Business structures
Sole trader
A sole trader is an individual who runs a business in their own name, with no separate legal entity, and who is personally responsible for the business's income, debts and tax.
A sole trader is the simplest business structure in Australia. One individual owns and runs the business, and there is no legal separation between the person and the business. The owner keeps all the profits after tax, but is also personally liable for all business debts and legal claims, which means personal assets can be at risk if the business fails. Many freelancers, tradespeople, market stallholders and consultants start out as sole traders.
To operate, a sole trader needs an Australian Business Number and, if they use a name other than their own, a registered business name with ASIC. They use their personal tax file number for income tax. The business has no separate tax return. Instead, business income and expenses are reported in the owner's individual tax return, and the net profit is taxed at the owner's marginal rates. The owner pays the Medicare levy on the taxable income as usual, and may need to make PAYG instalments during the year.
A sole trader does not pay themselves a wage in the way a company director does. Money taken out of the business for personal use is called drawings, and is not a deductible expense. The owner also does not have to pay super for themselves, but may choose to make personal contributions, which may be tax deductible subject to the caps and conditions that apply. Check ato.gov.au for the current limits.
For GST, a sole trader follows the same rules as any other business. They must register when GST turnover reaches $75,000, or at any turnover if they drive a taxi or provide ride-sourcing services. They can register voluntarily below the threshold. Once registered, they charge GST on taxable sales, claim credits on business purchases supported by tax invoices, and lodge a BAS. GST turnover counts all business income, not just the net profit.
Sole traders who hire staff become employers and must withhold PAYG tax, pay super and may be subject to state payroll tax and workers compensation obligations. These state matters are managed by the relevant state or territory authority and vary by jurisdiction. Records for tax purposes generally need to be kept for five years.
The main advantages are low set-up cost, simple reporting and full control. The main disadvantages are unlimited personal liability, less opportunity to split income and potentially a higher tax rate once profits grow. A common misunderstanding is that having an ABN creates a separate entity. It does not, since the sole trader and the business are still the same legal person.
This is general information only, so confirm which structure suits you with the ATO or a registered tax professional.
Worked example
Hannah runs a mobile dog grooming business as a sole trader. In the year she earns $68,000 in fees and has $23,000 of business expenses. Her net business profit is $68,000 - $23,000 = $45,000, which she reports in her personal tax return alongside any other income. Because her turnover is below $75,000 and she has not registered, she charges no GST and lodges no BAS.
Practical tips
- Keep a separate business bank account even though it is not legally required, as it makes bookkeeping and BAS preparation much easier.
- Track your GST turnover through the year, because the registration test looks at your income as a whole and not at profit.
- Plan for tax by setting aside part of each payment, since there is no employer withholding for your own earnings.