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Sole Trader Structure

 

A sole trader is the simplest business structure and consists of an individual trading on their own. That person controls and manages the business.


Advantages

1. Simplicity: The key trait and advantage of being a sole trader lies in its simplicity. Establishing a business as a sole trader is relatively easy as it usually requires a small amount of start-up capital and a nominal amount of paperwork.

  It also empowers the sole trader to control business assets and oversee all management decisions. Moreover, the reporting requirements are minimal and dismantling the business requires a less complicated process compared to dissolving a company.

2. Claim Business Losses: The income of the business is treated as the person’s individual income and they are solely responsible for any tax payable by the business. This offers the tax advantage that tax losses may be offset against the other sources of income of the taxpayer.

3. Capital Gains Tax: For capital gains tax (CGT) purposes, the sole trader is eligible to claim the 50% CGT discount for individuals

4. Superannuation contributions: Sole traders are not employees of their business. This means that there is no need to take the sole trader’s drawings into account in respect of ‘compulsory employee’ superannuation contributions. A sole trader also does not have payroll tax and workers compensation liabilities in respect of his or her drawings.

5. Full Deductions: A full deduction for a business-purpose vehicle or sometimes even a restricted private-use vehicle (with very minor other use) is allowable for sole traders and partnerships.

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Disadvantages


 
1. Inability to split income: The most significant disadvantage from a taxation perspective is that there is a lack of ability to split income.

2. Tax deductions:  A sole trader’s ability to claim a tax deduction for contributions to a superannuation fund is limited.

3. Proving fringe benefits: The sole trader is required to prove business deductions for “fringe benefits”.

4. Inflexible tax planning: The sole trader has no liability to vary income between family members from year to year. This means that there is no flexibility in tax planning.

5. Unlimited Liability: The sole trader has unlimited liability, this means that all the assets of the sole trader (including personal assets) are at risk.

6. Business end: The business ends when the sole trader ceases working on retirement or death.

7. Access to capital: Sole traders do not normally have access to large sums of capital, which could mean more bank overdrafts or debt.

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Other Tax Issues


 


ABN: A sole trader who is carrying on an enterprise in Australia may apply for an ABN for their business and use this number for all their business dealings.

GST: A sole trader who is carrying on an enterprise may apply for GST registration. This can be applied for on the ABN application form. A sole trader is required to be registered for GST if their annual turnover is $75,000 or more ($50,000 or more prior to 1 July 2007).

 

Drawings: A sole trader cannot claim a deduction for money they ‘draw’ from their business. Amounts taken from a sole trader business, and regarded by some as their ‘wages’, are not wages for tax purposes and are not tax deductible.

 

Superannuation: Sole traders are responsible for their own superannuation arrangements. They need to pay superannuation contributions for any employees they employ to help run the business.

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If you would like more information on how to set your business up as a sole trader, pleasecomplete and submit an express enquiry form or call us on 1300 QUINNS (1300 784 667) or on +61 2 9223 9166 to arrange an appointment.