Income tax and record keeping for dropshippers

Tax is rarely the exciting part of starting an online store, but getting it wrong can be expensive. The good news is that the core habits are simple: separate your business money, keep every record, and understand which costs you can claim. Do that from the start and you'll also have the data you need to see which products, suppliers and ads are actually profitable.

This guide covers the basics of income tax and record keeping for Australian dropshippers. It is general information based on ATO guidance, not tax advice. Tax law changes and depends on your circumstances, so use a registered tax agent for advice about your situation.

Is your dropshipping income taxable?

If you are carrying on a business, the income from it is generally assessable income that you must declare. As our ABN guide explains, the ATO looks at factors such as profit intention, regularity and businesslike organisation to decide whether you are in business.

How you report depends on your structure:

• Sole traders report business income and expenses in their individual tax return, using the business schedule. The business profit is added to other income, such as wages, and taxed at individual rates.
• Partnerships lodge a partnership return, and each partner reports their share in their own return.
• Companies lodge a company tax return and pay tax at the company rate.
• Trusts lodge a trust return, and income is generally taxed in the hands of beneficiaries or the trustee.

What counts as income

For a dropshipping store, assessable income usually includes:

• sales revenue from your store and marketplaces;
• shipping fees you charge customers;
• any other business income, such as commissions.

Your platform payouts are often net of fees and refunds. For accurate records, track gross sales, refunds and fees separately rather than only recording the amount that lands in your bank account. If you are registered for GST, your income for tax purposes generally excludes the GST you collect for the ATO.

Deductions

The ATO says you can generally claim a deduction for expenses you incur in running your business to earn assessable income, as long as you have records. Private expenses are not deductible, and if an expense is partly private, you can only claim the business portion.

Typical deductible expenses for dropshippers can include:

Some items, such as computers and equipment, may need to be depreciated over time rather than claimed at once, although small business concessions sometimes allow an immediate deduction. The rules and thresholds change, so check the ATO's current guidance.

Losses

Many new stores make a loss in their first year. If you are a sole trader or partner, the ATO's non-commercial loss rules may stop you offsetting a business loss against other income, such as wages, unless you meet an income requirement and pass one of several tests, or the Commissioner exercises discretion. If you can't offset the loss, it may be deferred and used against future business profits.

These rules are technical, so ask a tax agent before you assume a loss will reduce the tax on your salary.

Foreign currency

Dropshippers often pay suppliers and software providers in US dollars or other currencies. You need to report income and expenses in Australian dollars, so record the AUD amount actually charged by your bank or payment provider, including any conversion fees. Keep the statements that show the conversion.

The records you need

The ATO says business records generally need to explain all transactions, be in writing (paper or electronic), be in English or easily converted, and be kept for five years from when you obtained or prepared them, or completed the transactions, whichever is later.

For a dropshipping business, keep:

• Sales records: store and marketplace order reports, invoices and receipts.
• Refund and chargeback records: what was refunded, when and why.
• Purchase records: supplier invoices and order confirmations.
• Expense records: receipts and invoices for fees, ads, software and services.
• Bank and payment statements: business accounts, payment provider and marketplace payout reports.
• GST records: tax invoices, activity statements and working papers.
• Asset records: purchase details for equipment and depreciation calculations.
• Contracts and agreements with suppliers and service providers.
• Records of private use for mixed expenses, such as a phone or home office.

Digital records

The ATO accepts digital records. Scans or photos of paper documents must be a true and clear copy of the original. Platform data can disappear when you close an account, so export your order and payout reports regularly and back them up.

Practical bookkeeping habits

1. Use a separate business bank account and card for every business transaction.
2. Connect accounting software to your bank, store and payment provider.
3. Reconcile weekly, matching payouts to orders, fees and refunds.
4. Save supplier invoices as soon as you receive them.
5. Export platform reports monthly and store them in a dedicated folder.
6. Set aside money for tax, and GST if you are registered, in a separate account.
7. Review profit by product each month so you know what to keep selling.

Benchmarks and audits

The ATO publishes small business benchmarks for many industries, comparing businesses' costs and turnover. They can be a useful sense check, and the ATO uses them to identify businesses that may be under-reporting income. Accurate records are your best defence if the ATO asks questions.

Choosing a tax agent

Only registered tax agents can charge a fee to prepare your tax return or give tax advice. You can check an agent's registration on the Tax Practitioners Board's public register. Look for someone who understands ecommerce, including marketplace payouts, foreign currency and GST on imported goods.

Key points

If you are carrying on a business, declare your business income and keep records for at least five years. You can generally deduct expenses incurred in running the business, but not private costs, and only with records. Watch the non-commercial loss rules if you are a sole trader, record foreign currency in Australian dollars, and use accounting software and a registered tax agent to stay organised.

Related guides

Read GST for online sellers, ABN and business names and pricing and margins.