Feb 3, 2025 Joel Hernandez

Sole Trader 101: Essential Tax Tips for Your Business 

Navigating tax rules as a sole trader can be a challenge, but here are some tips to help make your business run smoother and help you stay on track.

Reporting Income

As a sole trader, you need to report all business income, including any side income outside the business. With an increasing amount of data available to the ATO, it will only be a matter of time before the ATO issues that “please explain” letter.  Also don’t forget to include non-cash payments such as payments in kind as these are generally taxable.

Claiming Expenses

Expenses incurred in your business are generally tax deductible, but it’s essential to separate personal and business use where applicable.  Only the portion of an expense related to business activities can be claimed.  If you are not sure if something is tax deductible, record it and ask your RDL accountant.

If you sell products, make sure to accurately calculate the cost of goods sold.

Managing Business Losses

Ensure that a business loss is calculated correctly and that thorough records are kept.  If your business incurs a loss, the Non-Commercial Loss rules may apply.  These rules, which generally deny a tax deduction for losses from running small scale business operations, provide a series of criteria to be met in order to offset business losses against other income.  Your RDL accountant will keep track of these in your return so you can maximise your claim when the time comes.

Treatment of PAYG Withholding and Instalments

It is common for sole traders to draw funds from their businesses. Personal drawings are generally not considered wages, and you are not required to withhold PAYG withholding (PAYGW) on these amounts.  However, sole traders may be required to pay PAYG tax instalments throughout the financial year to cover their income tax liability.  PAYG tax instalments paid will not be business expenses.

Personal Services Income (PSI)

If you earn income by providing services (like consulting), you may need to report it as personal services income (PSI). This classification affects allowable deductions, so understanding PSI rules is something that we help you work through so that you are claiming the correct items.

Your RDL accountant will help you navigate the tax rules that apply to sole traders to give you the best tax outcome.