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

Emma Koehn /

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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Emma Koehn

Emma Koehn is a former senior SmartCompany journalist.