Sole Trader Tax Return Guide: Everything You Need to Know

[Updated August 20, 2024]

As a sole trader, you have a set of talents to make your business successful. If you are like many in your position, your skillset does not include doing your taxes. Although it may feel like a daunting task, you can efficiently do your taxes. Here are some tips to help you maximise your sole trader tax refund in 2024.

Everything You Should Know

1. How to Do a Sole Trader Tax Return
2. How to Calculate Income Tax as a Sole Trader
3. What Counts as Taxable Income?
4. What is the Tax Rate for Sole Traders?
5. How to Estimate Your Income as a Sole Trader
6. What is Personal Services Income (PSI)?
7. Do I Need to Register for Goods and Services Tax (GST)?
8. What is a Business Activity Statement (BAS), and Do I Need It?
9. Sole Trader Tax Return Example
10. Tips to Maximise Your Tax Refund as a Sole Trader
11. Frequently Asked Questions

How to Do a Sole Trader Tax Return

Your taxes require maintenance just as any machine or piece of equipment would. Keeping all documents stored in an easy-to-remember place, or downloaded on your computer, makes the whole process much smoother. No matter what else is happening, you can avoid the mad scramble searching for that invoice you know is somewhere.

1. Understand your business structure and lodge your tax return accordingly
2. Get an estimate of your income tax based on last year’s figures or on projections of your income.
3. Keep an accurate record of every business expense, and if possible, download them to be sure you have the forms you need
4. Download or otherwise save all of your receipts related to your business
5. If you make Pay As You Go (PAYG) payments, keep track of them and be sure your quarterly payments are on time.
6. Remember to file a Business Activity Statement (BAS) quarterly
7. Format invoices carefully if you must collect Goods and Services Taxes (GST) and bill clients accordingly

How Do I Calculate Income Tax as a Sole Trader?

Calculating income tax as a sole trader means knowing how much money you earn after business expenses. And using the correct calculations based on your tax bracket. For a rough estimate, use our handy tax return calculator.

What Counts as Taxable Income?

Your taxable income is whatever money is left over after you pay business expenses. For example, if your company earns $100,000 and your business expenses are $20,000, your taxable income is $80,000.

What is the Tax Rate for Sole Traders?

Sole traders have the same tax obligations as individuals. You can calculate how much you must pay by using the Australian Tax Office’s (ATO) current tax table.

These rates apply to individuals who are Australian residents for tax purposes.

Sole Trader Tax Rates 2023–24

Source: ato.gov

How to Estimate Your Income as a Sole Trader

Estimating income is challenging for sole traders because no set amount is earned in specified periods. A few ways to estimate your income as a sole trader should make the process go smoothly.

• Use Past Data – Many sole traders will look at the amount they earned during the same period in previous years to predict future earnings.
• Overestimate Your Payments – If you make more than expected, you could be left with a surprise tax bill. If you overpay your taxes, you will get the money back. When over-estimating, you are creating a safety net.
• Make Quarterly Payments – Using quarterly payments means you will concern yourself with smaller amounts of data.

What is Personal Services Income (PSI)?

Your PSI is the money you receive when a client pays for products or services based on your skills and labour. If more than 50% of an invoice comes from your expertise, labour, or skills, the income is PSI. For tax purposes, this is treated as your income.

Do I Need to Register for Goods and Services Tax (GST)?

You will need to register for GST when your business earns more than $75,000 in a year.

What is a Business Activity Statement (BAS), and Do I Need It?

Your BAS is a document designed to assist you in reporting:

• Goods and services tax (GST)
• Pay-as-you-go (PAYG) withholding
• PAYG instalments
• Fringe benefits tax (FBT) instalments
• Luxury car tax
• When you register for an Australian business number (ABN) and GST, the ATO will automatically send you a BAS when it is time to lodge.

If your business is registered for GST, you will need to lodge a BAS.

Sole Trader Tax Return Example

Please see a mock example below for Tony’s Gardening, a fake gardening service.

