What is a sole trader?

A sole trader is an individual running a business in their own name, without a separate legal entity. It's the most common and straightforward business structure in Australia.

As a sole trader, you and your business are legally the same. You control all decisions, keep all profits, and take on full personal responsibility for any debts or obligations the business incurs. There's no separation between your personal and business assets.

To operate as a sole trader in Australia, you'll need a TFN and an ABN. You don't need to register with the Australian Securities and Investments Commission (ASIC) unless you want to trade under a business name that's different from your own legal name.

The sole trader structure suits freelancers, contractors, consultants, tradespeople, and anyone starting a small business who wants minimal paperwork and full control from day 1.

Advantages of being a sole trader

The sole trader structure offers clear benefits, especially if you're starting out or running a smaller operation. Here's what makes it appealing.

Easy and low-cost to set up

Registering as a sole trader is free. You can apply for an ABN through the Australian Business Register in minutes, at no cost. Compare that to setting up a company, which involves ASIC registration fees of $611 and ongoing annual review fees.

There's no complex paperwork, no shareholders' agreements, and no company constitution to draft. You can be up and running the same day you register.

Simple tax reporting

Your business income flows straight into your individual tax return. You don't need to lodge a separate company tax return, and you won't deal with corporate compliance obligations like annual ASIC statements.

You'll report your business income and expenses in the business section of your personal tax return using a straightforward schedule. This keeps your accounting simple and your compliance costs low.

Full control over your business

Every decision is yours. You don't need approval from partners, directors, or shareholders. This means you can move quickly, pivot when you need to, and run things exactly the way you want.

The small business sector is showing strong momentum. Data from Xero Small Business Insights shows Australian small businesses recorded sales growth of 6.7% year on year in the December quarter of 2025, the best result since mid-2023, with jobs growth reaching 3.4%, the strongest in 2 years.

Keep all profits

As a sole trader, you're entitled to every dollar your business earns after expenses and tax. There are no dividends to split and no profit-sharing arrangements to navigate.

This direct link between effort and reward can be a powerful motivator, particularly in the early stages when you're building your client base and reputation.

Privacy of financial information

Unlike companies, sole traders don't need to file financial reports with ASIC or make their accounts publicly available. Your financial information stays private.

This gives you a level of confidentiality that company directors don't enjoy, since company financial statements and director details are accessible through public ASIC searches.

Disadvantages of being a sole trader

The sole trader structure isn't without trade-offs. It's worth understanding the downsides before you commit.

Unlimited personal liability

As a sole trader, there's no legal distinction between you and your business. If your business can't pay its debts, creditors can pursue your personal assets, including your home, savings, and other property.

This is the single biggest risk of the sole trader structure. A company (Pty Ltd) provides limited liability, meaning shareholders generally aren't personally responsible for company debts beyond their investment.

Harder to raise capital and grow

Banks and investors tend to view sole traders as higher risk than companies. You can't sell shares to raise equity, and lenders may offer less favourable terms because there's no separate business entity backing the loan.

Scaling a sole trader business can also be harder because everything relies on you. Bringing on employees helps, but the structure doesn't easily accommodate business partners or co-owners.

Higher tax rates at higher income levels

Sole trader income is taxed at individual rates, which reach up to 45% (plus the 2% Medicare levy) for income above $190,000. By contrast, the company tax rate for base rate entities is a flat 25%.

At lower income levels, the sole trader structure can actually be more tax-effective thanks to the $18,200 tax-free threshold. But as your profits grow, the tax difference becomes significant.

No business continuity

A sole trader business is tied to you personally. If you become seriously ill, decide to retire, or pass away, the business doesn't continue as a separate entity. It can't be inherited or transferred the way a company can.

This can make succession planning difficult and may reduce the resale value of the business compared to a company structure.

Work-life balance challenges

When you're the sole operator, it's easy for the line between work and personal life to blur. You're responsible for every aspect of the business, from delivering work to chasing invoices and handling admin.

Without employees or partners to share the load, burnout is a real risk. Setting boundaries and using tools to automate routine tasks can help you reclaim time.

Sole trader tax obligations in Australia

Understanding your tax obligations is essential when you're running a sole trader business. Here's what the ATO expects from you.

Income tax for sole traders

Your business income is taxed at individual income tax rates. You'll include your net business income (revenue minus allowable deductions) in your personal tax return. The current tax rates for Australian residents are:

$0 to $18,200: nil
$18,201 to $45,000: 16 cents for each $1 over $18,200
$45,001 to $135,000: 30 cents for each $1 over $45,000
$135,001 to $190,000: 37 cents for each $1 over $135,000
$190,001 and above: 45 cents for each $1 over $190,000

On top of these rates, you'll pay the 2% Medicare levy on your taxable income. The ATO may also require you to make quarterly pay as you go (PAYG) instalments if your expected tax liability is above a certain threshold.

GST registration and BAS

You must register for GST if your annual turnover is $75,000 or more. Once registered, you'll charge 10% GST on most goods and services you sell and claim GST credits on eligible business purchases.

You'll need to lodge a Business Activity Statement (BAS) each quarter to report your GST, PAYG instalments, and PAYG withholding (if you have employees). Quarterly BAS is due on the 28th day of the month following each quarter.

Key tax deductions for sole traders

You can claim deductions for expenses directly related to earning your business income. Common sole trader deductions include:

Vehicle and travel expenses for business purposes
Home office costs at the ATO fixed rate of 67 cents per hour
Equipment, tools, and technology used for your business
Professional development, training, and subscriptions
Accounting and tax agent fees
Insurance premiums related to your business
Marketing and advertising costs

Keep thorough records of all expenses. The ATO requires you to retain records for 5 years, and you'll need them if you're ever audited.

