fbpx
By Bane Williams June 14, 2023

Mastering Sole Trader Taxes: A Step-by-Step Guide to Lodging Your Tax Return

A sole trader is an individual who owns and operates their own business. As a sole trader, you are responsible for managing your business and ensuring it remains financially stable. This can include managing finances, taxes, and other important aspects of running a business.

Unlike other types of businesses, there is no legal distinction between the owner and the business itself. This means that as a sole trader, you are personally liable for any debts or legal issues that arise from your business operations.

The Importance of Lodging a Tax Return as a Sole Trader

Lodging an annual tax return is an essential part of running a successful small business as a sole trader. It not only ensures compliance with Australian taxation laws but also provides valuable insights into the financial health of your business.

By lodging your tax return annually, you can get a clear picture of your profits and losses over the year, which will help you make informed decisions about how to grow and manage your business in the future. As a sole trader, it is also important to note that you will need to lodge both personal income tax returns as well as separate returns for your business income.

This means that you must keep accurate records of all income earned through your business throughout the year so that you can report it correctly on your tax return. Failure to lodge or report incorrect information may result in significant penalties or even legal action being taken against you by the Australian Taxation Office (ATO).

Gather Necessary Information

Before you can lodge your tax return, you need to gather all the necessary information. As a sole trader, this means you’ll need to gather information about both your business income and expenses as well as your personal income information.

Business income and expenses

Business income includes any money earned through your business activities. This can include sales revenue, service fees, and any other type of payment received for goods or services provided by your business. “What are considered business expenses?”

Business expenses are the costs incurred while running the business. This can include expenses such as rent or mortgage payments for a workspace, office supplies, travel costs, advertising or marketing costs, and any other expense that is directly related to operating the business.

To make sure you have an accurate view of all of your business’s earnings and expenditures throughout the year, it’s important to keep detailed records. Make sure you have access to all receipts and invoices related to both income and expenditure.

Personal income information

The Australian Taxation Office (ATO) requires that all individual taxpayers provide certain personal details on their tax returns. As a sole trader, this means providing information such as your name, date of birth, address details and bank account number. It’s important to ensure these details are up-to-date with the ATO so they can help make lodging easier for you.

Tax file number (TFN)

A Tax File Number (TFN) is a unique 9-digit number that the Australian government uses to identify you for tax purposes. As a sole trader, you’ll need to have a TFN in order to lodge your tax return.

If you don’t have one, visit the ATO website for more information on how to apply. Make sure that all your information is up-to-date and ready before you get started on lodging your tax return.

Choose Method of Lodging Tax Return

As a sole trader, you have two options for lodging your tax return: online or paper form. The Australian Taxation Office (ATO) strongly recommends using the online method since it is faster, more convenient, and can help reduce errors. You can use the myGov website or mobile app to lodge your tax return electronically.

Online through myGov website or mobile app

There are several benefits to lodging your tax return online using the myGov website or mobile app. Firstly, it is available 24/7 so you can lodge your tax return at any time that suits you.

Secondly, it is a secure platform that ensures the confidentiality of your personal information. Thirdly, it provides an instant confirmation once you have lodged your tax return.

To lodge your tax return online, you need to create a myGov account and link it to the ATO. Once linked, follow these easy steps:

  1. Click on the “Lodge” tab and select “Income Tax” 
  2. Click on “Continue” to proceed
  3. Select the correct income year 
  4. Follow prompts to confirm personal details such as name and address
  5. Report all business income details (income earned as a sole trader) 
  6. Report all allowable deductions claimed against business income
  7. Check for any government payments received by entering JobKeeper payment information 

Once you have completed these steps and reviewed everything for accuracy, submit your finalised tax return using either of the electronic signature methods available.

Paper Tax Return Form

If for some reason online lodgement isn’t an option for you then complete a paper lodgement form which can be downloaded from ATO’s website or requested from its customer service centre. The paper lodgement form consists of multiple sections requiring personal information such as full name & date of birth; Income details including total income, deductions, expenses and business related income and expenses.

The form requires you to record the figures on the appropriate line items that directly relate to your business. Once you have filled out the form, you need to mail it back to ATO.

It is important that all information is filled out correctly and legibly as this will make it easier for processing by ATO staff. Also note that paper returns take a longer process compared with online lodgement, so ensure you submit your paper return on schedule for timely processing.

Report Business Income and Expenses

As a sole trader, it is important to report all business income and expenses on your tax return. Business income includes any money you receive from the sale of goods or services, while expenses are the costs associated with running your business. Examples of business income include sales revenue, interest earned on business accounts, and any capital gains from selling a business asset.

Expenses may include rent for your business premises, employee salaries or wages, office supplies, advertising costs, and depreciation on assets such as company vehicles. It is essential to keep accurate records of all financial transactions related to your small business throughout the year.

This includes invoices for sales made, receipts for purchases made for the company, bank statements that detail transactions made using company funds as well as credit card bills that list charges related to the company’s activities. Keeping detailed records will help you accurately report your income and expenses when it comes time to file your tax return.

How to Report Business Income and Expenses on Tax Return

When it comes to reporting your business income and expenses on your tax return as a sole trader in Australia there are various forms that can be used including: 

  • The Individual tax return (ITR)
  • The Sole Trader Tax Return 
  • A partnership tax return (if applicable)

To report your income accurately in section P1 – ‘Income’ of the ITR form under question number 15 you need to show total assessable business income including any taxable government grants received i.e., Job Keeper payments received due to COVID-19 outbreak. In section D1 – ‘Business Income and deductions of ITR form,you must provide details about all the revenue generated during financial year along with expenses that were incurred in generating this revenue.You can claim certain deductions associated with running a small businesses And finally,you should report the net amount of your business income or loss on your overall tax return.

