Australia’s warm climate makes it one of the best places to work as a freelancer. It’s therefore not surprising that Australia has about 4.2 million freelancers, of which 47% are under the age of 40 years. In this Freelancing in Australia guide, you can explore how you can work legally as a freelancer in Australia.
The Australian government considers you a freelancer if you meet the following conditions:
Once you have chosen to monetize your skill, the next option is to choose how you are going to freelance. That’s because the government expects you to pay taxes on your income if it exceeds $4,000 per year. You can do it as a sole trader, in partnership with someone, or as a company.
There are benefits and obligations that you must fulfill with each business type, but starting as a sole proprietor is the simplest legal freelancing method in Australia.
However, working as a sole trader is often the easiest option. Furthermore, the Australian government’s Australian Business License and Information Service (ABLS) tool can help you to determine the type of licenses you need.
If you are just starting your freelance business, you can choose to work as a sole trader. It is a simple business model, and you take all the responsibility of running your business. You get to decide how much of the profits you can use, and you also bear all losses if they occur. Most important, when paying tax, you do it as one entity, instead of separating yourself from your business.
As a sole trader, you will need to obtain an Australian business number (ABN), which is free. Furthermore, you can opt to register a business name, which will cost you $36 annually or $86 for 3 years. You may also opt for a separate business bank account, of which the bank may charge some fees.
AS a sole trader, you must keep your important freelance records such as your invoices for a period of 5 years. In the event that you stop your freelance business, you must also notify the government within 28 days. You can learn more about other requirements and updates here.
You can choose to start your freelance business in partnership with one or more entities. In a partnership, you share profits and losses amongst yourselves. It also has an added advantage of pulling your resources together, to make the transition from formal employment to freelancing easier.
The Australian government recognizes the following types of partnerships.
In a GP, all partners have equal business responsibility. Moreover, each partner has unlimited liability for all their business obligations. Most freelancers opt for GP because they are actively involved in the business.
In an LP, each general partner’s liability is limited to the amount of money they have contributed to the LP. As a Limited Partner, you are likely to be a passive investor, without a role in the daily activities of the business.
An ILP is made up of at least one general partner. However, the rest of the partners have limited business obligations. In the event that the business fails to meet its obligations, the general partner becomes personally liable for the shortfall.
Overall, if you freelance in a partnership, you will require a separate tax file number (TFN), an Australian Business Number (ABN), and file a partnership tax return with the Australian Taxation Office (ATO), annually.
You also need to register for a Goods and Services Tax (GST), if your turnover exceeds $75,000. There are other partnership laws you need to consider, and they vary for different states and territories.
You can also work legally as a freelancer in Australia if you start your company. One of the major benefits of a company is it is treated like a business entity, unlike a sole trader or partnership.
It can incur debt, pay its taxes, record profits, sue and get sued, and conduct all other business activities, just as a natural person.
However, as an officer or director of the company, you still have to adhere to legal obligations when running the company, under Australia’s Corporations Act 2001. Your company must register for GST, once its turnover exceeds $75,000.
As a company director, you must keep proper financial records, and comply with all legal obligations as the company’s director. You must also update ASIC within 28 days if you make key changes in the company details.
As a freelancer working and getting paid legally in Australia, you will need an ABN. The ABN has 11 digits and is used to identify you to other businesses, government, as well as the Australian Taxation Office (ATO).
You can get it from the Australian Business Register, which issues it to all businesses.
If you fail to quote your ABN when invoicing Australian businesses, they can legally withhold up 47% of the payment. Furthermore, if your earning exceeds $75,000, then you need to register for a GST, which needs an ABN.
There are a few similarities when reporting your taxes as a sole trader or a company. There are also key differences, which you need to be aware of. Read on to discover these key differences.
Individual freelancers enjoy a tax-free threshold, which is a good thing is you are just starting your freelance career. As a sole trader or in a partnership, you qualify for a tax-free threshold. In the 2019-20 financial year, the threshold was set to $18,200.
You need to lodge your tax returns by 31 October, for each financial year, which runs from 1 July to 30 June. To lodge your taxes, you need to link to ATO online, through your myGov account.
The amount of tax you pay will depend on whether you exceed the tax-free threshold, and by how much. You can view rates for each tax bracket here, as well as tools for calculating the tax due and tax withheld.
Companies do not get a tax-free threshold and instead must pay for every dollar the company earns. Currently, companies that are not base rate entities, pay a tax rate of 30%. Companies lodge their tax returns as separate legal entities.
Therefore, as a director, shareholder, or employee, you must also lodge your own tax returns separately.
When lodging a company tax return, the returns must indicate the company name, deductions, as well as the company income tax due. Currently, company taxes are lodged manually, by downloading and filling a company tax return forms.
The forms are then mailed to the ATO’s Postal address in the state’s or territory’s capital city.
You check this link for more information on individual or company tax returns, capital gains tax (CGT), small business entity concessions, taxes and superannuation, and payroll tax.
You can deduct your freelance expenses from the tax if your expenses qualify as business expenses. These should be expenses you would not have incurred, had you not been working from your business office or home office.
Furthermore, your freelance office must not share resources with your home, if you plan to claim the expenses like deductibles.
As a freelancer, you have greater freedom to choose where to work from. We recommend that you choose to work from a state or territory with favorable business laws for your type of business.
To work legally in Australia you start by getting your ABN, to avoid being subjected to high tax withholding rates, and to streamline your tax lodging process. You also need to choose a business type that will make it easy for you to lodge taxes.
Getting your taxes right from the beginning will also make it easy to attract funding from potential investors if you need it. Finally, you need to create a tax account with ATO, so that you can be lodging and paying your taxes on time.
We hope that you found this freelancing in Australia’s guide to be informative. Have you had any unique experiences while freelancing in Australia? Please share them in the comments section below.