Sole Trader Tax: What Changes Once You Have an ABN
Getting an Australian Business Number takes minutes. Understanding what it changes at tax time takes longer. As a sole trader you and your business are the same taxpayer, so the business profit lands in your personal return, and nobody is withholding tax from it for you any more.
Key takeaways
- A sole trader uses their individual tax file number and reports business income and expenses in their own individual tax return.
- No one withholds tax from business income, so you need to set money aside, and the ATO may place you into PAYG instalments to pay tax during the year.
- You must register for GST once your GST turnover reaches the threshold set by the ATO, and some businesses must register regardless of turnover.
- Superannuation for yourself is generally voluntary as a sole trader, but super for any employees is not.
- Special rules such as the personal services income rules and the non-commercial loss rules can change how your business income and losses are treated.
What an ABN is, and what it isn't
An ABN is an identifier for your business that you use when dealing with other businesses and the government. You apply through the Australian Business Register at abr.gov.au. To be entitled to one you need to be carrying on, or starting to carry on, an enterprise. A hobby or a one-off sale doesn't qualify.
An ABN is not a separate tax identity for a sole trader. You keep using your own TFN for income tax. An ABN also isn't a business name: if you trade under any name other than your own, you generally register that business name separately with ASIC. And having an ABN doesn't by itself register you for GST; that is a separate decision covered below.
How your business income is reported
At the end of the financial year, you report your business income and deductions in your individual tax return. In practice this includes a business schedule that summarises your income, expenses and certain other details. Your business profit is added to any other income, such as wages from a job, and taxed at your individual marginal rates.
That is the crucial shift. As an employee, your employer withheld tax from every pay. As a sole trader, your customers pay you the full amount, and the tax on your profit is settled later. Many new sole traders spend their first year's income and then meet an unexpected bill when they lodge.
Business deductions follow the general principle that an expense must be incurred in carrying on your business to produce assessable income, and must not be private or capital in nature (capital items are usually claimed over time or under specific small business rules). Keep business and personal spending separate; a dedicated bank account makes this far easier.
Paying tax during the year: PAYG instalments
Once your business and investment income reaches a level set by the ATO, the ATO can enter you into the pay as you go (PAYG) instalments system. Instead of one large payment after lodgment, you pay instalments during the year towards your expected tax. They are credited against your final assessment.
Instalments are usually paid quarterly, either as an amount the ATO calculates or based on a rate applied to your actual instalment income. You can vary them if your circumstances change, but varying too low can attract a charge. The ATO's business section at ato.gov.au/businesses-and-organisations explains the options.
Even before the ATO enters you into instalments, setting aside a regular share of each payment you receive is the single most useful habit a new sole trader can build.
GST, employees and super
GST. You must register for GST if your GST turnover meets or exceeds the registration threshold, and some activities, such as providing taxi or ride-sourcing services, require registration whatever your turnover. You can also register voluntarily. Our explainer on when to register for GST covers the turnover test and the trade-offs.
Employees. If you hire staff, you take on employer obligations: withholding tax from their pay, reporting through Single Touch Payroll, paying super guarantee contributions, and considering workers' compensation insurance under state rules.
Your own super. Sole traders generally aren't required to pay super guarantee for themselves. You can make personal contributions, and you may be able to claim a deduction for them if you meet the conditions, including giving your fund a valid notice of intent before you lodge. See our guide to super contributions and tax.
The biggest change when you become a sole trader isn't a new form. It is that the job of putting tax aside has moved from your employer to you.
Two rule sets every sole trader should know about
Personal services income (PSI). If most of your income is a reward for your personal efforts or skills, such as many contractors and consultants, the PSI rules may apply. Unless you pass certain tests, they limit the deductions you can claim and treat the income much like salary. The ATO has a decision tool to work out whether the rules affect you.
Non-commercial losses. If your business makes a loss, you might expect to offset it against your other income, such as wages. The non-commercial loss rules restrict this unless you meet certain conditions. If you can't, the loss is generally deferred and carried forward against future business profit.
Employee, contractor or sole trader?
Having an ABN doesn't make you a contractor. Whether you are an employee or an independent contractor depends on the real working relationship, not the paperwork. If you are in substance an employee, your employer may owe you super and should withhold tax. The ATO and the Fair Work Ombudsman both publish guidance on the distinction.
| Area | As an employee | As a sole trader with an ABN |
|---|---|---|
| Tax on income | Withheld by your employer each pay | Your responsibility; paid on assessment and possibly through PAYG instalments |
| Where income is reported | Individual return, mostly pre-filled | Individual return with a business schedule, largely from your own records |
| GST | Not applicable | Register once you reach the threshold, or earlier by choice; some activities must register regardless |
| Superannuation | Employer pays super guarantee | Voluntary for yourself; compulsory for your employees |
| Deductions | Work-related expense rules | Business deduction rules, possibly limited by PSI or non-commercial loss rules |
| Records | Receipts for work expenses | Full business records: income, expenses, invoices, bank statements, asset registers |
Your first-year setup checklist
- Apply for an ABN and, if needed, register a business name.
- Decide whether you need or want to register for GST.
- Open a separate bank account for business income and expenses.
- Choose a simple bookkeeping method or software and use it weekly.
- Set aside a regular share of every payment for tax, and for GST if registered.
- Check whether the PSI rules could apply to your income.
- Keep every invoice, receipt and bank statement; see our record-keeping checklist.
Frequently asked questions
Do I need a separate tax return for my business?
No. A sole trader reports business income in their individual tax return, including the business schedule. Companies, partnerships and trusts lodge their own returns, but a sole trader is not a separate entity.
Can I have a job and be a sole trader at the same time?
Yes. Many people run a side business alongside employment. Both incomes go into the same individual return, which is why a side business can increase the tax payable on the whole return.
Is the small business income tax offset automatic?
Eligible sole traders may be entitled to a small business income tax offset, worked out from the business income figures in the return. Check the ATO's current eligibility conditions and how it is calculated for the year you are lodging.
Verdict: Treat the day you get an ABN as the day you become your own payroll officer: separate your money, set aside tax from every payment, track GST turnover, and keep business records from the start. A simple side business can be self-managed if you stay disciplined. When to see a registered tax agent: in your first year of trading, if the PSI or non-commercial loss rules might apply, if you are hiring staff, or if you are unsure whether you are really a contractor at all.