Accurate reporting of your business income and expenses is essential when filing your tax return as a sole trader. By keeping detailed records and utilising the correct forms, you can ensure that you are complying with all relevant tax regulations while minimising any potential financial penalties.

Deductions for Sole Traders

As a sole trader, you are entitled to claim deductions on your tax return for expenses incurred in running your business. Deductions can help reduce your taxable income, resulting in lower taxes.

However, it’s important to note that not all expenses can be claimed as deductions. Only those that are directly related to the operation of your business can be claimed.

Some common deductions that sole traders can claim include:

  • Office expenses: This includes costs such as rent, utilities, and office supplies.
  • Vehicle expenses: If you use your personal vehicle for business purposes, you may be able to claim a deduction for the costs of running and maintaining it.
  • Travel expenses: This includes costs such as airfare, lodging, and meals incurred while travelling for business purposes.
  • Marketing and advertising expenses: This includes costs associated with promoting your business such as website design and development or print media advertising.

How to claim deductions on your tax return

To claim deductions on your tax return as a sole trader, you must keep accurate records of all the expenses related to running your business. These records should include receipts, invoices or any other evidence of payment.

When preparing your tax return:

  • Gather all necessary documentation: Before starting the process of lodging a tax return, make sure you have all necessary documentation including receipts and invoices associated with deductible expenses.
  • Categorise each expense: It is important that each expense is categorised correctly when claiming refunds.

    For example – stationery purchased for personal use cannot be claimed under office supplies; however if the same purchase was made solely for work purposes then it can be claimed as a business expense.
  • Complete your tax return: Once you have all necessary documentation organised and categorised, you can complete your tax return either online or on paper. If you are completing your tax return online, the system may prompt you to provide additional information and supporting documents for certain deductions.

It is important that you keep accurate records of all deductible expenses and seek professional advice if in doubt about any write-offs available to sole traders. Overestimating deductions or making claims for expenses that are not related to the operation of your business can lead to penalties and potential legal action.

Payments Received from Government Programs

How JobKeeper payments affect your tax return

JobKeeper payments were introduced by the Australian government to support businesses and employees affected by COVID-19. As a sole trader, if you received JobKeeper payments, it is important to understand how these payments will impact your tax return. The JobKeeper payment is assessable income and must be included in your business income for the financial year.

This means that you will need to report the amount of JobKeeper payments you received on your tax return. If you were eligible for JobKeeper payment, you will have received it as either an employer or an eligible business participant.

If you were paid as an eligible business participant, the JobKeeper payment will be treated as personal income and not business income. It is important to remember that if the JobKeeper payments push your total income over a certain threshold, you may become ineligible for certain benefits such as a low-income tax offset or other government support.

How other government programs may impact your tax return

In addition to the JobKeeper program, there are other government programs that may impact your tax return as a sole trader. For example, if you receive any grants or subsidies from the government for operating expenses or capital expenditure, these amounts are generally considered assessable income and should be reported on your tax return.

Similarly, any financial assistance provided under bushfire relief schemes or drought assistance programs must be reported on your tax return. It is important to note that some government programs may also provide deductions or concessions when filing taxes.

For instance, small businesses can access accelerated depreciation under the instant asset write-off scheme introduced by the Australian Government which allows businesses with an annual turnover of less than $500 million to immediately write off assets up to $150k instead of depreciating them over time. As a sole trader operating in Australia, it is important to stay up to date with government programs that may affect your tax return and seek professional advice if you are unsure about how to report any payments received from government schemes.

Filing Deadlines & Penalties

Important Dates for Sole Trader Tax Returns

Sole traders must lodge their tax return for the previous financial year by 31 October, unless they use a registered accountant or tax agent to complete the return. If you use a registered accountant or tax agent, you may be eligible for an extended deadline. It’s important to note that if you fail to lodge your tax return by the due date, penalties and interest may apply.

The ATO may also take further action such as issuing a notice of assessment and garnishing your wages or bank accounts. Therefore, it is essential that sole traders keep up-to-date with their reporting obligations and meet all deadlines.

Penalties for Late Lodgement

If you don’t lodge your tax return on time, there are several penalties that may apply. The first penalty is a failure-to-lodge (FTL) penalty which starts at $222 per 28-day period that the return is overdue, up to a maximum of $1,110. This penalty applies even if no tax is payable on the return.

Further penalties can also be applied if your business has been identified as high risk by the ATO or if you have been previously penalised for failing to lodge on time. Therefore, it’s important to ensure that all obligations are met in order to avoid harsh penalties and interest charges from accumulating.

Conclusion

Lodging a tax return as a sole trader can seem overwhelming at first but with proper preparation and organisation it can be easily managed. It’s important to gather all necessary information such as income statements, expenses records and any other relevant documentation before beginning the process.

Choosing how to lodge your tax return is another critical decision which requires careful consideration of methods available such as online through myGov website or mobile app versus using paper tax return form. Deductions, payments received from government programs, and the filing deadlines and penalties are other important considerations that need to be taken into account.

By following this guide, sole traders can ensure that they comply with all regulatory requirements and file their returns promptly whilst avoiding fiscal penalties. Remember, paying your taxes on time is not only a legal obligation but also fundamental to the growth of your business in the long run.

About the author

Bane Williams is okke’s sole trader expert, has worked as a journalist and community manager for over 15 years. Passionate about helping people to start their businesses.

Read more from Bane

Next Up

The Art of Sole Trader Bookkeeping: A Guide to Financial Success

Read now