Advantages and Disadvantages of Sole Trading in Australia

Are you one of Australia’s solo entrepreneurs? Suppose you are operating as a sole trader. In that case, it’s essential to understand your financial position, including the advantages and possible disadvantages of sole trading, especially if you have financial difficulty.

What Is a Sole Trading in Australia?

The Australian Tax Office recognises a sole trader as “an individual running a business. It is the simplest and cheapest business structure to set up. If you operate your business as a sole trader, you are the only owner and control and manage the business”.

Benefits of Being a Sole Trader

Choosing to become a sole trader is attractive for a variety of reasons. Among the elements outlined by the Australian Government are such positives as:

• Simple set-up and operation.
• Complete control of assets and business decisions.
• There are fewer reporting requirements and generally a low-cost structure.
• Allows you to use your tax file number to lodge tax returns.

Often, sole trading is a low-risk exercise that allows people to run their business how they want to while remaining open to becoming a company later if their business needs change.

Sole Trader vs. Company

While sole trading offers multiple advantages, one significant risk must be considered. A sole trader is vulnerable to unlimited liability. This means that if problems evolve, you are financially responsible as an individual. This can be seen as one of the disadvantages of sole traders.

While a company can cost more to set up and have increased legal needs, it protects you personally from liability. Combined with a lack of workers’ compensation, a run of bad luck, and a slow response to changes in circumstances, being a sole trader could quickly place you in a debt spiral if things go wrong with your business.

Sole Trader Superannuation

You are required to pay the super of any employees you have, as per Australian law, and from July 2021, you will be required to pay 10% in keeping with the legislated annual increases.

When it comes to your own super requirements, payments are generally not compulsory for sole traders. Still, the lack of personal superannuation has long-term repercussions, so sole traders often pay super voluntarily.

Be sure to include your super contributions in your budgeting and work out an amount that meets long-term projections of your fiscal needs. Clarify whether your contributions are concessional (tax-deductible) or non-concessional. For more details and concessional cap amounts from July 2021, visit the Australian Tax Office website.

Sole Trading and Tax Deduction

Sole trading in Australia differs from business in that there is a tax-free threshold, and what you earn is taxed as personal income, paying at an individual tax rate. Sometimes, the capital gains tax can also be reduced for sole traders.

In general terms, expenses used to generate income can be claimed in some sense. For sole traders, proportionate rules are relevant. For example, this refers to personal and professional expenses, whereby only a work portion can be claimed for a mobile phone.

The list of ATO-approved expenses is extensive, but examples include:

• Depreciation on capital purchases (i.e., computers and tools)
• Advertising
• Insurance
• Sun protection and first aid costs
• Bank fees
• Work-related travel
• Interest costs on business-related debt
• Accounting costs for tax return filing

If you are a sole trader with a home-based business, include home office expenses in your running expenses. Ensure you calculate the costs correctly to align with the ATO’s requirements.

Check if your occupancy expenses can be included as deductibles. Passing the interest deductibility test means you have expenses like a mortgage, rates, land tax, and even your home and content insurance.

An accountant will help you ascertain if you are deducting all applicable expenses, whether you have the necessary records for each deduction, and check that your conclusion based on the portion of a fee isn’t too high or low.

Sole Traders and Insurance

Up-to-date insurance is essential for sole traders. A licenced Australian insurance broker can suggest an insurance policy that meets the particular needs of your business based on a risk assessment.

Remember that some insurance is compulsory, such as public liability insurance, workers’ compensation for employees and motor vehicle owners, and third-party personal injury insurance (included in your car registration).

The Australian Government offers business insurance insights here, but this is general information, not financial advice, allowing for a basic understanding of personal or loss of income, accident and liability, and technology and cybercrime insurance options.

Sole Trading in Australia and Business Debt

Sole traders are not required by law to have a separate business bank account, so it can be easy to lose track of business financials if all income and expenses (personal and professional) are moving through a single charge.

Because the business is in your name, you are personally responsible for any associated debt. For a sole trader, reaching out for help as the debt piles up is imperative, as you risk placing your assets on the line.

If facing possible insolvency, you may need to restructure your debt and alter business practices, or bankruptcy could be the most viable step. We work with sole traders to face financial debt and determine a possible solution.