You have started working for yourself. You have your ABN. You have your first few customers. You are sending invoices and watching the business slowly grow. Everything seems straightforward.
Then you hear those three letters: GST. And suddenly you are wondering whether being a sole trader means you need to register. The good news is that the basic rule is fairly simple. But there are a few things you need to keep an eye on.
So, let’s take a look at GST registration for sole traders.
Do Sole Traders Need to Register for GST?
Not necessarily. Being a sole trader does not automatically mean you need to register for GST. For most sole traders, GST registration becomes compulsory when your GST turnover reaches $75,000 or more.
It is your business turnover that matters. Not your personal salary. Not your bank balance. And not your business profit.
What Is the $75,000 Threshold?
Let's say you run a photography business as a sole trader.
During the year, your business makes: Sales: $80,000.
Your business expenses are:$50,000.
Your profit is: $30,000.
You might think: “My profit is only $30,000.
Surely I don't need GST.” But GST registration does not work based on your profit.
Your GST turnover may be $80,000.
That means you need to check whether you are required to register for GST.
This is why keeping an eye on your turnover is so important.
What If Your Turnover Is Below $75,000?
If your GST turnover is below $75,000 and you are not otherwise required to register, you generally don’t have to register for GST. You can continue operating as a non-GST-registered sole trader.
You generally do not charge GST on your invoices. And you generally cannot claim GST credits on your business purchases. But there is another option. You can choose to register for GST voluntarily.
Can a Sole Trader Register for GST Voluntarily?
Yes. You do not necessarily have to wait until you reach $75,000. You can voluntarily register for GST if your turnover is below the threshold. There can be good reasons for doing this. For example, you may have significant business expenses that include GST.
If the purchases are eligible, you may be able to claim GST credits. But voluntary registration also brings extra responsibilities. You generally need to charge GST on your taxable sales. You need to keep appropriate records. And you need to lodge BASs. So don’t register simply because someone says: “You can claim GST back.” Look at the bigger picture.
What Happens Once You Register?
Once you are registered for GST, things change slightly. You generally need to charge 10% GST on your taxable sales. You also need to account for the GST you collect. At the same time, you may be able to claim GST credits on eligible business purchases.
For example: GST collected from customers: $6,000.
Eligible GST credits: $2,000.
Your simple net GST position would be: $6,000 − $2,000 = $4,000.
You would generally account for this through your BAS.
You Cannot Charge GST Before Registering
This is important. If you are not registered for GST, you generally cannot simply add 10% GST to your invoices.
So if your invoice is: $1,000 and you are not GST registered, you generally don’t turn it into: $1,100 including GST just because you want to collect GST. GST registration needs to come first.
What If You Are Getting Close to $75,000?
This is where you should start paying attention. Don’t wait until your accounting software suddenly tells you: “Congratulations. You have passed $75,000.” GST turnover can involve both your current and projected turnover.
So if your business is growing quickly, you need to keep an eye on where you are heading. For example, imagine your turnover is currently: $68,000. You then sign a large contract worth: $20,000. Your expected turnover may now put you over the threshold. This is the point where you should review your GST position.
What Happens When You Cross the Threshold?
If you become required to register for GST, you generally have 21 days to register. This is one of those deadlines you don’t want to discover after the fact. If you fail to register when required, the ATO may require you to account for GST from the date you should have been registered.
And that can create a very unpleasant surprise. Especially if you have already issued invoices without GST.
What About a Sole Trader With a Job?
This is another question that comes up often. You might work as an employee during the week. You might also run a small business on the side. Your salary from employment is not simply added to your business turnover to determine whether your sole trader business has crossed the GST threshold.
The GST registration test is concerned with the relevant business or enterprise turnover.
So if you earn: Salary from your job: $80,000.
Sole trader business turnover: $50,000.
You don't simply add the two amounts and say: “My turnover is $130,000.”
The business turnover is what you need to consider for GST purposes.
What About Multiple Business Activities?
This is where you need to be careful. You might have more than one business activity. Perhaps you are a consultant during the week and sell products online as a side business. You should not automatically treat each activity as a completely separate GST threshold.
The GST rules can require the turnover of your relevant businesses or enterprises to be considered together. So if you have multiple business activities, check the position before assuming each one gets its own $75,000 threshold.
Can You Claim GST on Business Purchases?
If you are registered for GST, you may be able to claim GST credits on eligible business purchases.
For example, you buy a laptop for: $2,200 including GST.
GST included: $2,200 ÷ 11 = $200.
If the laptop is used for your business and the other requirements are satisfied, you may be
able to claim the $200 GST credit.
But remember: Not every business expense gives you a GST credit. Private expenses, GST-free purchases and certain other expenses can have different treatment.
What Records Should You Keep?
Once you are registered for GST, good record keeping becomes even more important. Keep your:
- Sales invoices.
- Tax invoices.
- Receipts.
- Business expense records.
- GST calculations.
- BAS records.
For eligible purchases, you generally need the appropriate documentation to support your GST credit claims. Good bookkeeping can make your BAS much easier. And it can save you a lot of time when your accountant asks: “Where did this GST figure come from?”
A Simple Sole Trader Example
Let’s say you run a landscaping business. Your business turnover reaches: $72,000. At this point, you are below the general $75,000 threshold. You then expect another: $10,000 in business sales. Now your expected turnover is: $82,000.
This is where you need to review your GST position. Don’t simply wait until the $75,000 has already passed. Your projected turnover can matter when determining whether you need to register.
What If You Want to Stay Below $75,000?
Your business does not stop being a business just because you are close to the threshold. Don’t make business decisions purely to avoid GST without understanding the consequences. GST registration does not mean that all of the extra GST becomes a cost to you.
You may also be able to claim eligible GST credits on business purchases. And the effect can be different depending on who your customers are and how you price your services. It is worth looking at the numbers before making a decision.
The Bottom Line
Being a sole trader does not automatically mean you need to register for GST. For most sole traders, the key threshold is: $75,000 GST turnover. If you are below the threshold, you may not need to register.
You can also choose to register voluntarily. If you are required to register, don’t leave it until the last minute. Keep an eye on your turnover. Watch where your business is heading. And if you are getting close to the threshold, check your GST position early. Because when you are running a small business, the last thing you want is to discover your GST obligations after the invoices have already gone out.