This guide aims to help sole traders understand key tax matters, such as the sole trader tax rate in Australia, when you pay tax, what you can claim and what documents are required to submit a successful tax return.
The sole trader tax rate.
Sole traders operate a business in their personal capacity (as opposed to a company) and as such, the sole trader tax rate is the same as it is for an individual. Tax on your business activities is included as part of your individual return. You don’t submit a separate return for your business.
The current tax rate for the 2021-22 financial year is as follows:
|Taxable Income||Tax Rate|
|$0 – $18,200||Nil|
|$18,201 – $45,000||19 cents for every $1 over $18,200|
|$45, 001 – $120,000||$5,092 + 32.5c for every $1 over $45,000|
|$120,001 – $180,000||$29,467 + 37c for every $1 over $120,000|
|$180,001 +||$51,667 + 45c for every $1 over $180,000|
In addition there is the 2% Medicare Levy on your taxable income.
Note: this is subject to change at the discretion of the ATO. You can visit their site to stay updated.
When does a sole trader pay tax?
All sole traders pay tax as part of their annual individual tax return. The due date for lodgement in Australia is as follows:
- If you’re doing your own return: 1 July each year until 31 October.
- If you’re using a registered tax agent: 1 July each year until 15 May.
Take note that as a sole trader, if you are registered for GST you are required to submit Business Activity Statements (BAS) every 3 months to the ATO. The GST portion of your income and expenditure is then excluded from your annual tax return.
Keeping track of your business activity and separating the GST portion is often overlooked by sole traders and can create a lot of unnecessary admin come tax time. We’ve put together this free worksheet to help you keep track of all income and expenses as well as the GST portions, on a daily basis. Download it for free here.
How to submit a tax return for a sole trader.
As a sole trader you can either submit your tax return on your own directly with the ATO, or via a registered tax agent like Teamwork Accounting.
Your tax submission must include:
- All income received
- List of expenses, broken into categories (stationery, licenses, rent, insurance, etc)
- Other Tax claims such as use of home for work purposes.
Tax deductions: What can a sole trader claim?
Here is a list of the most common items that sole traders can claim a business expense deductions.
- Motor vehicle claims
You can only claim motor vehicle expense deductions if these were costs incurred in travelling to see a client or if travelling for business purposes such as picking up supplies.
There are two ways to claim. You can either use the log book method or the cents per kilometer method.
To use the log book method, you must record your travel for 12 consecutive weeks. Then work out the percentage of travel that was specifically for business. (Let’s assume it’s 60% in our example).
You also need to keep a record of all your expenses (fuel, rego, insurance, repairs and maintenance), vehicle cost and depreciation and then multiply the percentage from above (60% in our example) by those amounts.
Your percentage worked out per your logbook can be used for 5 years if your work circumstances do not change.
The cents per kilometer method is capped at 5,000km per vehicle per annum. Although you don’t need to keep a log book for this method you must be able to show how you worked out your claim. In this method you can claim the present ATO rate of 72 cents per kilometer. This rate is liable to change so keep checking the ATO website for the most recent amount. You do not need to keep receipts under this method.
We recommend that you keep a diary or log book if using this method to more accurately calculate your claim and avoid issues should you be audited.
- Home expense claims
If you rent and have a dedicated area for work purposes you can claim the portion of that area of your office relative to your overall area of rental. For example, if your dedicated work space is 10% of the total rented property, you can claim 10% as a home expense. You can also apply that percentage to your utilities cost.
If you don’t have a dedicated area then you can only claim the marginal cost of working from home, which the ATO allows at 52c per hour. In this case you need to keep a record of hours worked from home.
If you own the property then technically, a taxpayer loses their right to the full main residence exemption if there is an entitlement to claim occupancy costs (regardless if they choose to claim or not). In practice this does not happen a lot and won’t apply if you don’t have a dedicated work area on your property. You could then choose to maintain a record of your hours and use the 52c per hour method.
- Phone and internet
Sole traders only need to analyse 1 month of billing and work out the percentage that is business related. You can then claim that percentage against your total annual phone and internet bill as a business expense. For example, if in one month 15% of your phone and internet account is business related then multiply 15% x your total annual phone and internet cost and claim that portion.
As it’s not always possible to get an itemised bill from your provider, the ATO will accept a one month usage diary logging all usage split into business & private components.
This is always an area that the ATO scrutinizes with regards to sole traders. You can’t claim things like work shorts if you’re a tradie or a business suit if you work in an office. You can only claim uniform costs if you have a compulsory uniform that you have to wear. A uniform must be clearly distinguishable with a business logo. You can claim the cost of protective clothing for specific trades.
It is expected that your employer register non compulsory uniform items with AusIndustry (more info here)
Sole trader tax advice
Sole traders have a lot on the go. A healthy cash flow, good financial management practices and taking the time to regularly interpret your monthly results plays a crucial role in moving from being a sole trader who’s just surviving each month to one who is generating real wealth for themselves and their family.
Our advice is to make sure you’re paying close attention to your finances. If you don’t have the time, we offer a range of services for sole traders and have successfully helped many grow into larger, healthy companies today.
These services range from basic tax submissions, assistance in managing your cash flow, helping with preparing budgets, monthly bookkeeping services to quarterly reviews with you where we sit down and help you dig into your numbers to better understand how you’re doing and where you could do better. We also offer a tax planning meeting before the end of the financial year.
Apart from running a successful business and minimising your tax through legitimate planning, you should be looking at investing your profits wisely to accumulate wealth over your working life. We have partnered with Partners Wealth Group to offer you this service as well.
Book a free consultation with us to discuss your business needs and aspirations.