Tax agent warns small businesses to consider sole trader status carefully amid ABN cancellations and ATO scrutiny

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As concerns are raised about the cancellation of Australian Business Numbers for sole traders, one tax agent says it’s important for small businesses owners think carefully about which business structure they operate under, given the levels of scrutiny ABNs are under.

On Wednesday a sole trader told SmartCompany that a decision by the Australian Business Register (ABR) to cancel her ABN after nine years of trading would run her business “dry”, explaining the number had been cancelled without a specific reason given.

The Australian Taxation Office confirmed that ABNs for sole traders may be cancelled for a variety of reasons, and that the communications about these cancellations usually don’t include “specific case detail” relating to why a number has been blocked.

Tim Wilshire, director of Confidential Tax and Business Services, tells SmartCompany that over the years, the tax office has been “getting a bit stricter” with those who use the sole trader business structure.

Based on his 17 years’ experience as a tax agent, Wilshire believes the ATO prefers business operators use other structures to carry out a business, and this means entrepreneurs should develop a plan for years into the future before they decide on how to set up their operations.

“We’ve seen this issue [of ABN cancellations] in the building and construction industry in particular,” Wilshire says.

He says over the past few years, he has seen several tradespeople operating as contractors with ABNs being “forced to incorporate” given how difficult it was for them to prove to the tax office that they were carrying on a business in a way that was suitable for sole trader status.

In general, Wilshire says the sole trader format is useful for “people starting out”, but warns business founders to think about the future in those early days, suggesting that incorporating or using a discretionary trust structure could give founders more freedom as their businesses grow.

If a person is operating as a sole trader, they need to be “very much an individual”, with Wilshire observing it can be challenging to prove to the tax office that an individual genuinely fits this category, particularly if they mainly contract to one client.

“I think a sole trader has a limited lifespan as a structure,” he says, observing that for most business owners, after they have been operating for some time, they can better protect their assets by choosing a trust or incorporated structure.

On Wednesday, executive director of Independent Contractors Australia Ken Phillips says his organisation has been drawing attention to the lack of reasoning and consistency of ABN cancellations for years.

Wilshire says in his experience, the most common reason for the cancellation of an ABN is lack of use.

“Once they have [not used the number] for a few years, it’s an automatic flag in the system,” he says.

However, Whilshire believes entrepreneurs are increasingly wanting to start up businesses without any external advice, which presents risks when it comes to choosing the right structure for their businesses.

“I see that kind of thing all the time,” he says, adding that seeking professional advice to help set up a business can pay off in the long run.

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2 years ago

Advice given by the tax office on its own website in numerous places is extremely misleading on just the issue of whether as a sole trader you are entitled to hold an ABN, rather than be classified as an employee. The Tax Office urgently needs to address the confusion about entitlement to hold an ABN and the area of “sham contracting”.

Michael Kaff
2 years ago
Reply to  Jenniffer

Totally agree Jennifer…and they also need to audit payers to ensure they are doing the right thing by employees.

Michael Kaff
2 years ago

I see so-called “contractors” all the time, including the Training industry.

I was unable to secure one training position, earlier this year, unless I used an ABN. Yet I was, for all intents and purposes, an employee.

This saves the payer Super, Insurance, holiday pay and entitlements, etc. Consequently, this costs employees the same.

The ATO outlines what is required to be a contractor, including, supplying your own equipment and being responsible and liable for outcomes.

I sincerely hope the ATO blows open this rort and makes payers responsible for full employee payments and entitlements.

2 years ago
Reply to  Michael Kaff

Michael, absolutely. However, I know of a situation where a person had their ABN cancelled even though they complied with all the guidelines the ATO provide, including the examples you gave above. The decision can be somewhat discretionary. The industry that comes to my mind where sham may be the most prevalent is construction, the “subbie” contractor who works under a building company, exclusively. I would suggest the ATO may be not willing to take on that industry. The ATO need to look at its guidelines, make them not so misleading and run a campaign to make these workers aware of when it’s not okay to insist on an ABN.

Michael Kaff
2 years ago
Reply to  Jenniffer

Trouble is Jenniffer, you may not get the job if you don’t supply an ABN, as in my case. So people needing the work feel powerless.

In my case, the employer was a relatively new RTO (training organisation) and only had a few employees to save costs. Many contract trainers had more than one gig, so the employer, who was a really nice guy by the way, thought this would qualify as contract work for the trainers.

He didn’t realise that the circumstances were those of an employment relationship and not a self-employed contractor.

Another RTO said he had advice from the ATO that it was fine to pay trainers as contractors. But having worked there I knew he must have received that advice based on incorrect or incomplete information given to the ATO.

I’ve been a tax agent and tax teacher for decades and know the rules pretty well.

James Deaner
James Deaner
2 years ago
Reply to  Michael Kaff

So michael whats your opinion on those who actually pay more then whats required as a gross , i get nearly twice what any union eba would give on top….

Michael Kaff
2 years ago
Reply to  James Deaner

If you’ve negotiated a great deal…and it seems like you have James…that’s brilliant and good on you for doing well from your contract. That more than compensates for lack of benefits and add-ons.

My concerns are for those receiving the same or less than employees, as well as not receiving associated benefits and payments.

In one of my situations, I was paid, as a contractor, less than I received previously from other jobs as an employee. When you add the super etc. that I also wasn’t receiving, it was quite a rip-off for me and cheap labour for the employer.