What It Means to Be a Sole Trader in New Zealand

What Is a Sole Trader?

A sole trader is an individual who owns and operates their business without any legal distinction between themselves and the business.

As a sole trader, you are responsible for all aspects of the business, from management and profits to liabilities and debts. This structure offers flexibility and control, as you’re the sole decision-maker.

Sole traders often include freelance professionals, contractors, small business owners, and those testing business ideas before potentially scaling up to a more complex

Advantages of Being  Sole Trader

Choosing to operate as a sole trader comes with several benefits, especially if you’re looking for a straightforward and cost-effective way to start a business.

Ease of Setup:

Becoming a sole trader in New Zealand is simple and inexpensive. You don’t need to register a company, saving time and avoiding the costs of more complex structures.

Full Control:

As the sole owner, you make all decisions about the business. There’s no need for formal meetings or consultations, giving you the freedom to run the business according to your vision.

Tax Simplicity:

Sole traders don’t file separate business tax returns. Business income is reported on your personal income tax return, meaning less paperwork and reduced filing requirements.

Profit Retention:

All business profits go directly to you, as there are no partners or shareholders involved. This can be especially appealing for those who want to retain full financial control of their earnings.

Flexibility:

It’s easier to wind up or change your business if needed. This structure is particularly useful for those testing a business idea or working part-time.

Disadvantages of Being a Sole Trader

While the sole trader structure is convenient, it also comes with some potential drawbacks.

1. Unlimited Liability:

As a sole trader, you’re personally liable for any business debts or legal actions. This means your personal assets, such as your home or car, could be at risk if the business faces financial trouble.

2. Limited Growth Potential:

Sole traders may find it challenging to raise capital, access loans, or attract investors due to the structure’s personal liability and lack of separation from the individual.

3. Heavy Reliance on One Person:

The business relies solely on your skills, resources, and availability. If you’re unable to work due to illness or other factors, the business may struggle to operate.

4. Tax Disadvantages at Higher Income Levels:

Since sole traders are taxed at personal income tax rates, high business earnings could push you into a higher tax bracket, resulting in a larger tax bill than you might face under other structures.

How to Register as a Sole Trader in New Zealand

Registering as a sole trader is straightforward and involves the following steps:

1. Choose Your Business Name:

If you’re using your personal name as your business name, there’s no need for registration. If you prefer a unique business name, you may want to check its availability to avoid conflicts.

2. Apply for an IRD Number:

You’ll need an IRD (Inland Revenue Department) number to report your earnings and pay taxes. If you don’t already have one, you can apply through the IRD’s website.

3. Register for GST (if applicable):

If your business earns over $60,000 annually, you must register for GST (Goods and Services Tax). For earnings under $60,000, GST registration is optional, though it may be beneficial for some businesses (more on this below).

4. Set Up Record-Keeping:

While you’re not required to have formal accounts as a sole trader, maintaining good records is essential for managing income, expenses, and tax obligations.

Obtain Any Necessary Licenses or Permits: Depending on your industry, you may need specific licenses, permits, or health and safety registrations.

Business Tax Rates for Sole Traders

As a sole trader, your business income is combined with any other personal income and taxed at New Zealand’s individual income tax rates.

From 1 April 2025, NZ income tax rates will be:

• 10.5% on income up to $15,600
• 17.5% on income between $15,601 and $53,500
• 30% on income between $53,501 and $78,100
• 33% on income between $78,101 and $180,000
• 39% on income over $180,001

This tax system can benefit those with lower earnings, as it provides graduated tax rates. However, if your income increases substantially, you may find it advantageous to consider a company structure for potential tax savings.

(See the IRD website for more information on income tax rates for individuals)

Do You Need to Register for GST?

Sole traders with an annual turnover exceeding $60,000 must register for GST. GST is a 15% tax added to the price of goods and services, which is collected and paid to the government.

When registered for GST, you can claim back the GST you’ve paid on business expenses, which can benefit businesses with significant operational costs.

Even if your earnings are below $60,000, you may still choose to register voluntarily if you expect growth or if you want to claim GST on expenses.

Is a Sole Trader Structure Right for You?

While being a sole trader offers flexibility and simplicity, it’s not the ideal fit for everyone. If you’re considering starting a business as a sole trader in New Zealand, consulting with a chartered accountant can help clarify whether this structure is best suited for your goals, potential earnings, and risk tolerance.

Chartered accountants can provide expert advice on tax obligations, liability considerations, and financial planning—guidance that can make a difference in your business’s long-term success.

Making the right choice now can provide a solid foundation for your business, setting you up for growth and helping you meet your financial and operational objectives confidently.

In addition to helping you decide on the right business structure, Drumm Nevatt & Associates offers comprehensive services to support your journey. From expert chartered accountant accounting services and business start-up advice to accounting software setup and training, our team is here to ensure you have a solid foundation.

We also offer business development and coaching, guiding you through growth and strategy decisions with insight and clarity. With Drumm Nevatt & Associates as your partner, you’ll be equipped with the tools, support, and expertise to build a successful and resilient business.