AYB205 – LAW OF BUSINESS ENTITIES
LECTURE 1: SOLE TRADERSHIP LAW
A sole trader is a person who carries on business alone, without the use of a company structure and without
A sole trader has complete control including ownership of all profits, business assets and personal responsibility
for all debts.
Why a Sole Trader?
o Income taxed at personal tax rates;
o Income losses offset against other income;
o Operating losses carried forward indefinitely;
o CGT small business concessions;
o Income splitting for tax offsets not allowed.
o Personally liable and all unencumbered assets are exposed – UNLIMITED LIABILITY
o Capital investment
o Revenue Stream (cash or debtor)
Simple and inexpensive to setup Unlimited personal liability
and operate Health and Lifestyle
Full operational control Limited tax concessions
No profit sharing
Limited costs concessions, e.g.
Privacy of operations vehicle ownership costs
Relatively simple to sell business Limited growth potential
Minimal winding-up costs Difficulty raising capital
Some tax advantages
Broadly, a small business will have: Defined differentially in different acts
o Assets ≤ $20M;
o Annual Income (Y) ≤ $2M p.a.
o Employees ≤ 20 full-time person equivalence
All sole traderships are small businesses but not all small businesses are sole traders
Carrying on a Business
‘Carrying on business’ includes establishing a place of business and soliciting or procuring any order from a
person in the State. Business Names Act 1962 (Qld) s3
o For the purposes of this Act a person shall not be regarded as carrying on business within the State for
the reason only that within the State the person —
Is or becomes a party to any action or suit or any administrative or arbitration proceeding, or
effects settlement of an action, suit or proceeding or of any claim or dispute; or
Maintains an account at a financial institution; or
Effects any sale through an independent contractor; or
Creates evidence of any debt or creates a charge on real or personal property; or
Secures or collects any of the person’s debts or enforces the person’s rights in regard to any
securities relating to such debts; or
Conducts an isolated transaction that is completed within a period of 31 days, but not being 1 of
a number of similar transactions repeated from time to time; or
Invests any of the person’s funds or holds any property. Working Out If You Are Operating A Business (ATO)
If you are in business:
o The money you earn from your business activities is generally assessable income;
o You can generally claim a deduction for the expenses you incur in earning that income;
o You may be able to offset any loss you incur against other income you earn or carry the loss forward to
offset future income.
o If your activities are a hobby, the above points do not apply.
Usually small capital base to start business, sourced from:
o Home Mortgage
o Bank Finance
o Business/Personal Loan
o Credit Cards and Credit Lines
o Angel Investor, e.g. family, friends, business associates
o Dependant on:
o Personal asset base to secure credit;
o Demonstrated ability to service debt; and
The following administrative matters need to be undertaken by all business types:
o Register for an Australian Business Number (ABN)
o Register for a Tax File Number (TFN) (will invariably already have one)
o Register for GST – payment can be made through ATO Business Portal
Business Activity Statements (BAS) can be submitted monthly, quarterly or annually depending
on turnover and PAYG withholding values
Superannuation for Associated Persons
RUNNING A SOLE TRADERSHIP
All businesses must deal with the following at some point in their lifecycle, but can be particularly onerous for
o Adherence to a myriad of business law and regulation;
o Adherence to a blizzard of zoning, town planning and environmental regulations, including adherence to
fire regulations, asbestos management and other cleanliness and safety matters, plus licensing, permits
and council by-laws.
o Asset and Income Protection Insurance.
Capital Gains Tax (Div 152)
Small Business CGT Concessions Basic Conditions Tests
o Maximum Net Asset Value Test: the entity must be a small business entity or a partner in a partnership
that is a small business entity, or the net value of assets that the entity and related entities own must
not exceed $6,000,000;
o Active Asset Test: the divested asset must be an active asset;
o Controlling Individual Test: essentially, 90% of the controlling ownership of the asset must be a small
business. Small Business CGT Concessions
o 15-year Asset Exemption –
Assets owned for >15 years exempt from CGT on realisation if owner is >55yo and
o 50% Active Asset Reduction
Applies to all small businesses who qualify.
o Retirement Exemption
Where owner is <55yo and rolls capital gain over into superannuation.
o Asset Rollover Concession
Where an asset is sold at a profit but the funds are reinvested within a certain time period in
Other Tax Issues
o Motor vehicles, travel, capital allowances, operating losses, employee-related, etc.
Substantiation of Expenses/Deductions
o Record keeping and document management – an absolute must for all business managers.
The ATO provides extensive assistance, support and technology for record keeping.
Personal Services Income
The PSI rules were essentially a measure designed to stop people claiming business benefits when they are not
really running a business.
Income generated in the following ways is not PSI:
o By selling or supplying goods. Income from selling or supplying goods, such as retailing, wholesaling or
manufacturing, is generally not PSI as the income is not mainly a reward for your skills, knowledge,
experience or efforts.
o Using an income-producing asset. Income from an income-producing asset, such as a bulldozer or
printing press, is generally not PSI as the majority of the income is generated by the asset.
o Granting a right to use property. Income from granting a right to use property, such as copyright to a
computer program, is generally not PSI as the majority of the income is generated from the right to use
o Through a business structure. Income from a business structure, such as a large firm, is generally not PSI
as the majority of the income is generated by the significant assets, many employees or contractors,
sizable operations or goodwill of the business s