Sometimes it isn’t a choice – you might need an ABN to do some jobs or run a franchise. What are the things you need to keep in mind?
In their weekly podcast James Flaherty quizzes Director’s Advocate Cheryl Stainsby about all the different things you’ve got to think about if you are starting, running, or especially if you are closing a business. This blog is based on episodes that look at business challenges for sole traders.
In this blog we cover:
What is a sole trader?
In our Small Business Podcast series we’ve frequently spoken about issues if you’ve got a company structure (often your accountant will set up a Pty Ltd company when you say you want to start or buy a business). James says, “lots of small business owners say to me things like ‘but look, I’m a small operator, I’ve just got an ABN’ (Australian Business Number). These people would be described as a sole trader”. Cheryl Stainsby says:
“a sole trader essentially means that you are trading in your own right. You’re incurring debt in your name, you’re earning income in your name”.
ABN eligibility depends on what you are doing. Small hobby type businesses, or something like selling and buying things online, here and there, can be done without an ABN. For most other situations James says:
“it’s one of those things, there are guidelines and a bit of common sense. If you’re buying or selling something, you want to make a profit, you’re doing it on an ongoing basis, and you keep records of what you’re doing (or should be!), any or all of those indicate likely, you should get an ABN. If you apply a skill (like a trade) then that also suggests you should get one.”
Some jobs advertisements say they require that you’re a ‘contractor’ and not an employee and they say you need to get an ABN. If it is really a job, but the employer doesn’t want to pay things like sick leave and so on, then that is not how the employment system is supposed to work.
So you need to be careful if you are doing what seems a regular job, even if you have to supply your own tools and van or ute. The trouble is, you may not get the job unless you agree! So as always, you should get some advice upfront.
If you don’t have an ABN, and what you sell or supply is over $75, then the purchaser is supposed to take an amount at the top marginal tax rate out of your payment and give it to the ATO. You then have to claim it back from the tax office (using the ‘PAYG payment summary – withholding where ABN not quoted’ form that the purchaser must complete). You can see where this is going – if you’re running a business without an ABN, it makes work. And you also can’t claim the GST back on things you buy!
How to pay tax as a sole trader? Straight away one risk that Cheryl points out is all the tax is being paid by you in your name. Cheryl says:
“most people would be aware there are personal marginal tax rates which go up quite dramatically when you earn over a certain amount of money. So potentially you have the disadvantage of paying a much higher tax rate if you earn a lot of money in a sole trader situation so a good thing about companies is that the company tax rate is lower”.
Yes, running company has a bit of paperwork, some costs, and things to keep in mind (listen out for episode 15 of our series, on companies). A lot of people say to me a company sounds all a bit hard. They say they “clean houses a few days a week” or “I do a bit of stuff on the Internet” or “I like to buy and sell a few things online”, so “I want to keep it simple”.
For very simple businesses there is some benefit to simplicity, running the books as money comes in money goes out. The rub is, you can’t claim back the GST you spend on purchases.
For Cheryl it’s a matter of how much money you make and how complex the business is. Cheryl says she feels:
“if you if you’ve got a bit of a hobby type business and you’re possibly earning under the threshold, where you have to pay GST, which is $75,000 or more, then possibly working as a sole trader is right for you. But I think if you’ve got to a point where your income is over that amount and if you’re starting to incur debts to suppliers, then I think you really seriously need to think about whether you should be operating as a company”.
Sole trader advantages
So when would you consider just operating as a sole trader? When you:
- run a simple business
- have low turnover
- may not need to register for GST
- aren’t taking on business debts
- like to do your own thing!
Employing staff as a sole trader ABN holder
Sole trader business examples, where a more complex structure would be more helpful are what Cheryl deals with everyday.
Business owners call the thesolvers.com.au all the time and explain they’re running quite complex enterprises just in their own name and the money all comes into their bank account.
When they employ staff, they then run the pays to everybody out of a personal bank account. James says, “To me that seems to be fraught with danger – operating a business of that that kind of complexity out of someone’s bank account!”
James adds, “even if it is an account they run ‘for the business’. I’m not saying you can’t do it, especially for more straightforward things. I think you need to be super organised, and there are resources available to help guide you”. Cheryl hits on a problem lots of small business owners have (and usually know they should do something about).
“My experience with a lot of the clients that I deal with is that a lot of people do have trouble differentiating between what is their money and what is their business money. I think it becomes even more difficult when you operate as a sole trader as it often becomes difficult for people to understand that you’ve got to put aside that money to pay the group tax on the wages or the superannuation or the GST, or in fact the money that you need to pay your suppliers – whereas I think sometimes if you’re trading via a company structure it’s sometimes a little bit easier to be able to differentiate between all of those separate you know bills, bank accounts.”
Even big businesses can get pays wrong, and there can be large fines for mistakes. So if your business is big enough to pay wages, then it is big enough to have the proper systems and legal structure in place to help protect you if things go wrong.
A reminder that Single Touch Payroll is now compulsory for just about all employers large and small as of 1 July.
I’ll get back to sorting that when I get a chance
Lots of people say it’s so much simpler just using an ABN. “I’m not very big it’s too hard” or “things have gotten so busy I just haven’t done anything about that”.
James asked Cheryl how often she works with businesses which started off small and get big – but the owners never really have then got back to actually sorting out all those things like structure and ownership.
Very often they’re the people we have to say they now face personal bankruptcy! One of the downsides of running a business as a sole trader is that you are responsible for 100% of the debt. And I’m not saying that anybody sets out in business to fail, or anybody sets out to not want to pay people, but the reality is that the Corporations Act was put there to give business owners who are entrepreneurial, and want to take a chance, who want to have a go, the ability to have a measure of protection. Cheryl adds however, “Provided they do the right thing, so they don’t do anything fraudulent, or trade while insolvent.”
Cheryl continues, “because as we all know from COVID that things happen that are out of your control, and if you find you’re in trouble, but you’re operating via a company structure, and you’ve done everything right then there is a measure of immunity for the director in that case. [see episodes 8,9,10 on risks to manage as a director of a company that has debts][Insolvent trading is explained in episode 10].
Simple is good only when your business is simple.
In conclusion, if what you do is regular or straightforward, and you’re organised (and lots of people are) then running your business using an ABN as a sole trader can work and save you money. As soon as there are staff, business debts and GST, then it is time to go to the accountant and get them to set up a business structure that’s better suited to your needs. Of course, chat to Thesolvers.com.au if you’d like to go through these issues in more detail.