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Advantages And Disadvantages Of Sole Trader Business Structure


Sole Proprietorship – Advantages and Disadvantages

Consider operating as a sole trader if your business is small and capital investment is minimal.

As a sole trader, you:

  • use your individual tax file number when lodging your income tax return
  • report all your income in your individual tax return, using the section for business items to show your business income and expenses (there is no separate business tax return for sole traders)
  • apply for an ABN and use your ABN for all your business dealings
  • register for Goods and Services Tax (GST) if your annual GST turnover is $75,000 or more
  • pay tax at the same income tax rates as individual taxpayers and you may be eligible for the small business tax offset
  • put aside money to pay your income tax at the end of the financial year – usually, you will do this by paying quarterly Pay As You Go (PAYG) installments
  • claim a deduction for any personal super contributions you make after notifying your fund.

As a sole trader you can’t claim deductions for money ‘drawn’ from the business. Amounts taken from the business are not wages for tax purposes, even if you think of them as wages.

Hiring people as a sole trader

You can employ people to help run your business under the sole trader business structure.

If you do decide to take on any employees there are obligations you must comply with such as workers’ compensation insurance and superannuation contributions.

Advantages of sole trading include:

  • you’re the boss
  • you keep all the profits
  • start-up costs are low
  • you have maximum privacy
  • establishing and operating your business is simple
  • it’s easy to change your legal structure later if circumstances change
  • you can easily wind up your business.

Disadvantages of sole trading include:

  • you have unlimited liability for debts as there’s no legal distinction between private and business assets
  • your capacity to raise capital is limited
  • all the responsibility for making day-to-day business decisions is yours
  • retaining high-calibre employees can be difficult
  • it can be hard to take holidays
  • you’re taxed as a single person
  • the life of the business is limited.

TO Superannuation Legislation changes- effective as of 1 January 2020

If you’re across the recent Australian Taxation Office’s (ATO) announcements, you’ll know that the way Superannuation Guarantee Contributions (SGC) are calculated is changing. From 1 January 2020, salary sacrifice amounts can no longer be used to reduce your SGC obligations. Please take a look at the ATO website for more information.

What do I need to do?

The next time you do a pay run with a payment date on or after 1 January 2020, Xero will help you process this correctly by flagging employees where SGC has been nominated to be reduced. We will highlight the employee name and whether they triggered the validation through salary sacrificed super, and/or a deduction. The alert will remind you how to update these settings to comply with the ATO change, and you can find information about how to do this here.

If you’ve already posted a pay run with a payment date on or after 1 January 2020, you may need to review this to make sure the calculations are correct. An easy way to do this is to revert to make any amendments.

Where do I find more information?

Here is the link again to a step-by-step guide to the simple steps you need to take to adjust Xero Payroll to make sure you are all set up.