- A sole trader business is easier to set up, requires less reporting and costs less to maintain than a company.
- Operating as a sole trader business means that your personal finances are connected to your business, and they're protected in case of insolvency.
- To set up your business, you need to register for an ABN. If you want to trade under a different name, you also need to register a business name.
- This article tells you everything you need to know about sole trader businesses in Australia, including sole trader tax requirements and accounting.
In this article, we explain how to set up a sole trader business in Australia. We will cover the following topics:
- What is a sole trader business structure?
- What are the benefits of a sole trader business structure?
- What are the disadvantages of a sole trader business structure?
- How do you become a sole trader in Australia?
- Do sole traders in Australia pay tax?
- Do sole traders pay superannuation?
As well as practical information on how to start a sole trader business, you can also find information on:
- and much more on the SavvySME platform.
What is a sole trader business structure?
A sole trader business is a business structure in which the proprietor is responsible for the entire business, essentially you are the business. When tax time comes around, all business profits, income, etc. are counted together with your own personal, individual income.
What are the benefits of a sole trader business structure?
There are many benefits of a sole trader business, including:
- Simple to set up and operate (in comparison to other business structures such as a Partnership, Trust or Company)
- You have complete control over your business including all assets and decisions
- It's much less expensive to set up and maintain
- There are less reporting requirements, paperwork and government interference and regulations
- Any losses may be offset against other income earned
- As you are not considered an employee, you are not required to pay payroll tax, superannuation contributions or worker’s compensation on the income you earn
- You have more privacy as you are not required to disclose your profits to the public
- It’s the easiest business structure to change if the business grows or if disbanding and you’ll keep any after-tax gains when you sell
What are the disadvantages of a sole trader business structure?
Some of the disadvantages of a sole trader business structure include:
- There is unlimited liability, meaning your personal assets are at risk when things go wrong
- You are personally liable to pay tax on all income derived from the business and there is a little opportunity for tax planning
How do you become a sole trader in Australia?
To start a sole trader business in Australia, you need to:
- Apply for an Australian business number (ABN)
- Register a business name in Australia
These steps apply whether you want to start a sole trader business in Victoria, New South Wales, Western Australia, Queensland, Northern Territory, South Australia or Tasmania.
1. Apply for an Australian business name (ABN)
In order to operate as a sole trader, you must have an Australian Business Number (ABN). To apply for an ABN you’ll need to apply for one through the Australian Business Register (ABR). It’s an extremely simple process and will only take around 30 minutes to complete online. You can use this number for all your business dealings.
Having an ABN ensures no withheld payments when you issue an invoice. Without quoting an ABN, business clients are required to withhold 46.5% of any payments. It is also essential if your business collects GST, which you can apply for within the ABN application form. GST is required when your business earns $75,000 or more.
2. Register a business name in Australia
If you use your own personal name for your business, then there is no need to set up and register a business name. However, if you don’t wish to trade under your own name, you’ll need to apply for a business name. Your business name should be something relevant to your business, preferably catchy and memorable.
This is how to register a business name as a sole trader:
To register your business name, first check if it’s available by checking the National Names Index and if you wish to trade online it’s a good idea to check that a suitable domain name/address is also available. You can apply for a business name through the Australian Securities & Investments Commission (ASIC).
Next, you’ll need to ensure that your new business name is linked to your Australian Business Number (ABN) by contacting the Australian Tax Office (ATO).
The business name you choose for your business has no legal entity status and does not give you ownership of that name or legal protection of it. If you wish to legally protect your business name and stop other businesses from using it, you’ll need to trademark it.
Do sole traders in Australia pay tax?
As the business income is treated as your personal, individual income, you as the proprietor of the business are responsible for any tax the business must pay. After claiming a deduction for all relevant and allowable expenses, you are required to include all business income with any other personal income earned and report it on your individual tax return.
After your first year of business, you may pay quarterly, Pay As You Go (PAYG) instalments towards the expected amount of tax payable at the end of the financial year. You are required to pay the same tax as an individual taxpayer, at personal income tax rates.
As sole traders pay tax with their individual Tax File Number (TFN), at the start of the business there aren’t generally any tax applications to register for as most individuals will already possess their own TFN. However, if you do not already have a Tax File Number you can apply for a TFN through the Australian Business Register.
Businesses who earn over $75,000 per financial year are also liable to pay Good and Services Tax (GST), which is usually 10% tax placed on top of most goods and services in Australia.
Do sole traders pay superannuation?
A sole trader is responsible for all aspects of their superannuation arrangements. When making super contributions you may be eligible to claim a deduction. You will first need to notify the fund of your intention to claim a deduction and wait until their confirmation before proceeding. Once you receive confirmation you are able to claim the super contribution as a personal deduction on your tax return.
You may also be eligible for government super contributions when paying your own, depending on the amount you earn and the amount you contribute. You will also be required to pay superannuation to any eligible employees.
Are you thinking about registering as a sole trader business?
Editor's Update 06/07/20:
Thanks for reading our article by Phil Joel. We hope it has helped you understand how to set up as a sole trader in Australia. Members at SavvySME have some additional questions regarding this topic, so we have responded to some of these FAQs below.
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