Most Australian contractors have a handle on the obvious stuff — send invoices, pay tax, lodge BAS. The gaps that create problems are narrower: not knowing that the ATO will start sending quarterly PAYG instalment notices once your income crosses a threshold, not having a compliant tax invoice format, or running a PTY LTD and inadvertently triggering Division 7A by drawing money from the company informally. Bookkeeping for contractors in Australia isn’t complicated — but there are specific rules that apply to self-employed people that don’t apply to employees, and knowing them in advance is significantly cheaper than finding out through an ATO review.
GST registration: when it’s required and what it actually means
Once your GST turnover — the total value of your taxable supplies before GST — reaches $75,000 in any 12-month period, you’re legally required to register for GST within 21 days. The $75,000 threshold applies to a rolling 12-month window, not just the financial year. If you earn $80,000 between October and September, you hit the threshold even if your financial year revenue was lower.
Once registered, you charge 10% GST on your invoices, claim GST credits on eligible business purchases, and lodge a Business Activity Statement (BAS) quarterly. Most contractors lodge quarterly — the periods end 31 March, 30 June, 30 September, and 31 December, with BAS due 28 days after each quarter end (or later through a registered tax agent). See the BAS and ATO page for more on lodgement deadlines and quarterly obligations.
GST registration has implications on both sides of your invoices. As a registered contractor, you must issue valid tax invoices for any taxable supply over $82.50 including GST. A valid tax invoice must show your business name and ABN, the date, a description of what was supplied, the total price including GST, and a statement that GST is included — or the GST amount shown separately. Without a compliant tax invoice, your clients can’t claim the GST credit, which creates friction with corporate clients who need a clean paper trail.
PAYG instalments: the quarterly tax notice contractors don’t expect
One of the most common surprises for contractors who’ve moved from employment is the PAYG instalment notice. When you’re an employee, tax is withheld from your salary each fortnight and you rarely owe much at tax time. As a contractor, you pay tax on your business income when you lodge your annual return — which means you could owe a large sum in October or November with no prior payments made.
To address this, the ATO automatically enrols contractors in PAYG instalments once their income tax return shows a tax liability above approximately $1,000. You’ll receive a quarterly instalment notice — either a set dollar amount calculated by the ATO, or a percentage rate you apply to your actual income — and payments are due alongside your BAS (usually 28 days after each quarter). The amounts paid during the year are credited against your end-of-year tax bill.
⚠ Cash Flow Warning
PAYG instalments and BAS land in the same quarter — plan cash reserves accordingly
In quarters where both BAS and a PAYG instalment are due, contractors can face a combined cash obligation that runs to several thousand dollars. This is manageable with monthly P&L visibility and a dedicated tax provision — but catches contractors off guard when they haven’t been setting money aside throughout the quarter.
Sole trader vs company: the tax trade-off explained plainly
Most contractors start as sole traders — it’s the simplest structure, minimal compliance cost, and straightforward to set up. As income grows, some consider incorporating as a PTY LTD company for the tax rate difference: sole traders pay personal income tax rates up to 47%, while a small company pays 25% on its taxable income (for businesses with turnover under $50 million).
The 25% rate looks attractive until you factor in what happens when you actually want to use the money. Profits retained in the company are taxed at 25%. But to access those profits personally — as salary or dividends — you pay additional tax at your marginal personal rate. If you draw all profits out as salary, there’s no net tax benefit. The benefit applies only to earnings genuinely retained in the company for business purposes — equipment purchases, reinvestment, building a cash reserve.
Companies also carry higher compliance obligations: ASIC annual fees, a separate company tax return, and the requirement to maintain proper corporate records. The most significant risk for contractor companies is Division 7A — the provision that treats informal loans or advances from the company to a director as unfranked dividends, triggering income tax. Contractors who use the company bank account for personal expenses, or who “borrow” money from the company without a compliant loan agreement, face Division 7A assessments that can be significant.
