Being a sole trader is probably the simplest business structure you can have in Australia, which is why so many people start there. You’re basically running a business under your own name and tax file number, without creating a separate company entity. The setup is straightforward enough, but sole trader accounting catches people off guard because suddenly your personal and business finances are legally intertwined, your income tax works differently, and you’ve got obligations that didn’t exist when you were just an employee. Getting the accounting side right from the start saves you from stress at tax time and helps you actually understand whether your business is making money or just keeping you busy.
Separating Money Even Though It’s Legally The Same
Here’s the weird thing about being a sole trader: legally, there’s no distinction between you and your business. All the income is your income, and all the debts are your debts. But for practical accounting purposes, you absolutely need to treat them separately or you’ll have no idea what’s going on.
Open a separate bank account just for business transactions. Every dollar you earn from clients goes in there, and every business expense comes out of it. When you need money for personal stuff, transfer it to your personal account as a drawing. Don’t just swipe the business card for groceries because the money happens to be there.
This separation makes tracking so much easier. At the end of the financial year, your accountant isn’t trying to figure out which transactions were business related and which were you buying coffee on a Sunday morning. More importantly, if you ever get audited, having clean records shows you’re treating your business seriously.
What You Can Actually Claim and What You Can’t
The ATO lets you deduct expenses that directly relate to earning your income. That sounds simple until you start wondering about things like your phone bill when you use the same phone for personal calls, or your car when you sometimes drive it to visit clients and sometimes just to the beach.
For mixed use items, you need to work out the business portion. If you use your phone 60% for business calls and emails, you can claim 60% of the bill. Your internet connection, same deal. Home office expenses get more complicated because there are different methods for calculating them, and picking the right one depends on your specific setup.
A lot of sole traders miss out on claiming self-education expenses that directly relate to their current work. If you’re a photographer taking a course on advanced lighting techniques, that’s claimable. Random courses that might help you switch careers someday aren’t. Tools and equipment under $300 can be claimed immediately, while more expensive items need to be depreciated over their useful life.
Dealing With Irregular Income
One of the hardest adjustments when you go from employment to sole trading is that your income probably won’t be consistent. Some months are great, others are quiet, and you’re supposed to somehow manage cash flow through the ups and downs.
Setting aside money for tax is crucial and most people underestimate how much they need. As an employee, tax was taken out before you saw your pay. As a sole trader, you’re getting the gross amount and need to put aside around 30% or more depending on your income level. That money isn’t yours to spend even though it’s sitting in your account.
Many sole traders use a separate savings account specifically for tax. When income comes in, they immediately transfer the tax portion there and pretend it doesn’t exist. Come tax time, they’ve got the money ready instead of scrambling to find $15,000 they already spent.
Building up a buffer of 3 to 6 months of expenses helps smooth out the irregular income patterns. This takes time to build, but once you have it, quiet months don’t create panic.
Keeping Records That Won’t Drive You Crazy
The ATO requires you to keep records for five years, and they need to show how you calculated your income and expenses. In practice, this means keeping invoices, receipts, and bank statements. Losing paperwork is one of the most common problems sole traders face.
Going digital from the start makes life easier. Apps like Dext or Receipt Bank let you photograph receipts on your phone and the image gets stored in the cloud. Even just using your phone’s camera and organizing photos into folders by month works better than paper receipts that fade or get lost.
Your invoicing should be systematic too. Every invoice needs a unique number, clear description of what you provided, your ABN, and payment terms. Keep copies of everything you send out. When clients are slow to pay, having proper invoices makes follow-up much easier than trying to remember what you agreed to in a text message three months ago.
Understanding Your Tax Obligations Throughout The Year
Sole traders don’t just deal with tax once a year. If your business is growing, you’ll probably need to pay tax in installments through the PAYG system. The ATO calculates this based on your previous year’s income, and you get a notice each quarter telling you what to pay.
These installments can feel annoying, especially when business is slower than last year, but they’re actually helpful because they prevent a massive tax bill at the end of the year. You can vary your installments down if your income has dropped, though you need to be careful not to underestimate and face penalties.
If you’re earning over $75,000, you need to register for GST, which means lodging Business Activity Statements quarterly. This adds another layer of reporting but also lets you claim back GST on business purchases.