Important tax deadlines

Missing a deadline can result in penalties, so it's worth keeping these dates in your calendar:

31 October: tax return due date for self-lodgers
28 October: BAS due for the July to September quarter
28 February: BAS due for the October to December quarter
28 April: BAS due for the January to March quarter
28 July: BAS due for the April to June quarter

If you use a registered tax agent, you may get an extended lodgement deadline for your income tax return. Check with your accountant or bookkeeper for your specific due date.

How to set up as a sole trader in Australia

Getting started as a sole trader is straightforward. Follow these 5 steps to set yourself up properly.

Get a tax file number (TFN). If you don't already have one, apply through the ATO. Your TFN is essential for lodging tax returns and meeting your tax obligations.
Apply for an Australian Business Number (ABN). You can register for free through the Australian Business Register at abr.gov.au. Your ABN identifies your business to the government and other businesses, and you'll need it for invoicing.
Register a business name (if needed). If you're trading under a name that isn't your personal legal name, you'll need to register it through ASIC. Business name registration costs start from $44 for 1 year or $102 for 3 years.
Register for GST (if applicable). If your annual turnover is $75,000 or more (or you expect it to be), you must register for GST. You can do this when you apply for your ABN or later through the ATO's online services.
Check for licences and permits. Depending on your industry and location, you may need specific licences or permits to operate. Check with your state or territory government and visit business.gov.au for a full list of requirements.

Sole trader vs company (Pty Ltd)

Choosing between a sole trader structure and a company is one of the biggest early decisions you'll make. Here's how they compare.

Key differences

A sole trader and a proprietary limited company (Pty Ltd) are fundamentally different in how they're set up, taxed, and regulated:

Legal identity: a sole trader and their business are the same legal entity, while a Pty Ltd is a separate legal entity from its owners
Liability: sole traders have unlimited personal liability, whereas company shareholders' liability is generally limited to their investment
Setup cost: registering as a sole trader is free (ABN only), while company registration with ASIC costs $611
Tax rates: sole traders pay individual rates (up to 45% plus Medicare levy), while base rate companies pay a flat 25%
Compliance: sole traders lodge a personal tax return, whereas companies must lodge company tax returns, annual ASIC reviews, and maintain corporate records
Profit distribution: sole traders keep all profits directly, while company profits are distributed as dividends or director salaries
Superannuation: sole traders aren't required to pay super for themselves (though it's recommended), while companies must pay super for employee directors

When to choose a sole trader structure

The sole trader structure is often the better fit if you're just starting out, your business is low-risk, and your income is below the higher tax brackets. It's ideal when simplicity and low cost are priorities.

Consider switching to a company structure once your taxable income consistently exceeds $135,000, you want limited liability protection, or you're planning to bring in investors or co-owners. An accountant can help you model the tax implications and timing of a structure change.

Legal considerations and insurance

Even though the sole trader structure is simple, there are legal responsibilities and protections you should be aware of.

You're required to comply with all relevant laws and regulations in your industry. This includes consumer protection laws under the Australian Consumer Law, workplace health and safety obligations (if you have employees or work on client sites), and any industry-specific licensing requirements.

Insurance isn't legally required for all sole traders, but it's strongly recommended. The types of cover worth considering include:

Public liability insurance: covers claims if someone is injured or their property is damaged because of your business activities
Professional indemnity insurance: protects you if a client claims your advice or service caused them financial loss
Income protection insurance: replaces a portion of your income if you're unable to work due to illness or injury
Business insurance: covers your tools, equipment, and stock against theft, fire, or damage

Since you carry unlimited personal liability as a sole trader, insurance is one of the most practical ways to protect yourself financially. Speak with an insurance broker who understands small business needs to find the right level of cover.

Simplify your sole trader finances with Xero

Running a sole trader business means you're handling the finances alongside everything else. The right tools can save you hours each week and help you stay on top of your tax obligations.

Xero's online accounting software is built for small businesses like yours. It helps automate bank reconciliation, simplify invoicing, and keep your records organised year-round, so BAS time and tax time are less stressful.

Managing cash flow is particularly important when you're a sole trader. According to Xero Small Business Insights, Australian small businesses waited an average of 23.9 days to be paid in the December quarter of 2025, the fastest result since the data series began in 2017. Despite this improvement, late payments still averaged 6.6 days past the due date.

With features like automatic bank feeds, GST tracking, and real-time financial reports, you can spend less time on bookkeeping and more time growing your business. Get one month free.

FAQs on sole traders

Here are answers to frequently asked questions about sole traders in Australia.

Can I switch from a sole trader to a company later?

Yes, you can change your business structure from sole trader to a company (Pty Ltd) as your business grows. The process involves registering a new company with ASIC, transferring your business assets, and updating your ABN and tax registrations.

Can a sole trader have employees?

Yes, sole traders can hire employees. You'll need to register for PAYG withholding, pay superannuation on their behalf, and meet all employer obligations under the Fair Work Act.

Do I need an ABN as a sole trader?

You need an ABN if you're carrying on a business. Without one, other businesses are required to withhold 47% from payments to you. Applying for an ABN is free through the Australian Business Register.

What happens if I exceed the $75,000 GST threshold mid-year?

You must register for GST within 21 days of reaching the $75,000 turnover threshold. You can register through the ATO's online services or the Business Registration Service, and your GST obligations start from the date of registration.

Do I need to pay superannuation as a sole trader?

You're not legally required to make superannuation contributions for yourself as a sole trader. However, voluntary contributions are tax-deductible and help you build retirement savings, so it's worth setting aside a regular amount.

Disclaimer

This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.

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