Many Australians start a sole trader business or partnership while still working as an employee. It might begin as a side hustle, a family business, consulting work, a trade, an online store, or a passion project that slowly becomes more serious. While this can be a smart way to test the waters before leaving paid employment, it also creates extra tax responsibilities that should not be ignored.
At tax time, the first thing to understand is that your employee income and business income are generally assessed together in your individual tax return. Your employer may have withheld PAYG tax from your wages, but that does not necessarily cover the tax payable on your business profit. This is where many side-business owners get caught. A profitable side business can create an unexpected tax bill, especially if no money has been set aside during the year.
For sole traders, business income and expenses are reported in your personal tax return. For partnerships, the partnership generally lodges its own tax return, but the profit or loss is distributed to the partners and included in each partner’s individual return. This makes it important to have accurate records, clear ownership of income and expenses, and a shared understanding between partners about drawings, contributions and tax responsibilities.
Deductions are another key area. You may be able to claim expenses that directly relate to earning your business income, such as tools, software, marketing, insurance, motor vehicle expenses, home office costs, accounting fees and business-related subscriptions. However, private expenses must be separated from business expenses. If something is used for both business and personal purposes, only the business portion should be claimed.
You should also consider whether GST registration is required. If your business turnover reaches the GST threshold, you may need to register, charge GST, lodge business activity statements and manage GST cash flow. Even below the threshold, voluntary registration may be useful in some cases, but it also adds administration. This is a decision best made with your accountant.
Personal services income is another area to discuss. If your business income mainly comes from your own labour, skill or expertise, special tax rules may apply. This can affect what deductions you can claim and whether income splitting through a partnership or another structure is appropriate.
Top 5 things to discuss with your accountant
- Your total tax position
Ask how your wages, business profit, deductions, Medicare levy, HELP debt, offsets and any investment income work together. Do not look at the business in isolation. - How much tax to set aside
Your accountant can help estimate how much of each payment should be placed into a separate tax account so you are not surprised at lodgement time. - GST and BAS obligations
Discuss whether you need to register for GST, whether voluntary registration makes sense, and how often you may need to lodge activity statements. - Business deductions and record keeping
Check what you can claim, what evidence is required, and whether your bookkeeping system is strong enough to support your claims. - Structure, risk and growth
A sole trader or partnership may be suitable at the beginning, but as revenue, risk, employees or assets grow, another structure may become more appropriate.
When is it time to go out on your own?
The decision to leave employment should not be based only on enthusiasm or one strong month of sales. It should be based on evidence. Consider whether your business has consistent income, reliable demand, repeat clients, strong margins, manageable costs and enough cash reserves to cover tax, super, insurance and quiet periods.
You should also think about what your employment currently provides: stable income, paid leave, superannuation, workers compensation and career security. When you work for yourself, you need to replace many of these benefits yourself.
The best time to go out on your own is often when the business has proven itself while you are still employed. If the numbers work, the pipeline is strong, and your accountant agrees the tax and structure are manageable, stepping into full-time self-employment can be exciting and rewarding.
The key message is simple: do not wait until tax time to get advice. Speak with your accountant early, plan properly, and make the move with confidence rather than guesswork.
If this article has inspired you to think about your unique situation and, more importantly, what you and your family are going through right now, please get in touch with your advice professional.
This information does not consider any person’s objectives, financial situation, or needs. Before making a decision, you should consider whether it is appropriate in light of your particular objectives, financial situation, or needs.
(Feedsy Exclusive)
