Sole trader tax tips: What you need to know

Over 10% of Australia’s workforce are sole business owners or managers, with popular industries for self-employment including construction, professional services and agriculture. And, year, over 100,000 people take the plunge to start their dream and become self-employed as a sole trader, according to data from the Australian Bureau of Statistics (ABS).

If you’ve recently started your own business or are thinking about making the leap, then you should know the legal ramifications and the tax implications.

What is personal services income and why does it matter?

Personal services income (PSI) is a term used in Australia’s tax legislation to describe income or reward generated from the personal efforts or skill of an individual (such as a marketing expert, human resource consultant or accountant, for example), as opposed to profits generated from an asset (such as if you rent out a car), from selling a product (such as at a restaurant or retail shop) or from licensing your intellectual property or IP (such as a patent on an invention). PSI also doesn’t affect salary or wages that people earn as employees.

Will my sole trader business be affected by personal services income?

To determine if your sole trader business is caught under the PSI rules, you can work through the following steps, as outlined by the Australian Taxation Office (ATO).

Step 1Review each of your contracts

If more than 50% of the business’s income is as a result of your personal efforts or skills, then you need to move to Step 2. If not, the PSI rules do not apply to you.

Step 2 – Results test

Under the terms of your contracts, are you being paid for a result or are you being paid for your time? To satisfy the results test, you have to meet all three of the following conditions:

  • you are being paid at least 75% of your income to achieve a result (including being paid after achieving the result);
  • the risk to rectify any defects belongs to you; and
  • you have to provide all the necessary tools and equipment to complete the work relating to that 75%.

If you meet all these conditions, you generally won’t need to worry about the PSI rules. However, if you fail to meet any one of these conditions or are being paid on an hourly rate, you won’t satisfy the results test. If you cannot satisfy the results test, move to Step 3.

Step 3 – The 80% rule

This test asks whether 80% or more of your income comes from one client. If you have clients that are associates of each other, such as subsidiaries, partners or trustees of related entities, you need to count the income as coming from the one client. If more than 80% of your income comes from one client and its associates, then the PSI rules apply. 

Avoid these common sole trader tax-time errors

Some of the most common mistakes made by sole traders at tax time are:

  • Not declaring all income received — that means keeping your invoices in order and staying on top of BAS
  • Claiming expenses that are not business related
  • Not taking into account the private proportion of expenses
  • Not keeping a logbook, which can limit your motor vehicle claims
  • Not claiming interest on motor vehicle loans and business loans
  • Incorrectly claiming loan repayments as leases
  • Not claiming expenses that were paid for personally


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