Tony’s Gardening Service Tax Return 2023-2024:

1. Personal Information:
   • Name: Tony Smith
   • Tax File Number (TFN): 123-456-789
   • Business Name: Tony’s Gardening
   • Business Address: 123 Green Street, Suburbia
   • Contact Information: Phone: (01) 2345-6789, Email: tony@example.com
2. Business Income:
   • Gross Business Income: $50,000
   • Other Business Income: $2,000 (Interest on business savings account)
3. Business Deductions:
   • Operating Expenses:
     • Rent for Business Premises: $12,000
     • Utilities (electricity, internet, phone): $2,000
     • Office Supplies: $500
     • Business Insurance: $1,200
     • Advertising and Marketing: $1,500
     • Vehicle Expenses: $3,000 (Fuel, maintenance, and insurance for the business vehicle)
     • Depreciation of Business Assets: $1,500 (Depreciation on gardening equipment)
   • Cost of Goods Sold:
     • Seeds, Plants, and Soil: $2,000
4. Goods and Services Tax (GST):
   • GST on Sales: $5,000
   • GST on Purchases: $1,272 (Calculated based on GST paid on eligible business expenses)
   • Net GST: $3,728 (GST payable to the ATO)
5. Other Taxes and Levies:
   • PAYG Instalments: Tony made PAYG instalments of $4,000 during the year.
6. Net Income (Loss) Calculation:
   • Total Income: $52,000 ($50,000 Gross Business Income + $2,000 Other Business Income)
   • Total Deductions: $23,700 (Sum of Operating Expenses and Cost of Goods Sold)
   • Net Income: $28,300 ($52,000 Total Income – $23,700 Total Deductions)
7. Income Tax Calculation:
   • Tony falls into the 32.5% tax bracket for the 2023-2024 financial year.
   • Income Tax Payable: $9,157.50 (32.5% of $28,300 Net Income)
8. Medicare Levy:
   • Medicare Levy is 2% of taxable income.
   • Medicare Levy: $567.00 (2% of $28,300 Net Income)
9. Tax Offsets and Rebates:
   • Tony is eligible for a Small Business Income Tax Offset of $1,000.
10. Final Tax Liability:

• • Income Tax Payable: $9,157.50
  • Less Small Business Tax Offset: $1,000
  • Total Tax Payable: $8,157.50
  • Less PAYG Instalments Paid: $4,000
  • Final Tax Liability: $4,157.50 (To be paid to the ATO)

11. Declaration and Lodgement:
    • Tony signs and dates the tax return.
    • Tony lodges the tax return through the ATO’s online platform.

Please note that this is a fictitious example, and the figures provided are for illustration purposes only. The actual tax liability for a real business will depend on its specific financial situation and the prevailing tax laws in Australia. Always consult with a qualified tax professional or the ATO for accurate and up-to-date tax advice.

Tips to Maximise Your Tax Refund as a Sole Trader

One of the keys to getting your maximum tax refund is getting every possible deduction. Knowing what to write off can be tricky. Maintaining excellent records and keeping receipts is vital in case the ATO has questions to ask you.

Below are nine tax deductible expenses that you may be able to claim come tax time:

1. Bad debts or invoices that will not be paid.
2. Business travel expenses like bus, train, and taxi fares.
3. Depreciation of things such as furniture (there is a simplified depreciation rule that sole traders to work this out).
4. Home office expenses, including occupancy (mortgage interest, insurance, council rates) and operating expenses (electricity, phone, cleaning).
5. Maintenance charges for machinery, tools, or the premises.
6. Other business expenses, including accounting, advertising, banking, relevant courses, stationary, and subscriptions.
7. Personal super contributions for yourself and any employees, as well as health insurance premiums.
8. Prepaid expenses on items or services delivered in the following tax year.
9. Vehicle expenses such as fuel and oil, servicing and maintenance, loan interest or lease payments, insurance, and registration (remember, if you use the vehicle for both home and business, you can only deduct part of the costs on your work usage)

Bonus Tip

You may discover that even with this valuable collection of tips, doing your taxes as a sole trader is time-consuming and sometimes frustrating. Get rid of that stress with professional assistance. You can count on us to get you all eligible tax breaks, file, and get your maximum refund (if eligible) immediately – simply complete your free refund estimate today!

Disclaimer: This information is general in nature and does not take into account your individual circumstances. For expert advice relating to your specific needs, you can contact one of our registered tax agents. 

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