If you’re a new business owner, it’s important that you understand what your tax obligations are, to avoid any complications down the track. These obligations will differ based on the specific structure of your business (i.e. sole trader, company etc.) Read on to find out the tax you’ll have to pay if you operate your business as a sole trader.
Sole Trader Tax Obligations
If you’re operating as a sole trader, you’re legally responsible for all aspects of your business, including tax. Sole traders are essentially considered individuals by the ATO and are required to pay income tax at personal rates. As a result, you won’t need to lodge separate tax returns for your business and yourself personally. This allows you to make the one lodgement using your own individual tax file number (TFN).
Given sole traders are viewed as individuals, the personal income tax thresholds will effectively dictate the amount of tax your business pays. One of the more significant implications of this is that the tax-free threshold will be applicable to your business’ income. Currently the threshold sits at $18,200, although this can change from time to time. Therefore, it’s important to monitor tax rates on the ATO’s website.
Despite the fact that you will be viewed as an individual with regards to tax, this does not make your business immune from common obligations. As a sole trader you still have to register your business by obtaining an Australian business number (ABN). In addition, if your business turns over more than $75,000 a year then you will be required to register and pay GST. Similarly, if your business has employees you may have to withhold money for PAYG income tax. On the topic of employees, you will also be required by law to make payments to their superannuation fund.
Lodging Your Return
As mentioned, when the time comes to submit tax returns, you won’t have to complete two separate lodgements for personal and business. This can be done under the one return as a sole trader. When completing your individual tax return, you will report your business’ revenue and expenses under a separate section for business items. Don’t forget that you are responsible for your own superannuation contributions as a sole trader. You also won’t be able to claim deductions for money drawn from your business.
If operating as a sole trader, the most applicable tax concessions would be those afforded to small businesses. A small business for tax concession purposes is an entity that has an aggregated turnover of less than $10 million. There are also specific concessions for sole traders, such as the small business income tax offset. Although this requires turn over to be less than $5 million. You can explore the various small business concessions in greater detail here.
For sole traders, the key takeaway from this information should be that your business and personal tax obligations are considered as one. However, it’s important to understand that if you alter your business structure at any stage, your tax obligations will change with it. If you are unsure or confused about your tax obligations, it’s best to contact a tax lawyer prior to entering into business.
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Author: Christopher Tsiknas