In case you are not aware, more than 10% of the Australian workforce are generally solopreneurs, with popular industries being construction, agriculture, as well as professional services. According to data from the Australian Bureau of Statistics, over 100,000 Australians this year alone have indicated their interest to dive into the world of sole trading.
So whether you are already a sole trader or you intend to start your own business anytime soon, there are tax implications and legal ramifications that you need to be aware of.
What is personal services income and why does it matter?
In Australia, personal services income (PSI) is a tax term that is used in the country’s legislation to describe the reward or income generated from your personal efforts or skills, as against the profit you generate from owning an asset.
Will my sole trader business be affected by personal services income?
As outlined by the Australian tax office, you need to work through the following steps in order to be able to determine if your sole trader business will be impacted by the PSI rules.
Step 1 – Review each of your contracts
You need to review each of your contract if more than 50% of the income earned by executing a contract as a result of your personal effort. Otherwise, move to the next step.
Step 2 – The 80% rule
The PSI rules apply if more than 80% of your earnings come from one client and its associates.
Avoid these common sole trader tax-time errors
During tax time, some sole traders usually make some mistakes that may cause them a fortune. In order to avoid such mistakes, you need to adhere to the following tips:
- Declare all income that you earned.
- Claim all the expenses that are not related to business.
- Keep logbooks to track motor expenses.
- Claim expenses that were paid for personally.