Bookkeeping for Australian Sole Traders

Nuts and Bolts of GST Registration for Sole Traders

Posted 16 June 2012

For anyone who was around when the GST was introduced to Australia in 2000, you’ll remember there was a lot of fuss about Howard’s “New Tax System” — easier, fairer, healthier for the economy. I was 16 at the time, and I remember mainly negative reactions; we felt it was yet another tax we’d have to pay on top of our already exorbitant income tax. Its replacement of sales tax was widely unknown or misunderstood.

It meant something quite different for freelancers. I started my freelance career a few months after the GST was introduced, so I was fortunate that the ATO held my hand through most of the set-up. But they still didn’t get it quite right — there was no free accounting software for small business, as many believed there should have been, and I found myself in all manner of strife years later, because I’d misunderstood the way expense claims were supposed to work.

For others who’ve started much later, it’s a much colder, lonelier scene. You know you’re supposed to have an ABN, but GST is optional, activity statements can be monthly, quarterly or yearly (depending on factors beyond common understanding), and invoicing is a minor formality without any perceivably consequence — at least that you can see.

Most sole traders opt out of GST if they can avoid it. Many clients are happier without the 10% loading on their cash flow, and some agencies even force contracted employees to absorb the GST if they’re required to pay it.

It’s sad, because with an education that could be condensed into a single pamphlet the size of a credit card, most people would feel quite differently.

Let me break it down for you, so you know how to invoice as a sole trader:

  1. Registering for GST is good. If you are GST-registered, any GST you pay on business expenses (computers, mobile phone bills, travel etc) can be claimed back. As cash. The ATO will give you money. Could that be any clearer?

  2. If you are supplying a professional service, chances are, your fees are tax-deductible for your client. That means if they pay you GST, the ATO will give it back to them.

The combined effect means GST is cyclic and effectively no one pays it. You invoice your client with GST, they pay it to you, you pay it to the ATO, and they refund it back to your client.

If, on the other hand, you don’t register for GST, your client keeps that 10% and ultimately, nothing changes — except that your client won’t whinge about a few pennies of lost bank account interest, and you’re not able to claim back the GST you spend on your business. If you add up one eleventh of all your phone bills, travel, supplies, etc, that can be a significant amount of money, so it at least deserves some consideration.

The other gripe most sole traders have with their ABNs is having to submit quarterly business activity statements. Most freelance Australians can cope with a tax return every 12 months, but those boring beige BAS forms are a proper pain in the proverbial. You have to track down all your invoices for the last three months, tote them up with a calculator or, if you’re really classy, a spreadsheet, and if you’re registered for GST, add up all the GST you’ve spent for a tidy refund.

That’s where Bfast really makes a difference. Bfast gives you a drop-dead-simple way to draft, save, and send invoices via email (using a great-looking invoice template), and keeps track of your running totals behind the scenes. When the time comes to submit your BAS, there’s nothing left to do; your totals are already there, waiting for you. The same goes for expenses; as long as you record your expenses in Bfast as they occur (and it’s incredibly easy to do), the painful quarterly ritual is replaced with a comfortable daily habit. For anyone who’s ever lost their patience with managing invoices and tax returning, Bfast really is the best accounting software they could want.

Without Bfast, most sole traders are reluctant to attend to their tax affairs, favouring delay of 2 to 4 years and a panicky catch-up session. Last time I checked, the ATO imposed a $550 fine for each late activity statement, so such practices can be extraordinarily costly. Amazingly, I’ve heard comparatively few stories of fines actually being issued; it seems most people can talk their way out of it. My theory is the ATO are fully aware of how difficult the red tape is for so many Australians, and enforcing their rules would be more trouble than it’s worth.

Disclaimer: this article is not authoritative in any way, and means to serve only to provide background knowledge. You should seek advice from the ATO or a trained taxation professional before making any decisions relating to your business’s financial practices.