1. You MUST obtain an ABN (Australian business number).
The ONLY place that you should obtain your ABN is from the ABR (Australian Business Register) website. It is free to obtain an ABN, however, be warned there are plenty of websites offering ABN setup services for a fee. As a sole trader, you can only ever have one ABN.
2. You should register a business name.
As a sole trader, you can simply link your ABN to your own name (as your trading name). Having said this, we always recommend that you register a business name.
3. You should register a business bank account.
Though this is not legally required, it will certainly make things clearer and easier for your record-keeping.
4. You should develop a clear, simple, and effective bookkeeping system.
If your business is small and simple with very few transactions, then a manual system of storing receipts and maintaining an excel schedule may well be all that you’ll need.
In most cases, it is best to be as prepared as possible and have an online bookkeeping system set up.
5. As a sole trader, you do not technically pay yourself a wage.
You are free to transfer cash between your business and personal bank accounts as you wish, and these transfers are simply recorded within your bookkeeping software as “transfers” (i.e. they are not an income nor an expense). Tax is payable on any net profits that your sole trader business makes during the financial year at your marginal rate of tax.
6. As a sole trader, you and your business are considered one and the same.
What this means is that your business is NOT a separate legal entity to you. You’ll have one tax return each year – your personal tax return. A sole trader is different from an alternative business structure such as a company, trust, or partnership – each of which requires its own separate tax return and from which funds are distributed to you personally in different ways.
7. You cannot generally offset sole trader losses against other taxable income (e.g., employment income) to improve your tax outcome.
What you can do, however, is carry forward any business losses to future income years, during which these can be offset against net profits to reduce any tax payable in a future year.
8. When your turnover exceeds A$75K within the financial year (or you expect that it will), you are required to register for GST.
Once registered, you will need to charge an additional 10% to your clients, show this on your invoices and retain this to pay the ATO through a business activity statement (BAS) every quarter (most common), or month.
9. A sole trader is the simplest Australian business structure.
It is cheap and easy to set up and if you use the services of an accountant, you are only paying for one tax return each year (your personal tax return). A sole trader is best when your business activity is simple, risk-free, and small. There are many cases in which a new business owner will begin as a sole trader but eventually change to a company, trust, or partnership structure depending on the situation.
10. You should engage a skilled accountant and bookkeeper.
It is important that you ensure that the tax specialist you have engaged to assist you is an Australian registered tax agent. You should also be looking to check that your accountant is registered as a CPA, CA, or IPA and ideally, well-versed in using Xero.
If you don’t enjoy bookkeeping, we strongly advise that you make use of Bookkeeping service (like ours!) which will enable you to focus on growing your business while the financial side of your business along with ATO obligations are taken care of. Incorrect bookkeeping over long periods of time can ultimately result in surprise tax and GST bills.