Xero for sole traders works when the setup matches how a creative business earns and spends money. That means a chart of accounts built around your real income streams, a bank feed from a dedicated account, GST settings that match your registration status and a receipt attached to every expense. With that in place, tax time becomes a report, not a rescue mission.
The rest of this guide covers where those settings live, what a creative's version of each one looks like and which ATO record-keeping rules sit underneath them. Those rules apply whichever software you use. Xero is one option among several, and nothing here depends on it being the right choice for every business.
Before you start, check which Xero plan fits. Plans differ in features such as invoice and bill limits, multi-currency and project tracking, and those details change over time. Compare current plan features against how many invoices you send in a typical month, whether you bill overseas clients and whether you need GST and BAS tools. An entry-level plan can suit a low-volume creative, while a busier practice may outgrow it quickly.
A sole trader is taxed as an individual. Your business profit (assessable income, meaning the income the ATO counts for tax, minus deductible expenses) is taxed at your personal marginal rate and reported in your individual tax return in the business and professional items schedule, according to the ATO. Once your business income builds up, the ATO may also put you on PAYG instalments. That means paying tax in advance during the year instead of in one lump after you lodge.
Creative income rarely arrives neatly. Many practising artists work freelance or self-employed in their creative practice. For many, the money comes from many small sources: a wedding gig, a book cover commission, a streaming payment, a term of teaching, a grant instalment. Almost two-thirds of cultural and creative businesses have no employees (Department of Infrastructure, Transport, Regional Development, Communications and the Arts, 2024). For most of them, the person doing the bookkeeping is the same person doing the work.
That's why the default setup in any accounting software tends to fall short. It assumes one kind of income and a tidy set of costs. Creative businesses rarely look like that.
The chart of accounts is the list of categories every transaction gets sorted into. A new Xero organisation comes with a ready-made chart covering assets, liabilities, equity, income and expenses. You can edit it under the accounting settings or import a replacement from a CSV file.
The default chart has a single income account called something like "Sales". For a creative sole trader that's too blunt to be useful. Splitting income by how it's earned shows which work actually pays, and it gives your accountant a clean starting point. The expense side benefits from the same thinking: accounts named after real creative costs get coded consistently, while generic ones collect a mess.
| Account | Type | What goes in it |
|---|---|---|
| Performance and commission income | Revenue | Gig fees, session work, commissioned artwork, shoots, writing briefs |
| Licensing and royalties | Revenue | Royalty statements, sync fees, stock image licensing, streaming payouts |
| Teaching and workshops | Revenue | Lessons, masterclasses, workshop tickets |
| Merchandise and print sales | Revenue | Merch, prints, books, products sold online or at shows |
| Grants and prizes | Revenue | Grant funding and prize money received for the business |
| Gear and equipment (low cost) | Expense | Strings, cables, lenses under your capitalising threshold, consumables |
| Software and subscriptions | Expense | Editing suites, design apps, plugins, cloud storage |
| Studio and venue hire | Expense | Rehearsal rooms, studio time, gallery or space hire |
| Travel for work | Expense | Parking, tolls and fares to gigs, shoots and client meetings |
| Equipment (asset) | Fixed asset | Larger items such as instruments, cameras and computers |
| Owner drawings | Equity | Money you take out of the business for personal use |
Grants deserve a quick note. Whether a particular grant or prize is assessable depends on its terms and your circumstances, so a separate account makes it easy for a registered tax agent to review each one rather than having it buried in general sales.
As a sole trader you don't pay yourself a wage. You simply move money out of the business when you need it. Those transfers belong in an equity account such as "Owner drawings", never in an expense account. Coding drawings as an expense understates profit, and an understated profit in your books flows straight into an inaccurate tax return. On a related point, sole traders don't have to pay super guarantee for themselves, so there's no superannuation expense line to create for your own drawings.
Tracking categories add a second layer of reporting on top of the chart of accounts. Where the chart answers "what kind of income or cost is this?", a tracking category answers "which project, band or income stream does it belong to?" A musician might track "originals band", "covers work" and "teaching". A photographer might track "weddings" and "commercial". Xero limits how many tracking categories and options you can create, and those limits change from time to time, so check the current numbers in your settings before you design the structure. Two well-chosen categories usually cover a sole trader's needs.
A bank feed pulls transactions from your bank into Xero automatically. You set it up under Accounting, then Bank accounts, then Add bank account. The connection is read-only under the Consumer Data Right, so Xero can see transactions but can't move money. When you first connect, you can import up to 12 months of past transactions, which helps if you're starting your books part-way through.
Bank rules are where the time savings come from. A rule can recognise a recurring transaction, such as a monthly software subscription or a regular teaching payment, and suggest the right account, tracking category and GST treatment each time. Bank reconciliation then mostly means confirming matches rather than coding from scratch.
According to the ATO, sole traders don't have to have a separate business bank account. The ATO describes one as better practice, because it keeps business spending, personal spending and drawings apart. From a bookkeeping view, the case is overwhelming. A feed from a mixed personal account fills Xero with groceries and streaming subscriptions that each have to be coded as drawings or excluded, and every one is a chance for a personal cost to slip into the business figures.
A bank feed connected to a personal account doesn't automate your bookkeeping. It automates the mess.
Some costs are genuinely mixed: the mobile you use for bookings and family calls, home internet, a laptop that edits client footage and streams films at night. The ATO expects you to keep documents showing how you worked out the business-use percentage, such as a representative diary of usage. As a simplified illustration with round hypothetical numbers, a $100 monthly phone bill is $1,200 over a year. If records support 40% business use, the business portion is $480. Real outcomes depend on individual circumstances and on what your records actually show. In Xero, one clean approach is to record the full bill and hold the working for the percentage as an attachment, then have your accountant apply the adjustment at year end, or split the transaction at the time of coding. Either way, keep the working.
