Sole trader tax: How much you pay and what to claim it in Australia

Published Monday 24 November 2025

Table of contents

• Sole trader income tax
• Sole trader tax rates and how they’re calculated
• Sole trader tax obligations
• Sole trader vs company tax
• When is your sole trader income tax return due?
• What are PAYG instalments?
• Record keeping for sole traders
• Managing sole trader tax
• FAQs on sole trader tax

Key takeaways

• Register for an Australian Business Number (ABN) and lodge annual income tax returns by 31 October (or later with a tax agent), even if your income falls below the tax-free threshold.

• Claim allowable business deductions including home office expenses, business travel costs, and vehicle expenses to reduce your taxable income, which is calculated by subtracting business expenses from total business income.

• Enroll in the PAYG instalments system to spread your annual tax bill across quarterly payments if you meet the criteria (instalment income of $4,000+, tax payable of $1,000+, and estimated tax of $500+).

• Maintain organised records of all income and expenses for at least five years, including invoices, receipts, and bank statements, to ensure compliance and make tax preparation easier.

Sole trader income tax

Sole trader income tax is personal income tax applied to your business profits at individual tax rates. As a sole trader, your business profits are taxed at individual income tax rates, just like your personal income.

Here’s how this structure can help you:

• manage just one tax return instead of separate business and personal returns
• pay tax only on combined income above $18,200

You include all your business income in your individual tax return under the business items section. Your taxable income is your total income minus allowable deductions.

Common sole trader deductions include:

• Business travel: Transport and accommodation for work trips
• Home office expenses: Portion of utilities, rent, and equipment costs
• Vehicle expenses: Business use of your car or truck

You can claim deductions for some business activities – for example, business travel, home office or vehicle expenses.

Sole trader tax rates and how they’re calculated

As a sole trader, you pay the same income tax rates as an individual, but you may be eligible for the small business income tax offset, which can reduce your tax payable by up to $1,000 per year. This means your business profits are added to any other income you have, and you’re taxed on the total amount. You pay tax on income over the tax-free threshold.

To work out your taxable income, you simply subtract your allowable business expenses from your total business income. This final figure is what you’ll be taxed on.

Sole trader tax obligations

As a sole trader, you need to:

• get an Australian tax file number (TFN) and an Australian business number (ABN)
• lodge an annual income tax return, even if your income is below the tax-free threshold
• register for goods and services tax (GST) if your business turnover is $75,000 or more
• pay tax instalments through the pay as you go (PAYG) system if you meet the criteria

Sole trader vs company tax

The main difference between being a sole trader and a company is how you handle tax. As a sole trader, your business isn’t a separate legal entity. You and your business are one and the same for tax purposes, which simplifies things.

A company, on the other hand, is a separate legal entity and pays tax at the company tax rate. This structure has more complex reporting requirements. Many businesses start as sole traders and become companies as they grow.

When is your sole trader income tax return due?

Your tax return is due by 31 October if you lodge it yourself, or later if you use a tax agent. The Australian financial year runs from 1 July – 30 June.

Late lodgement penalties apply if you miss the deadline. You must lodge annually regardless of your income level, even if:

• Your income is below the tax-free threshold
• You’re making PAYG instalments throughout the year

You can lodge your income tax return with the ATO using myTax, by mail, or through a registered tax agent.

After you lodge your tax return, the ATO calculates how much tax you owe or if you are due a refund. The ATO then sends your notice of assessment, and you must pay any tax due within 21 days of receiving it.

What are PAYG instalments?

PAYG instalments are quarterly tax prepayments that spread your annual tax bill across the year. Instead of one large payment after lodging your return, you pay smaller amounts quarterly.

The ATO automatically puts you into the PAYG instalments system when you meet all three criteria:

• have instalment income of $4,000 or more from your latest tax return
• have tax payable of $1,000 or more on your latest assessment
• have estimated tax of $500 or more for the current year

*Your instalment income is your gross business and investment income, excluding GST and any capital gains.

If you do not meet these criteria, you pay your income tax in one lump sum by the date shown on your notice of assessment.

