What you need to know about operating as a sole trader

If you want to run a business in Australia you need to do it via a structure. There are a few options including sole trader, company, partnership and trusts.

Trading as a sole trader means that it’s just you, no other person or legal entity, that’s carrying on the business. It means you are personally entering into contracts, you are hiring people, you are being sued (though hopefully not!).

Trading as a sole trader is the simplest of all the structures and is free to establish and has limited ongoing compliance (i.e. accounting/tax) costs associated with it. It also has limited flexibility and legal protection – but for many small businesses just starting out it tends to be the best option. You can always roll your sole trader business up into a company or other structure when the time comes.

What’s in a name?

You can carry on the business under your own name, or you can register a business name with ASIC, which will allow you to trade under a name other than your own. This can be useful if you’re trying to build a brand that stands separately from yourself.

How do I set it up?

Head over to the Australian Business Register armed with your TFN and personal details and you’ll be able to register for an ABN (Australian Business Number) in no time.

You’ll want to set up a few new bank accounts to handle all of your income and expenses. Best bet is to create a transaction account that can be used (and only used) for business income and expenses and then have an online savings account attached to this which you can use to set aside funds to pay your tax and BAS when the time comes. As a guide aim to squirrel away 30% of each invoice into your savings account.

Once your accounts are setup it’s highly recommended you put in place a good bookkeeping system. Modern cloud systems allow for easy access to your data and do much of the heavy lifting for you – they’ll connect directly with your business bank accounts, handle invoicing, payroll and much more.

If it seems too hard, or a bit of a drag, get yourself a bookkeeper to handle it for you – it’ll be money well spent in the long run.

What about managing risk?

First up speak with a lawyer to ensure you’ve got some solid standard contracts in place for dealing with clients, suppliers, employees, etc. It’s a little bit of money upfront but it’ll save you loads in the long run. For example, a good client agreement (commonly referred to as a services agreement or engagement letter) will cover situations where clients don’t pay on time and who owns the work before and after payment is made.

With legals sorted, your next concern is insurance. Every business is different so you should speak with a broker familiar with your industry so you can get the most appropriate products at the most competitive price. Cover to consider includes professional indemnity, public liability, equipment, motor vehicle, income protection insurance, life and TPD, etc.

What tax stuff do you need to know?

If you’re going to turn over (i.e. total invoices) more than $75,000 in a year you need to be registered for GST. Being registered means you’ll be charging GST (i.e. adding 10% on to your invoices that you’ll then hand over to the ATO) and it means you won’t be paying it when you incur costs for your business that have GST included in the price (e.g. buy a $2200 laptop and you’ll get the $200 GST refunded by the ATO).

GST isn’t a cost for businesses, it’s only paid by the end consumer of a product, but businesses are responsible for collecting it on behalf of the ATO. Those who are registered will likely need to lodge a quarterly Business Activity Statement (BAS) that summarises the GST collected and paid for that quarter so you know what to pay to the ATO – if this is putting you to sleep then it’s definitely advisable to line up a bookkeeper to handle this for you!

Annual tax returns are much the same as when you were an employee except there’s an extra section added in that reports on your business activities – income and expenses – with the net amount simply getting added on to your taxable income. The first year you lodge a sole trader return (that shows a profit) expect a tax bill as the income you’ve been earning hasn’t yet been taxed, but this is okay because remember the online saver account with 30% of your invoices?

There are no special tax rates for sole traders. The net income from the business simply gets taxed at your regular marginal tax rates. However, it’s worth noting there is currently a ‘small business income tax offset’ available for sole traders which may reduce your tax bill by up to $1000. Not life changing, but not terrible either.

As for special deductions, there isn’t a lot different to being an employee except for a few minor differences with the main one being the ability to claim a deduction for any business asset acquired at a cost of under $20,000. This means that new computer can be deducted in full the year you buy it rather than depreciated over a number of years.

What next?

Before you get going on your sole trader adventure we recommend having a good think about what it is you’re selling and who is going to be buying it. A common mistake for new businesses is to have a product first rather than a customer – always start with the customer and what they want rather than a product or service that you think is great but may have no market.

This is all part of the business planning process which you can find out more about via  here. It’ll also get you thinking about the sales and marketing side of things which is something that new businesses tend to underestimate when it comes to the amount of time it’ll take (think close to 50% of your time!).

Written by Ben Fletcher, managing director at Generate. A version of this article was originally posted on their Better Business blog.


Generate are not your typical accountants. We provide operational and strategic support to creative and innovative businesses of all stripes and colours. 

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