Home office deductions: fixed rate vs actual cost method
Contractors who work from home — which covers the majority of IT, consulting, and professional service contractors — can claim home office deductions. From the 2022–23 year, the ATO’s revised fixed rate method allows 70 cents per hour for each hour worked at home, covering electricity and gas, internet, phone, computer consumables, and stationery. You need to keep a record of actual hours worked — a timesheet or diary — and the method applies to the running costs listed. Depreciation on furniture and technology is claimed separately.
The actual cost method calculates the genuine work-use proportion of all home expenses — rent or mortgage interest, rates, insurance, power, internet — based on the floor area percentage of your dedicated workspace. It produces a larger deduction for contractors with a dedicated home office, but requires a clearly defined workspace and more detailed records. For contractors in a shared apartment or without a genuinely separate workspace, the fixed rate method is simpler and more defensible.
Keeping contractor records that actually support your tax position
The ATO requires businesses to keep most records for five years. For contractors, the records that matter most at review are: tax invoices for all sales and purchases (to support GST claims), bank statements, receipts for all expense claims, vehicle logbook if claiming vehicle costs, and evidence of home office hours if using the fixed rate method.
The practical issue is that expense receipts are easy to lose, bank feeds get miscoded when caught up at quarter-end, and invoices issued to clients don’t always get matched against incoming payments in real time. A bookkeeper keeps this current throughout the year — every invoice tracked, every expense coded, every bank transaction reconciled — so nothing needs to be reconstructed at tax time.
Contractor Records Checklist
Keep for at least 5 years: All tax invoices issued · All supplier tax invoices received · Bank and credit card statements · BAS lodgements and payment receipts · Vehicle logbook (if claiming) · Home office hours record · PAYG instalment notices and payment confirmations
What Free My Cloud handles for contractors
Invoice tracking and accounts receivable · Bank reconciliation weekly · Expense coding to correct accounts · BAS preparation quarterly · PAYG instalment coding and payment tracking · Monthly P&L reporting · Records maintained ATO-ready year-round
The questions about structure, what to deduct, and how to optimise your tax position are ones for a registered tax agent or accountant — that’s their domain. The bookkeeping layer — keeping records current, coding transactions correctly, preparing BAS, tracking what’s been paid and what hasn’t — is what a dedicated bookkeeper handles, and it’s what makes your accountant’s job straightforward at tax time rather than a reconstruction project.
The Free My Cloud contractors bookkeeping page covers the full scope of what a dedicated bookkeeper handles. For trade-specific contractors, see the tradies bookkeeping page. Use the accounting services overview for a broader picture of what outsourced bookkeeping covers, the savings calculator for costs, or contact us directly.
Yes, once your GST turnover reaches $75,000 in any 12-month period you must register within 21 days. Once registered, you add 10% GST to invoices, claim GST credits on business expenses, and lodge BAS quarterly.
PAYG instalments are quarterly tax pre-payments the ATO requires once your tax liability exceeds approximately $1,000. The ATO automatically enrols contractors once their income tax return shows sufficient taxable income. The instalments are credited against your end-of-year bill — many contractors are surprised by the first notice because it arrives with no prior warning.
Sole traders pay personal income tax rates (up to 47%) on all profit. A PTY LTD pays the small business company rate of 25% on retained earnings. However, extracting money personally means paying dividends taxed at your marginal rate — the timing benefit applies to earnings retained in the company. Companies also carry more compliance: ASIC fees, company tax returns, and Division 7A risk. The right structure depends on income level and how much you retain.
Yes. The ATO’s fixed rate method allows 70 cents per hour worked from home (from 2022–23) covering energy, internet, phone, and stationery. The actual cost method requires a dedicated workspace but produces a larger deduction with more documentation.
Tax invoices are required for taxable supplies over $82.50 (including GST). A valid tax invoice must include your business name, ABN, the date, a description of the supply, the price including GST, and indication that GST is included. Clients cannot claim GST credits without a valid tax invoice.
