Being a sole trader increases your yearly income on paper?

AustriaBargain on 01/09/2020 - 02:18

Saw a post about a guy with an income less than 30k being denied credit cards, or assuming he'd be denied. I do a lot of work as a sole trader and on paper my income is pretty high, but in reality I could be charging a client $2,000 for a project that costs me $1,700 in materials. So I only profited $300 on that, even though on paper my income is up $2,000. As a sole trader it's all personal income, your business activity is taxed like personal income and you deduct expenses off your personal income at tax time.

Anyway are there any benefits to being a sole trader and having a very high revenue, even if your actual profits put your income quite low. Can I tell banks my income is my revenue when I apply for stuff?

Financial

Comments

  • supacheap on 01/09/2020 - 02:25
    +2

    Nope. Life lesson: banks will try to screw you more than you it.

    https://www.finder.com.au/credit-cards-for-self-employed

  • JIMB0 on 01/09/2020 - 06:45
    +6

    Next time someone makes a thread for people to post their income you can use the higher revenue figure and win OzBraggin.

  • Arthur Dunger on 01/09/2020 - 06:59

    Also as a sole trader it's up to you if you want to put any income into your super.

    • AustriaBargain on 01/09/2020 - 07:05

      I'd rather invest it in myself, right now. If I was making gangbuster profits and was no need to expand or buy more stuff I would though, super is meant to be a good place to put money for retirement yeah?

      • Arthur Dunger on 01/09/2020 - 07:10

        It depends what you do with it instead I guess. I chose to put it into paying off my apartment.
        I don't regret this decision.

      • toniyellow on 01/09/2020 - 08:45

        The biggest benefit of super really is the tax savings. If you are on a low income that is probably not relevant to you at this stage though if under 53k a year you could consider putting a single small deposit each year, just enough to get a co-contribution from the government
        https://www.ato.gov.au/Individuals/Super/In-detail/Growing-y…

        • AustriaBargain on 01/09/2020 - 08:55

          I save tax on expenses anyway. But it's trickier when I have to work out depreciation.

  • JimmyF on 01/09/2020 - 08:47

    As a sole trader it's all personal income, your business activity is taxed like personal income and you deduct expenses off your personal income at tax time.

    and banks will ask who you're employed by and when you say self employed/sole trader, they 'adjust' what they are looking at.

    You'll most likely then have to provide a few years tax returns to prove your REAL income.

  • [Deactivated] on 01/09/2020 - 09:17

    Sure it looks high on paper, but then you have to adjust for tax, super, personal leave, annual leave, and expenses.
    You can invest in yourself at the moment, but then you have no savings for retirement, or if you need to take a day off, or when you get your tax bill.

    Reality is, it's not as high as it looks.

    • Arthur Dunger on 01/09/2020 - 15:00

      Yep that's what the Op already said.

      • [Deactivated] on 03/09/2020 - 07:45

        Not really, no.

  • kipps on 01/09/2020 - 09:49
    +1

    I do a lot of work as a sole trader and on paper my income is pretty high, but in reality I could be charging a client $2,000 for a project that costs me $1,700 in materials. So I only profited $300 on that, even though on paper my income is up $2,000.

    No, this appears to be very incorrect. Your taxable income should be net of permissible deductions incurred to earn that income. Materials are costs of goods sold so ordinarily this should only increase taxable income by $300.

    Banks look at the net income.

    I wouldn't recommend sole trader structure unless you had very good reasons.

    • AustriaBargain on 01/09/2020 - 09:53

      Would you recommend the typical sole trader changes to a corporation?

      • kipps on 01/09/2020 - 09:54

        Generally speaking, I would be looking at a corporation or discretionary trading trust structure.

        • AustriaBargain on 01/09/2020 - 09:56

          That cost at least a few hundred bucks more than being a sole trader.

  • dirtybigbjelke on 01/09/2020 - 10:21

    I did business loans about 20 years ago. We looked at your profit and loss statement and added back depreciation to profit to get your income, which in a lot of cases ended up being less than a McDonald's worker. That's when the claims about cash in hand came out… It seemed to me a some self employed people liked to big note themselves on their turnover and ignore the realities of their finances. Not everybody just a certain percentage.

    • AustriaBargain on 01/09/2020 - 10:57
      +1

      I don't do anything cash in hand or anything. I'll even declare bartered goods if I'm paid partially in food or something. If it's something I'd have paid for anyway then I declare it at the price I would have paid. I don't see why anyone would want cash in hand, then they can't declare it as a business expense, and they get no GST credits which a lot of small businesses seem to like collecting. Maybe cash in hand offsets their higher tax to a poor sole traders low tax rate? But that seems like a lot of overthinking just to save a few percent on a single job.

      • dirtybigbjelke on 01/09/2020 - 11:19

        This was 20 years ago. I guess the cash economy was stronger then.

  • Godric on 01/09/2020 - 11:00

    Your tax returns will say it all

    • AustriaBargain on 01/09/2020 - 11:01

      I guess I could just not declare any of my expenses.

      • Godric on 01/09/2020 - 12:56

        And then you'll be the first to complain when policies and regulations get stricter

        • AustriaBargain on 01/09/2020 - 13:12

          Why would the government care if I didn’t declare my tax deductions. It’s more money for them.

  • [Deactivated] on 01/09/2020 - 11:13

    Your not charging enough you are only making 15% less tax/costs, should be more like 30-35%. Wouldn't be worth trading imo.

    • AustriaBargain on 01/09/2020 - 11:17

      That was just an example. But if the work only takes an hour then isn’t that $300 per hour, despite the $1700 material costs?

      • [Deactivated] on 01/09/2020 - 11:26

        Like what? What material costs $1700 and 1 hours labour?

        • AustriaBargain on 01/09/2020 - 11:31

          Let's say a diamond for a plain ring I was making. Or $1700 in fees to upload an update for an app.

  • coco1458 on 01/09/2020 - 12:44

    Generally for sole traders, banks may look at income minus expenses = gross income and that'll be taxed appropriately to reach net income.
    Whatever you say, you'll have to have the supporting documents to support ie Tax return, notice of assessment or BAS

  • zombrex on 01/09/2020 - 13:49

    What kind of work do you do?

    • AustriaBargain on 01/09/2020 - 14:40
      +1

      Designer. But I’ve been making things for clients and it’s turned my usually low operating costs into higher operating costs. Not just materials but I’ve been needing other services more. It used to be I only needed a computer and adobe subscription.

  • GuyfromMelbourne on 17/09/2020 - 23:31

    Bankers are trained to read tax returns. Not all of them would turn out to be the best but I can imagine they all know the difference between gross income and net profit/loss.

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