to sole traders in Australia:
- income tax, and
As a general rule, income tax is the amount of tax you pay to the government on all of the ‘taxable income’ you receive during a financial year.
For sole traders (not registered for GST) your taxable income equation is:
[The money you make selling your goods and services] minus [tax deductible business expenses].
For sole traders (registered for GST) your ‘taxable income’ equation is:
[The money you make selling your goods and services (not including any GST)] minus [tax deductible business expenses].
It’s important to note that when you are registered for GST as a sole trader you do not include GST in your taxable income calculations because you pay that tax separately when you lodge your BAS.
Here’s an example calculation that’s applicable to both scenarios:
If a sole trader earns $70,000 in a financial year, with business expenses totalling $15,750, then their taxable income is $70,000 – $15,750 = $54,250.
Because sole traders are taxed at the same rate as people in a traditional job the ATO’s current individual income tax table will always indicate what tax bracket a sole trader falls into.
Accordingly, an income of $54,250 falls into the tax bracket of: $45,001 – $120,000. See table below.
This means there is a minimum of $5,092 in income tax that is owed to the ATO.
In addition, the sole trader will need to pay 32.5-cents-in-tax for every $1 of their taxable income over $45,000.
I.e. $54,250 – $45,000 = $9,250.
Thus $9,250 x 32.5 cents = $3,006.25.
Total income tax owing on a taxable income of $54,250 is $5,092 + $3,006.25 = $8,098.25.
Obviously, everyone’s financial circumstances are different and there are other income streams and expense claims that may need to be factored into these equations, which is why it is always imperative to always seek advice from a professional tax accountant regarding these calculations.
WHAT ABOUT GST?
The second tax that applies to sole traders is GST.
GST refers to a 10% tax that’s applied to most ‘goods and services’ sold in Australia.
There are some goods and services that are exempt from having to charge GST – a more comprehensive list can be found here – but otherwise it’s broadly applicable.
DO SOLE TRADERS NEED TO BE REGISTERED FOR GST?
It is only compulsory for sole traders to register for GST if:
- their annual turnover exceeds $75,000 per year, or
- they drive a taxi.
OBLIGATIONS FOR GST REGISTERED SOLE TRADERS
Some sole traders choose to register for GST voluntarily, despite earning well below the $75,000 threshold.
Those sole traders – regardless of their subsequent turnover – are then (like all other GST registered businesses) obliged to include GST in their fees and claim GST credits for their business expenses.
Once you’re registered for GST then you are basically collecting a 10% tax on behalf of the government on all the goods and services that you sell, which is why everyone registered for GST must issue a ‘tax invoice’ (with the GST portion clearly stated) as opposed to just an ‘invoice’ (for a total amount).
Being GST registered also means you can claim back credits for any GST you paid on your business expenses and Xero have a really informative post that illustrates that GST formula.
WHEN & HOW TO REPORT GST
All businesses that are registered for GST must lodge a BAS as a way of notify the ATO about what GST they’ve collected and what GST they’ve paid.
WHAT IS BAS?
A BAS is essentially a form that summarises your earnings and business expenses for a specified period of time.
When you first register for GST you nominate how frequently you’d like to report your GST; how often you will prepared and lodge your BAS.
Personally, I lodge my BAS monthly because I like to know where I stand every month in terms of whether I owe money to the ATO, or they owe me.
It helps me with my cashflow.
Most sole traders choose to prepare and lodge their BAS quarterly, which means they’re reporting their GST for the previous 3-month period.
This is why those quarterly dates I mentioned earlier are so important!
That’s also why I’m posting BAS dates on my social media feeds regularly throughout the year!
HOW TO PREPARE A BAS
Most accounting packages will have built-in GST reporting functionality.
So, as long as you categorise your income and expenses accurately the software will be able to generate a report for a specified period of time that demonstrates what GST you’ve collected and what GST you’ve paid.
These amounts then get recorded on your BAS that is then lodged with the ATO.
If you’re only using a spreadsheet for your bookkeeping then Xero’s infographic that I mentioned earlier will probably be a really useful guide for your calculations.
LODGING A BAS
There are a few ways to lodge your BAS:
- engage your accountant or a registered BAS agent to lodge it on your behalf
- via your accounting software
- through your myGov account
- using the ATO’s business portal.
WHAT IF I HAVE NOTHING TO REPORT?
If, for a particular reporting period, you have no GST transactions to report you still need to let the ATO know.
In that instance you still submit a BAS, but you submit it as a ‘Nil’ statement.
LODGING INCOME TAX
Unlike employees – whose employer ‘withholds’ their income tax and pays it to the ATO on the employee’s behalf – sole traders are completely responsible for paying their own tax.
Fortunately, in Australia, the government has established the Pay As You Go (PAYG) system to help tax-paying Australians meet their tax obligations.
The PAYG system enables sole traders to make regular quarterly advance payments towards their estimated EOFY tax bill.
The ability to contribute to what you’re likely to pay in tax is a great way to side step a surprise tax bill at EOFY.
Think of it as forced savings.
As a sole trader you can sign up to the PAYG scheme voluntarily, or, you can wait until the ATO advises you ‘it’s time’ (usually based on their assessment of your most recent tax return coupled with other criteria).
If you’re not signed up for PAYG, then your tax gets finalised at EOFY when your accountant prepares your tax return, and you have until 31 October to pay what’s owed, if anything.
In terms of paying your PAYG instalments, there are two options:
1. Pay a predetermined amount.
You pay what the ATO calculates your tax is likely to be according to your most recent tax return. This assumes you’ll earn much the same in the current financial year as you did the year before.
2. Pay an amount you set yourself.
If you suspect your income will fluctuate throughout the current financial year then you might choose this option, and if so you should definitely consult with your accountant first to ensure you’re not over or under estimating the value of your PAYG contributions.
HOW TO PAY YOUR PAYG INSTALMENTS
If you have a myGov account you can manage all of your PAYG contributions there.
Otherwise, your accountant will be able to manage them on your behalf.
If you’ve managed to read all the way to the end, then congratulations, because I know it’s not the most riveting of topics.
The bottom line is: understanding your broader tax obligations as sole trader is a fundamental part of running a business and if you don’t get on top of it, it will most certainly get on top of you!
What systems do you have in place to manage your tax & GST?
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