Sole Trader Tax Basics

Sole traders don't get a separate tax return for the business — and that surprises people in both directions. There is less paperwork than running a company, but the tax bill lands on you personally, and the first year catches many people off guard because nothing has been withheld along the way.

How sole traders are taxed

Your business income and expenses go into a business schedule inside your individual tax return. The net profit is added to any salary, interest or other income you have, and the total is taxed at individual marginal rates. The tax-free threshold of $18,200 applies to your combined income, not separately to the business. There is no company rate involved and no option to leave profits in the business — you are taxed on the profit whether or not you spent it.

Drawings are not wages. Taking money out of the business account for yourself is not a deduction, and it is not what you are taxed on either — tax is calculated on profit, not on what you paid yourself.

Deductions that actually matter

• Running costs: materials, subcontractors, insurance, software, and the business portion of phone and internet
• Motor vehicle expenses, using either the cents-per-kilometre or logbook method
• Home office costs if you genuinely work from home
• Personal super contributions, which can be deductible if you lodge a notice of intent with your fund before claiming

The business portion is the key phrase in all of this. Claiming 100% of a phone, car or home internet bill that is partly private is one of the most common triggers for ATO questions we see.

The first-year cash flow trap

Employees have tax withheld from every pay; sole traders don't. In your first year, no tax is set aside unless you do it yourself. Then, after you lodge that first return, the ATO usually brings you into the PAYG instalment system — quarterly prepayments towards the current year's tax. The practical effect is that your first tax bill and your first instalments often arrive close together, which hurts if nothing was put aside. The fix is boring but effective: transfer a slice of every payment you receive into a separate account and treat it as the ATO's money — and don't forget GST if you are registered for it.

When to get advice

Get advice before your first lodgement if income has grown quickly, if you are unsure how much to set aside, or if you are starting to wonder whether a company or trust structure makes more sense. That structure conversation is far better had mid-year than after a large profit has already landed in your personal name.

Do I lodge a separate return for my sole trader business?

No — business income is reported in a business schedule within your individual tax return, under your own TFN and ABN.

Can I pay myself a wage as a sole trader?

Not in the tax sense. Money you take out is drawings, not deductible wages, and you are taxed on the business profit regardless of what you draw.

What are PAYG instalments?

Quarterly prepayments the ATO asks for towards your expected current-year tax once your lodged returns show business or investment income; they are credited against your final bill when the return is done.