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The Advantages and Disadvantages of Sole Trading in Australia

The Advantages and Disadvantages of Sole Trading in Australia

Are you one of Australia’s solopreneurs? If operating as a sole trader it’s important to understand your financial position, including the advantages and possible disadvantages sole trading affords.

According to the Australian Bureau of Statistics, sole trading continues to be an extremely popular option for Australian businesses. The 2019-2020 period saw a 21% entry rate for sole proprietors, with almost 140,000 entries.

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What Is a Sole Trader?

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


Sole Trader Benefits

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

  • Simple set up and operation.
  • Full control of assets and business decisions.
  • 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 the advantage to run their business the way they want to, while remaining open to becoming a company later down the track if their business needs change.


Sole Trader vs Company

For many, choosing to operate as either a sole trader or company comes down to a few deciding factors. As a sole trader, the profit goes in your bank account because you are the business—and you decide the working hours.

While sole trading offers multiple advantages, there is one notable risk that needs to be considered. A sole trader is vulnerable to unlimited liability. Meaning as an individual, if problems evolve, you are financially responsible.

While a company can cost more to set up, and have increased legal needs, it protects the person from liability. Combined with a lack of workers’ compensation, a run of bad luck and a slow response to change in circumstances could place you in a debt spiral.

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Sole Trader Superannuation

You are required to pay the super of any employees you have, as per Australian law. Remember that as of July 1st 2021 you will be required to pay 10% (in keeping with the legislated slight annual increase).

When it comes to your own super requirements, payments are generally not compulsory for sole traders (a detail best confirmed with the ATO). But lack of super has long-term repercussions, which is why sole traders often choose to pay super voluntarily.

In the case of sole traders, the 10% minimum law does not apply. 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 to find out concessional cap amounts from July 2021, visit the Australian Tax Office website.


Sole Trading and Tax Deduction

A sole trader differs from a business, in that there is a tax-free threshold, and what you earn is taxed as personal income, paying at an individual tax rate. The Capital Gain Tax can also be reduced in some cases for sole traders.

In general terms, expenses used to generate income can be claimed in some sense. For sole traders, proportionate rules are relevant. This refers to expenses used both personal and professionally, whereby only a work portion can be claimed (i.e. your mobile).

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

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

If a sole trader with a home-based business, take care to include home office expenses in your running expenses. Just make sure you calculate the expense correctly so they align with the ATO’s requirements.

Check if your occupancy expenses can be included as deductibles. Passing the interest deductibility test means you get to include such expenses as 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 deduction based on the portion of an expense isn’t too high, or low.


Sole Traders and Insurance

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

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

The Australian government offers business insurance insight here, but emphasises 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 Traders 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 account.

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 debts pile up is imperative, as you risk placing your personal assets are on the line.

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

At Bankruptcy Advisory Centre, we can offer a no obligation health assessment of your business. Our experienced financial practitioners will help you gain a clear perspective regarding your options.


The Popularity of Sole Trading in Australia

A piece in The Weekend Australian Magazine final quarter of 2020 pointed out prior to COVID19, the Australian workforce had surpassed 13 million, with 1.5 million sole traders, and ponders why sole trading is so popular here.

“Maybe one outcome of the pandemic will be a workforce that is even more determined to retain control over its destiny. And when you think about it, that idea really does connect with Australia’s core individualistic values.”

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Talk to Our Team

While sole trader advantages are clear, being solely responsible for your business can become a pressure-filled experience, especially in today’s unpredictable world. Knowing when to ask for help is a skill in itself.

If a self-employed sole trader experiencing difficulty, our highly experienced debt experts are ready to assist. Contact the Bankruptcy Advisory Centre here to access a free, no obligation consultation, and we’ll help you prep for a brighter financial future.


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