You picked up some freelance work, started driving, or turned a side project into paid gigs, and someone told you to get an ABN. You did, and now you are not sure what any of it means for tax. The good news is that being a sole trader is the simplest way to earn on your own, and the rules make sense once someone lays them out without the accountant's fog.
You and the business are one
As a sole trader there is no separate business in the eyes of the tax office. You and it are the same person. That has one big, freeing consequence: there is no separate business tax return to lodge. Your business income and your business expenses go into your ordinary individual tax return, under a business section, using the same Tax File Number you have always had.
The profit is taxed at the normal individual rates, the same brackets and tax-free threshold that apply to a wage. One rule catches people out: you have to lodge a return even in a year the business made a loss or earned less than the tax-free threshold. Silence is not an option the ATO offers.
No separate return, no company rate. Your business lives inside your own tax return, taxed at your own rates.
The ABN, and the 47% trap
An ABN is free, and getting one does not create a new tax or a new obligation to charge anything. It is simply the number that says you are running a business. Its main job is on your invoices. When one business pays another and no valid ABN is quoted, the payer is required to hold back 47% of the payment and send it to the ATO. Quote your ABN and that withholding does not happen. Leave it off and nearly half your invoice can vanish until you sort it out at tax time.
Because nothing is taken out of your pay along the way, the money that lands in your account is pre-tax. It can feel like untaxed income, but it is not. You owe tax on the profit when you lodge, so the single most useful habit for a sole trader is to move a slice of every payment into a separate account the moment it arrives, ready for that bill.
When GST starts
GST is not automatic just because you have an ABN. Most sole traders hold an ABN for a long time without ever registering for GST. You are required to register once your business turnover reaches $75,000, measured on your gross sales over a rolling twelve months, not your profit. Below that, registering is optional.
There is one important exception. If you drive taxi or rideshare, Uber, DiDi and the like, you must register for GST from your very first dollar, before your first trip, no matter how little you earn. This first-dollar rule is specific to carrying passengers. If you only deliver food or parcels and never carry passengers, you fall under the ordinary $75,000 threshold like everyone else.
Pre-paying tax through the year
Once your business income is steady, the ATO will usually put you into PAYG instalments. It sounds ominous but it is just a way of paying your tax in quarterly pieces through the year instead of one alarming lump at the end. Each instalment is credited against your final bill when you lodge, so you are refunded anything you overpaid and top up any shortfall. It is a pre-payment, not an extra tax. If your income drops, you can vary the instalments down, though it pays to be honest, because under-paying by too much can attract interest.
What you can claim
You can deduct the genuine costs of earning your income, claiming only the work-related share of anything you also use privately. The everyday ones for people working for themselves are the tools and equipment of the trade, work travel in your car, a portion of your phone and internet, and the running costs of a home office. For the car you choose one of two methods: a set rate for each work kilometre up to a cap, or the work-related percentage of your actual costs backed by a twelve-week logbook.
Equipment has a line worth remembering. Anything that costs $300 or less can be claimed in full the year you buy it. Cost more than that and you claim it gradually as it wears out over its useful life. Keep the receipts, hold your records for five years, and a separate bank account for the business, while not compulsory, makes every one of these steps easier.
Easy to miss
A few things that trip up people new to working for themselves:
- Small side-hustle income still counts. There is no minimum you are allowed to leave off. If you earn it from a business or income-making activity, you declare it, even if it sits on top of a regular job. The platforms you earn through report your income to the ATO anyway.
- Your super is now your job. No one pays the super guarantee for you when you work for yourself. If you want retirement savings, you make personal contributions, and you can usually claim a tax deduction for them by lodging a notice of intent with your fund first.
- Set money aside from day one. The tax bill on a good year is real and it arrives all at once. Treat a portion of every payment as never having been yours.
Keeping a clean record of what came in, what you spent and what to set aside is most of the battle, and it is exactly the kind of thing PFO is built to do quietly in the background, so your deductions and your tax-time picture are ready when you need them.
Put in your expected profit for the year and see the tax and take-home, so you know how much to set aside.
General information only, not financial advice. For your own situation, check the ATO or a registered tax agent.