If you run a business as an individual, you are considered a sole trader. Before the pandemic that we know as COVID-19, you may already know the differences in the taxes of companies and sole traders. Being the cheapest out of all business structures, tax-related discussions are not too complicated. After all, you operate your business on your own. No one else runs and owns it, so you get to manage and control all its aspects.
Let us take a look at some of the differences between the taxes of a sole trader and a company:
- Companies do not have a tax-free threshold, while sole traders do not need to pay taxes if their earnings are $18,200 and below.
- The taxes that sole traders pay are based on their individual income rate. While companies are at 30%, although some companies have different rates.
- Sole traders are just like employees and other taxpayers. They have to lodge their individual tax return each year that they operate their business. Meanwhile, a company tax return is required for bigger firms.
- The returns should provide the deductions, income, and income tax of the company.
- As a sole trader, you will have to pay the capital gains tax, but you can lower the capital gain through the indexation or discount method. On the other hand, companies are only allowed to use the indexation method unless the company sells life insurance. In this case, they can also use the discount method.
- The activities that you perform for your business will determine which types of superannuation and taxes should be paid and reported as a sole trader. In general, you only have to register for goods and services tax (GST) if you have a turnover of at least $75,000. If you want to claim fuel tax credits, you can also register for GST. The same thing applies to companies. Those with employees will have to collect PAYG withholding amounts and provide reports to the ATO as well.
The Australian Government does have plenty of economic relief plans to get through the pandemic. One of them is to help the taxpayers by making their taxes more accessible. It has become easier to make a claim deduction, thanks to the 80-cent-per-hour shortcut method. Through this new method, taxpayers no longer have to provide proof and a breakdown of their accounts. Instead, they only have to take the number of hours they work daily against their expenses.
Tax Obligations as a Sole Trader
Sole traders can employ other people; however, you cannot treat yourself as an employee in terms of benefits. You have many responsibilities, especially when you have workers. One is to make sure that you are paying for their super. You will also need to pay your own super, which you can settle into a fund. This way, you can use it upon retirement.
As a sole trader, you will need to have your individual tax file number. It is not the same as the Australian Business Number. Your TFN will be used to lodge your income tax return, which means you are treated as an individual and not a company. However, you should still apply for an ABN, which you will use for every business transaction you have.
The Australian Taxation Office requires you to report all your income when you lodge your tax return. You will also have to pay your tax at the same tax rate as individual taxpayers. It is possible, though, that you will be eligible for a small business tax offset.
It is essential to understand that sole traders are not allowed to claim deductions for business-related money. Therefore, if you take money from your business, it should not be a part of your tax return items.
After you have lodged your tax return, you will need to start providing for your pay-as-you-go instalments (PAYG). They are a form of prepaid tax for the next financial year. You will then be credited with the instalments after the subsequent income tax evaluation.
If you get paid mainly for your skills or efforts, you get personal services income (PSI). You earn it when the money you receive comes from a contract that requires your knowledge and skills.
Support from the Government during the Pandemic
The coronavirus pandemic has had a massive impact on the lives of people in Australia. Businesses are affected, whether you are self-employed, freelancer, employee, contractor, or a business owner. Everyone is bound to face different personal and business challenges – if you haven’t already.
The Australian Government has announced support to protect the health of the people. At the same time, the economy remains one of the top priorities. A package of measures has been announced to support employees, employers, and businesses. As a sole trader, you should know how you can take advantage of these solutions.
Did your turnover reduce since the lockdown? If so, you have a big chance of benefitting from the JobKeeper Payment from the Government.
What is the JobKeeper Payment?
Quite recently, the Government announced the JobKeeper Payment, which includes a $130 billion budget. The purpose is to help Australians keep their jobs. It also secures the health of businesses, especially those affected by the pandemic.
According to the Government, about six million workers all over the country will receive a payment of $1,500 fortnightly. With the JobKeeper, employers, including sole traders, can remain connected to their employees. When the crisis is over, it will be much easier for the business to start over. The money can be used to keep operations going or serve as extra funds, which can be used when the lockdowns and restrictions are lifted.
The payment will be ongoing until the 27th of September. The ATO administers the JobKeeper scheme. If you are a sole trader, you can apply so that the ATO can determine whether you are eligible for the payment or not. Others, such as trusts, partnerships, and even companies, may also be entitled to this program. However, not-for-profit organisations are exempted.