Xero lets you build invoice templates with your business name, ABN (Australian Business Number, the identifier the ATO issues to businesses), payment terms and bank details. Sending invoices from Xero rather than from a word processor matters for one reason above the rest: the invoice sits in your books as money owed from the moment you send it. When the client pays, the bank feed shows the deposit and you match it to the invoice.
Separate templates for different work are worth the ten minutes. A template for gig fees, another for licensing and another for workshops can each default to the right income account and tracking category, so the coding happens at the moment of invoicing instead of during a scramble later.
If you're registered for GST, invoices carry extra legal requirements. At the time of writing, the ATO says that if a customer asks for a tax invoice, you must provide one within 28 days, unless the sale is $82.50 (including GST) or less. A tax invoice under $1,000 must show:
At $1,000 or more, the tax invoice must also show the buyer's identity or ABN. A Xero invoice template set up as a tax invoice covers these fields, provided the description field actually describes the work.
At the time of writing, a business must register for GST once its GST turnover (gross business income, not counting GST) reaches or is expected to reach $75,000 in a 12-month period. The ATO tests this both backwards (this month plus the previous 11) and forwards (this month plus the next 11), and you generally have 21 days to register after you become required to (ATO). Plenty of creatives sit below it, and the Xero setup differs depending on which side you're on.
Your invoices must not charge GST, and Xero should not be calculating GST credits on your purchases. In practice that means setting the GST options to reflect that you aren't registered and making sure income and expense accounts default to a no-GST tax rate, such as BAS Excluded. Leaving the default GST rates in place on an unregistered file produces figures that look plausible but are wrong across the board. It's also worth watching your rolling 12-month income in Xero, because a few big commissions or a tour can push turnover past the threshold faster than you'd expect.
Once registered, you generally add 10% GST to taxable sales, claim GST credits on business purchases and report the difference on your BAS (business activity statement, the form used to report GST and PAYG instalments to the ATO). As a simplified illustration with round hypothetical numbers: a $2,000 gig fee plus $200 GST gives a $2,200 invoice. If the same period's only business purchase was $330 of software including GST, the GST credit is $30, leaving $170 of GST to report as payable. Real outcomes depend on individual circumstances, including whether each sale and purchase is actually taxable.
The other key decision is cash vs accrual GST reporting, also called your accounting basis. According to the ATO, businesses with aggregated turnover below a set threshold can generally choose cash or accrual GST reporting, and the ATO publishes the current threshold on its website. On a cash basis you report GST when you're paid or when you pay. On an accrual basis you report it when you invoice or are paid, whichever comes first. For a creative whose clients pay slowly, the difference in timing can be significant. In Xero this is a setting in the financial and GST options, and it needs to match the basis you've told the ATO you use. Make that call with a registered tax agent rather than guessing.
The ATO requires records of all income and proof of every business expense, including receipts, supplier tax invoices and card vouchers. Records must be in English or easy to translate, and must explain each transaction. Most records must be kept for five years. Records for assets and capital gains may need to be kept for as long as you own the asset, plus five years after you sell it.
One point catches a lot of people out. Typing the supplier, date, amount and GST into Xero doesn't replace the receipt. The ATO treats the original document as the record, and digital records need to stay unaltered, easy to find and backed up. Scanned or photographed receipts are acceptable, as long as each one is a true and clear copy of the original, and you usually don't need to keep the paper after that unless another law requires it.
This is the strongest argument for attaching a file to every expense transaction. Xero's receipt capture lets you photograph or forward a receipt, pulls out the supplier, date, total and GST, and links the document to the matching bank transaction. The receipt for a new amp or lens then lives next to the transaction it supports, rather than in a shoebox or an unsearchable camera roll. For assets kept long-term, attach the purchase invoice to the asset record too, since its retention clock runs well past five years.
A tidy file pays off in a handful of reports.
None of these reports can be better than the coding underneath them, which is why a light, regular routine beats a heroic catch-up. A practical rhythm for a creative sole trader looks like this:
An accountant working from a reconciled Xero file with attachments can spend the time on tax planning and advice instead of rebuilding your year from bank statements. That shift, from data entry to useful conversations, is the real return on setting the file up properly.
This article is general information only, reflects the rules at the time of writing and does not take your personal circumstances into account.
If your books feel more like feedback than music, we'd love to help tune them up. Give the Amplify 11 team a call on (02) 4715 1000 or email [email protected], and let's get your numbers playing in time.
Yes, you can start a Xero file at any point. The usual approach is to set a conversion date, enter opening balances as at that date and then use the bank feed history import to bring in earlier transactions. Records from your old system or spreadsheets still need to be kept for the ATO retention period, so archive them rather than deleting them once the new file is running.
Income received in a foreign currency generally has to be converted to Australian dollars for tax purposes. Depending on your plan, Xero can record multi-currency invoices and accounts, or you can record the Australian dollar amount that lands in your account. The right treatment depends on how and when you are paid, so a registered tax agent can confirm the approach for your platforms and keep it consistent.
Yes. Xero lets you invite users and set their access level, so an accountant or bookkeeper can log in to review, reconcile or prepare reports without you exporting anything. You stay the owner of the subscription and the data, and you can remove access at any time. Shared access usually makes year-end work faster because questions can be answered against the live file.
Not if you are a single sole trader. One ABN generally means one set of books, and tracking categories can separate projects, bands or income streams within that file. A separate file usually only makes sense when there is a separate entity, such as a partnership with bandmates or a company, because each of those lodges its own tax return. Structure questions are worth raising with an accountant.
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