How much should a sole trader tradie put aside for tax?

Two separate pots: GST and income tax

If you are GST registered, one-eleventh of every GST-inclusive payment is GST, and it goes to the ATO on your BAS. It was never your income. Move it aside the day the customer pays.

Income tax is different. As a sole trader you are taxed on your business profit, which is income minus deductible expenses, at the same individual marginal rates as an employee, plus the Medicare levy. The first $18,200 of your total income is tax free, and the rate steps up from there. The current rates are on ato.gov.au and change from time to time.

The working rule

Set aside 25 to 30 percent of your profit for income tax, on top of the GST pot. Profit, not turnover: if you invoice $150,000 and spend $60,000 on materials, fuel, insurance and tools, the tax is on the $90,000.

Early in the year, when you do not know your profit yet, a simpler version is to set aside about 20 percent of every payment after GST. Then, once a quarter, look at the actual profit and adjust.

PAYG instalments

After your first year with a tax bill, the ATO usually puts you on pay-as-you-go instalments: quarterly prepayments toward next year's tax, either a set amount or a percentage of your income, paid with your BAS. They are not extra tax; they are the same tax paid in pieces. If your income drops, you can vary the instalment down, but vary too low and there is a penalty.

Deductions that change the number

• Materials, tools and equipment used for work. Assets above the instant asset write-off threshold are depreciated over time; the threshold has changed several times, so check the current figure.
• Vehicle costs. Either keep a logbook and claim the business percentage of actual costs, or use the cents-per-kilometre method for up to 5,000 business kilometres a year at the ATO's current rate (88 cents per kilometre at the time of writing).
• Phone and internet, at the business-use percentage.
• Insurance, licences, registrations, union or association fees.
• Subcontractor payments, with an ABN on the invoice.
• Home office costs if you do your admin from home, using one of the ATO's methods.
• Superannuation you pay yourself, up to the concessional cap.

Every one of these needs a record. A photo of the receipt attached to the expense entry on the day is enough, and it is the difference between a deduction and a guess.

Know the number before June

The tradies who get stung are the ones who find out their profit in July. Track income and expenses as you go and the profit is on screen all year. SmokoBooks shows cash-book profit, the GST position and an estimated set-aside for tax on the dashboard, using the reserve percentage you choose, so the number is never a surprise.

Common questions