If you run a business with employees, you can get additional JobKeeper payments. Nevertheless, you have to make sure that the employees are eligible as well. You get another $1,500 fortnightly for every employee that matches the requirements.
Who is qualified? As a sole trader, you are eligible for the JobKeeper Payment. The reason is that you serve as the business entity yourself, as well as the likely business participant. According to the regulations of this scheme, only the entity (not the business participant) will be able to collect the cash. Since you are both, you will receive the payment yourself.
Other requirements include:
- You are an individual whom the entity did not employ.
- You are proactive in the business that the entity operates, precisely the times when the JobKeeper payments will be provided.
- You are at least 16 years old, an Australian resident, or hold a Subclass 444 visa starting from the 1st of March 2020. If you are a resident for tax purposes, you are still eligible.
- You do not receive government parental leave pay.
- You can work and not incapacitated. You receive payments under the workers’ compensation law of the country.
- You are not an employee of another business entity. An exception is if you are a casual employee of another organisation.
- You recently received a JobKeeper eligibility notice.
You have to meet ALL the conditions above to qualify. After applying for the program, you will still have to be on standby, as there may be additional requisites to meet.
If you believe that you meet all the requirements above, you can proceed to the application process. How do you apply? You first need to identify your eligible employees so that you can enrol them as well.
Sole traders who do not have employees can nominate themselves as the business participant. You can apply through myGov, which is the ATO’s online service. It is vital that you enrol right away; otherwise, you cannot claim the payment for April if you do not send it on time. If you do need more time, you can still enrol for the JobKeeper scheme until the end of May.
Here are the complete steps on how you can prepare your business for the JobKeeper program as a sole trader:
- Ensure that you have checked your eligibility as well as your business.
- It should include the turnover test, which is based on the GST turnover. If you are not registered for the GST, you will still need to perform the turnover calculation test.
- If you are a sole trader with employees, you will need to check all the employees you have to ensure they are eligible for the JobKeeper Payment. If qualified, you are required to pay the employees $1,500 every fortnight.
- You should send the nomination notice for all your employees so that they can fill it out completely. Before the end of April, they should be able to send the notice back to you. This way, you can get the JobKeeper payments for the month of April.
- Make sure that you have the documents on file. You will also be requested to provide a copy to your tax agent if you have hired one.
- Next is to enrol for the payment. You can do so by logging in to the myGov site or use your myGovID on the Business Portal. You need to confirm that your business has experienced a turnover decrease of at least 30%. You will also have to provide the number of employees eligible for this scheme (if applicable). Sole traders also have to provide bank and contact details. Also, remember that you are a sole trader nominating yourself as an eligible business participant for this particular program.
- If you do not have employees, you only need to confirm that you have not employed anyone for your business. On the other hand, if you do have employees, you should identify them through your Single-Touch Payroll (STP) software, which has the JobKeeper functionality. Another option is to use the ATO online services through myGov.
- Sole traders with more than 40 employees should create their own JobKeeper statement using the Payment Guide. Here is a sample. The finished report should be uploaded back to the ATO’s Business Portal transfer file function.
The ATO recommends that you seek help from a registered tax agent to assist you throughout the process. The JobKeeper scheme can be quite complicated. However, it will become less stressful and easier to comprehend when you have a pro behind you. TaxReturn.com.au can help you in this matter.
The JobKeeper program already begun on the 30th of March. However, if you have not received your first payment yet, do not worry. Sole traders and other eligible entities are scheduled to get their subsidy in the first week of May.
What Should You Do Next?
Sole traders should take the time to make a business declaration every month. You will need to reconfirm the employees that you have nominated, as well as yourself through the ATO. Your registered tax agent can also perform this task for you, which will help you save a lot of time.
If some employees left or had to go, you still need to notify the ATO about this change. It is also necessary for sole traders to provide information about their current GST turnovers, along with their projected tax.
Note that the information you will have to keep providing will not be used to retest whether or not you are still eligible. Once your eligibility has been confirmed, it will remain so until the crisis is over. The repeat submission of GST is for the Government to assess the progress of your business with the help of the JobKeeper Payment scheme.
We can help you get the best return on your tax possible, get in touch with us today!