Voluntary PAYG instalments help smooth cash flow and avoid large tax bills. This option works well if:

• You’re in your first year of business
• Your income will likely exceed the automatic enrollment thresholds
• You want to spread tax payments evenly throughout the year

The ATO has a calculator to help you estimate your income and instalment amounts. You can increase or reduce the instalment amounts if your circumstances change.

You may want to put your PAYG liability into a separate bank account so you have the cash ready when it is due. Talk to your tax agent or accountant about the best way to manage your PAYG instalments.

How are PAYG instalments calculated?

PAYG instalment amounts are calculated using your previous year’s income as the baseline, since future income can’t be predicted with certainty.

There are two options: a predetermined instalment amount or a predetermined instalment rate.

If you are eligible to choose, both options are shown in your first activity or instalment statement of the year. You pick which one to use and that applies for the rest of the financial year.

Most sole traders use the predetermined instalment amount, but some choose the predetermined instalment rate. Discuss the benefits and drawbacks of each option with your accountant or tax agent.

1. Predetermined instalment amounts

The ATO calculates your PAYG instalment amounts for you. They’re based on the previous year’s instalment income and adjusted to reflect your likely income.

1. Predetermined instalment rate

You pay a percentage of your instalment income for the quarter or income year just gone. The ATO calculates your instalment rate as a percentage based on your previous year’s tax return. If you have no income in a quarter, your instalment amount will be zero.

When are PAYG instalments due?

Most sole traders pay their instalments quarterly.

At the end of each quarter, the ATO sends you either a Business Activity Statement (BAS) or Instalment Activity Statement (IAS). If you’re registered for GST you’ll get a BAS.

Find out more about GST and BAS in the GST and BAS guide.

If you lodge online, you can find your activity statement in your ATO Online services account. The due date for your payment is usually 28 days after the end of the quarter — 28 October, 28 February, 28 April, 28 July — unless you’ve lodged through a tax agent.

If you receive and lodge your statements online you might be able to get an extra two weeks to lodge and pay your instalment. And if you use a tax agent, they can lodge up to three weeks later.

How do you lodge and pay PAYG instalments?

There are a number of ways you can lodge your PAYG instalments.

• online through your myGov account and ATO’s online services
• through a tax agent or BAS agent

Business activity statement (BAS): You or your BAS agent completes and lodges it to report your PAYG instalment. The BAS covers both GST and PAYG instalments, so you do not need to report and pay them separately.

Instalment activity statement (IAS): You do not need to complete or lodge it unless you want to vary the amount. You simply pay the amount shown on the notice.

You can pay the ATO electronically by BPAY, credit card or debit card. Find out more about how to pay the ATO.

Record keeping for sole traders

Keep records of all your income and expenses for at least five years. This includes invoices, receipts and bank statements.

Organised records make tax time easier and help you track your business performance. Accounting software can automate much of this process, saving you time and helping you stay compliant.

Managing sole trader tax

Effective tax management protects your business from penalties and maintains healthy cash flow. Poor tax management leads to:

• Financial penalties from the ATO for late or incorrect lodgements
• Cash flow problems from unexpected large tax bills
• Lost time dealing with compliance issues

You can make business tax easier by using Xero accounting software, keeping accurate records of your expenses and income, and working with bookkeepers, accountants or tax agents. Most sole traders in Australia use a tax advisor and consult with them once or twice a year to check they are managing their taxes correctly.

FAQs on sole trader tax

Below are answers to some of the most common questions about sole trader tax.

How much tax does a sole trader pay?

A sole trader pays tax at the same rate as an individual. The amount you pay depends on your total taxable income for the financial year, which includes your business profit plus any other income.

What is a sole trader taxed on?

You’re taxed on your business’s profit. This is calculated by taking your total business income and subtracting any allowable business expenses you’ve incurred.

Do I need an ABN as a sole trader?

Yes, if you’re running a business in Australia, you need an Australian Business Number (ABN). It’s a unique identifier for your business and is essential for tax and other business activities.

Can I claim home office expenses as a sole trader?

Yes, if you work from home, you may be able to claim a deduction for the costs of using your home as an office. This can include a portion of your utility bills, internet, and phone expenses.