STRUCTURES – THE SOLE TRADER
It is important to carefully consider your options when selecting which structure to use for your business operations. The following guide is intended to get you thinking about the relevant issues and are by no means exhaustive. This first instalment is about the humble sole trader option.
A person who wishes to start a business can simply trade under their own name. This is known as being a ‘sole trader’ and is the simplest of business structures. All taxable income and deductible expenses for the business will go in the section ‘Net income or loss from business’ in your individual tax return and you’ll be taxed at marginal rates on the net amount.
Setup procedure
- Register for an ABN
- Register for GST (if applicable)
- Register for PAYGW (if applicable)
- Register a business name with ASIC (if required)
- Get a bookkeeping system in place
- Get relevant insurances in place
- Appoint accountant and lawyer (if required)
Advantages
- Simple
- Minimal compliance
- Lower maintenance costs
- Capital gains tax discounts
- Total control of assets
- Minimal setup costs
Disadvantages
- No asset protection
- The structure has limited life – on the death of the individual the business must change hands
- Taxed at marginal rates
- Inflexible tax planning
- Restrictions on superannuation contributions
Compliance requirements
- ABN registration — compulsory
- GST registration — compulsory if turnover is over $75,000 (registration is voluntary if less)
- PAYGW registration — compulsory if you have employees
- BAS — monthly or quarterly (if GST registered and depends on turnover and level of PAYGW)
- Tax return — yearly
- Financial records — you are required to keep financial records pertaining to your tax returns for five years from the date of lodgement
Summary
This type of structure is suitable for someone with little or no assets and is just starting out in business with little turnover. The income tax is either paid at the end of the year after lodgement of tax returns or paid through an Instalment Activity Statement (IAS) during the year and via an adjustment at the end of the year. Tax is paid on net profit, not what you draw out of the business. Equipment, public liability and other indemnity type insurance is recommended.
If you’re thinking of starting a business, or restructuring an existing business, please get in touch, we’d love to help. Asides from appointing a great accountant, we’d also recommend speaking with a lawyer before starting any kind of business, just to make sure all angles are covered.
