The tax trap for sole traders

The tax trap for sole traders

Consider this, in 2014 there was $35 billion owed in unpaid taxes to the ATO and micro business was responsible for three quarters of it. Tax is one of the biggest stumbling blocks for sole traders and it can be one of the most crippling.

Let me tell you about Sam to explain what happens when you fall into the tax trap. Sam runs a small air-con business in Sydney and started his business 11 years ago. For the first three years business was booming, they had more work than they could handle, the team was growing and so was their fleet. With all the pre-occupation servicing clients and growing the business, it took three years to get their taxes done. Shortly thereafter the business had a $200K tax debt. Sam made the tough decision to stay in business and it took him 7 years to pay back the debt to the tax office. This is a success story as Sam’s business continues to grow, but the overwhelming majority don’t make it far past that first tax bill.

Here’s why:

Your first year in business

That first year in business is a roller coaster of learning and hard work to put everything together. Early on you obsess over getting the logo and business name bang on, then you get on the phone start drumming up some business. Once the work starts flowing in you turn your attention to upgrading tools, the car, the signage to be more professional.

Pretty quickly that first 12 months disappears and most look back thinking it was a lot harder and a lot more work than they expected. Looking after the books and doing the admin is normally the last priority and tax is a distant thought.

Solo & Smart is a mobile app designed to automate the admin and put aside savings for tax so that you know your business is organised and on track.

Solo & Smart The tax trap for sole traders

Your first tax return

Once that first June rolls around you get constant reminders that it’s tax time with promo’s all over your social, tv, radio and in the papers. Sometimes this goes on for a couple of years before you finally get around to putting your numbers together for the tax man. Interestingly, there is an even split between individuals who go to their accountant and those who do it themselves. Technology platforms are making it easier and easier to do your tax yourself, however I am a strong supporter of getting a professional accountant to at least look over the details.

Your first tax bill and….

Let’s assume you were on the ball and you got your numbers organised by the end of August. This is about the time the penny drops and you realise you might have a bit of tax you need to pay. Unfortunately, tax is a necessary evil and many sole traders fall into the trap of not putting the tax aside as they go.

Once you have done your first tax return, the tax office will send you your tax bill for that year AND estimate how much tax you will need to pay in the coming year. Typically for sole traders you will be issued an amount to pay at the end of each quarter.

The big problem hits sole traders when they haven’t budgeted for tax and they get a tax bill for their full previous year/s of business plus the bill for the first quarter of the next year. It is hard to come back from this position and the effects of growing tax debts can have an enormous effect on individuals like Sam and their families.

At Solo & Smart we recognised the need to combat tax debt as fundamental to the success of sole traders around Australia. Our app is designed to automate a portion of every payment the user receives to be put aside as savings for their tax bill. Automated payments can then be made to the ATO to ensure they don’t fall behind. Our users describe it as giving them peace of mind knowing that their tax is looked after.

This article provides general information only and should not be considered tax or any other advice.

Written by

Patrick Harrison

2017-09-18T09:03:39+00:00 September 5th, 2017|Blog|

About the Author:

Solo & Smart is a business admin app designed specifically for the self-employed in Australia. Through the app users can organise, manage and grow their business. We believe that when business and lifestyle combine, everything changes. The self-employed in Australia deserve the support to help them thrive in business and in life.