Let’s cover the easy one first: income tax.
For sole traders it’s quite simple: it works exactly the same as for those who have a regular job – the amount of tax you pay is based on your taxable income and calculated using the Individual Income Tax Rates.
Generally, you lodge a tax return between 1 July and 31 October for the previous financial year and after it’s been assessed, the ATO will either cough up a refund into your bank account or slug you with a tax bill.
What is taxable income?
In simple terms, your taxable income is the amount of money you make in a financial year (not including GST – more on that later) minus your business expenses. For example, if you earn $100,000 and have business expenses totalling $18,250 your taxable income will be $81,750.
Check out this useful tool to help you calculate the amount of tax you are liable to pay for a given financial year.
Understanding PAYG instalments and how they help
If you make a living from your business you’re going to have to pay tax. Unlike employees who have tax taken out of their salary, as a sole trader it’s up to you to meet your tax obligations.
Fortunately there’s a system in place called Pay As You Go (PAYG) which allows you to make payments in advance towards your expected tax bill for that financial year.
Paying your tax bill in regular installments (usually quarterly) ensures you don’t fall behind and aren’t hit with an eye-watering bill at the end of the financial year.
As of 2015 you can manage all of your PAYG installments through the myGov website.
For further fun reading the ATO has detailed information on PAYG here.
Goods and Services Tax (GST)
The other tax that can apply to sole traders is GST, which is 10% tax placed on most goods and services sold in Australia. Not all sole traders need to register for and pay GST but in general if you earn over $75,000 per financial year or drive taxis you can’t avoid it.
Business Activity Statements (BAS)
If you’re required to pay GST, you’ll need to complete and lodge a BAS to the ATO every quarter which will contain details about your earnings and business expenses.
As of July 2017 the ATO introduced the simpler BAS format which requires you to report far less information and takes less time to complete.
Income tax and GST
When it comes to calculating your taxable income for your tax return, do so excluding any GST charged as you’ve already paid the GST component with your quarterly activity statements.
For example, if you earn $110,000 including GST in a given financial, your taxable income will only be $100,000.
Use accounting software to make tax time simple
Apps like Rounded make meeting your tax obligations a lot easier and far less stressful. Rounded is designed specifically for Australian sole traders and produces everything you need for tax time.