Sharing income between two sole traders

[James_d]

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Hi, Bit of a beginner question here maybe, I’m struggling to find the answer as I don’t know the name for the thing i need.

I wanted to know if there’s anything specific I need to do in order to share my earnings with another sole trader (we worked together on a project). Specifically related to reporting the earnings and having the correct documents to show it’s shared etc.

Full story; I have been working on a project with another person (who is also a sole trader). Normally we’re just doing our own client work, invoicing clients etc, easy business. But this is a product that we started selling this year online. We both worked on it and we agreed at the beginning to half the income each (we expected it to be quite small income and therefore a small part of our earnings).

In turns out though it was more successful than we thought. The income was quite a lot larger, and now is starting to become the majority of our earnings, it looks like this will continue into next year also.

Currently the money from the sales have just been landing in my Paypal account, and now it’s coming to Tax time and the ATO are going to think I’ve earned nearly 2x what is actually mine, as they take the figure from Paypal (they did this last year). I’ll pay my friend their half towards the end of this month.

I don’t want to get into trouble, and I’m sure the ATO will see a huge discrepancy between what they have as my income, and the final figure I’ll report and be questionning it. It will look like I’m just sending a friend money to avoid paying tax.

How do I make sure this isn’t the case? Apart from just sending the money, what document would I need to keep to show the transaction and prove the business relationship? We’re not business partners in any legal sense, nor are they a client of mine.

BTW incase anybody was going to suggest – We have no interest in setting up a company, we wish to remain seperate sole traders, but as long as this product is selling, we’ll be sharing the earnings from it. i’m just not sure how to do it properly, so there is a record of it and I’m doing it the right way.

• This topic was modified 1 year, 2 months ago by James_d.
• This topic was modified 1 year, 2 months ago by James_d.

[Paul – FS Concierge]

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Hi and Welcome to Flying Solo.

Thank you for joining and posting,

The simplest way to achieve what you want is to have your friend invoice you before paying them any money.

You could alfo form a Partnership (much like a Sole Trader) with it’s own ABN and Bank Account etc. This would provide it’s own benefits and would require a separate tax return.

Cheers
Paul

[Dave Gillen – Former FS Concierge]

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Hi @james_d, Paul is right. Have your friend invoice you for the services and/or materials he’s provided you.
Your tax return will now show the higher amount as revenue, but you’ll only be taxed on the lower amount (i.e. your profit).

Dave

Dave Gillen | LinkedIn

[James_d]

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Thanks a lot. Invoice seems pretty simple way to do it, wasn’t sure if that was even allowed given the agreement between us, but i guess we set the amount so it’s fine.

[moodycharles037]

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The simplest way to achieve what you want is to have your friend invoice you before paying them any money

[IBFlyingSolo]

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Hi James,
All of the previous advice is sound so I can’t add anything on that.
I know you mentioned that you have no plan to set up a company but what you can do is set up a separate trading name with a separate ABN with you and your partner as the owners.
The challenge is when the business goes well and starts to create value as well as revenue.
Talking about how you would split the share of the Value if someone came to buy it off you, or one of you decided you wanted out, and your share.
Get some advice from a Solicitor who specialises in Partnership Agreements when the time comes.
I’ve seen too many friendships fragment because they didn’t have the difficult conversation about value soon enough.
Good luck

[Emywilson]

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Thank you for this post!

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