General advice only. This article is intended as a general overview and does not constitute financial, tax, or legal advice. Every business situation is different — before making any decisions about your business structure, tax obligations, or superannuation, please consult a registered tax agent or qualified professional advisor.
Sole trader is the most popular business structure in Australia — and it’s easy to see why. It’s cheap to set up, simple to run, and puts you in full control. But simple doesn’t mean consequence-free. There are real obligations, real risks, and a few surprises that catch people off guard.
This is part one of our business structures series. We’ll cover what it means to be a sole trader, what your obligations are, the liability risks you need to understand, and some important rules around superannuation that many sole traders — and the businesses that engage them — don’t know about.
What actually is a sole trader?
A sole trader is a person who runs a business in their own name — or under a registered business name — as an individual. There is no legal separation between you and the business. You own all the assets, you earn all the income, and you are personally responsible for all the debts and obligations.
It’s the default structure for anyone who starts working for themselves without setting up a separate entity, and it’s used by tradespeople, consultants, creatives, therapists, retailers, and freelancers across every industry.
Setting up: what you actually need to do
Sole trader setup checklist
Apply for an ABN — free via the Australian Business Register. You’ll need this to invoice clients and avoid having 47% withheld from your payments under PAYG withholding rules.
Register a business name (if trading under a name other than your own) — registered with ASIC, not the ATO.
Register for GST if your turnover is or is expected to exceed $75,000 in a 12-month period. Voluntary registration is available below that threshold.
Open a dedicated business bank account — not legally required, but essential for clean bookkeeping and making tax time far less painful.
Consider PAYG instalments — once your tax bill exceeds a certain threshold, the ATO will require you to pre-pay your income tax in quarterly instalments.
Get the right insurances — public liability, professional indemnity, and income protection are worth serious consideration (more on this below).
Tax as a sole trader
Your business income is your personal income. There is no separate tax rate for the business — all profit is added to any other income you earn and taxed at your individual marginal rate, which can be as high as 45% plus the Medicare levy.
This is one of the key differences between a sole trader and a company, where a flat 25% small business tax rate applies. As your income grows, this gap becomes significant — and is often a key driver for people to consider restructuring.
Don’t forget to set aside tax as you go. Unlike an employee, no one is withholding tax from your invoices. A common rule of thumb is to set aside 25–30% of every payment received into a separate savings account, and only touch it when your BAS or tax return is due.
You’ll report your business income and expenses on your individual tax return each year using the business and professional items schedule. Your net profit (income minus allowable deductions) is what gets taxed.
Superannuation — what sole traders need to know
Super is where things get more nuanced than most people expect — both for sole traders paying themselves, and for businesses engaging sole traders as contractors.
Your own super
As a sole trader, you have no legal obligation to pay yourself superannuation. Nobody is going to do it for you — and there’s no SGC (Superannuation Guarantee Charge) penalty if you don’t. But that doesn’t mean you should ignore it.
Liability — the biggest risk of operating as a sole trader
Because you and the business are legally the same entity, there is no separation between your business assets and your personal assets. If your business incurs a debt it can’t pay, or you face a legal claim, your personal assets — your home, your savings, your car — are all at risk.
Real-world liability scenarios
Where sole traders are exposed
- A client trips on your worksite and sues for personal injury — you are personally liable for the judgment
- You provide advice that leads to a client’s financial loss — professional indemnity claims come back to you personally
- Your business can’t pay a supplier debt — the supplier can pursue your personal bank account and assets
- A data breach exposes client information — regulatory fines and civil claims are your personal responsibility
- A product you sell causes harm — product liability claims attach to you, not a separate corporate entity
How to manage liability risk as a sole trader
Insurance to consider as a sole trader
Public liability insurance — covers claims for personal injury or property damage caused to third parties. Essential for any business that interacts with the public, clients, or worksites.
Professional indemnity insurance — covers claims arising from advice, design, or professional services you provide. Critical for consultants, accountants, designers, health professionals, and advisors of any kind.
Income protection insurance — replaces a portion of your income if you’re unable to work due to illness or injury. As a sole trader, there’s no sick leave — if you stop working, the income stops too.
Product liability insurance — relevant if you sell physical goods. Covers claims arising from damage or injury caused by your products.
Business interruption insurance — covers loss of income if your business is forced to stop operating due to an insured event.
Sole trader or company — which offers better protection? A company (Pty Ltd) provides limited liability, meaning your personal assets are generally protected from business debts and claims (with some exceptions). If your business is growing, handling significant contracts, or operating in a high-risk industry, it’s worth a conversation about whether a company structure is right for you.
Other things to keep on your radar
The personal services income (PSI) rules
If more than 50% of your business income comes from your personal skills, knowledge, or efforts — rather than from selling goods or using business assets — the ATO may classify it as personal services income. PSI rules limit the deductions you can claim and can affect how your income is taxed. Many sole traders in consulting, IT, or creative services are caught by these rules without realising it.
Employing staff
As a sole trader, you can have employees. Once you do, your obligations increase significantly — PAYG withholding, SGC super for staff, payroll tax (once you exceed your state’s threshold), workers’ compensation insurance, and the Fair Work Act all come into play.
When to consider changing structure
Most people don’t need a company on day one. But there are clear signals it’s time to reconsider: your tax bill is growing significantly, you’re taking on larger contracts with significant liability exposure, you want to bring on a business partner, or you’re looking to build and sell the business as an asset in the future.
We’ll cover all of this — and more — in the upcoming parts of this series. Next up: partnerships, where two people share a business and what that actually means for your obligations, income, and liability.
General advice disclaimer
The information contained in this article is general in nature and has been prepared without taking into account your personal objectives, financial situation, or individual needs. It is intended as an educational overview only and does not constitute financial, tax, legal, or professional advice.
Tax laws, superannuation rates, and ATO requirements change regularly. While we have taken care to ensure the information is accurate at the time of publication, we recommend you verify current rates and thresholds directly with the ATO at ato.gov.au.
Before making any decisions about your business structure, tax obligations, or financial arrangements, you should seek advice from a registered tax agent, or qualified professional advisor who can assess your specific circumstances.