Sole trader tax in Australia: a complete guide for 2025–26

Published Wednesday 27 May 2026

Table of contents

• Sole trader income tax
• Sole trader tax rates 2025–26
• How to calculate sole trader tax
• Sole trader tax deductions
• 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
• Tips for managing sole trader tax
• Common sole trader tax mistakes to avoid
• Simplify your sole trader tax with Xero
• FAQs on sole trader tax

Key takeaways

• You pay personal income tax on your business profits at individual tax rates, with a tax-free threshold of $18,200 for the 2025–26 financial year.
• You can claim a wide range of business deductions, including home office costs, vehicle expenses, tools, and personal superannuation contributions, to reduce your taxable income.
• You need to register for an Australian Business Number (ABN), lodge your tax return by 31 October each year (or later with a tax agent), and register for goods and services tax (GST) if your turnover reaches $75,000.
• You should keep records of all income and expenses for at least five years, and consider using accounting software to automate tracking and stay on top of your pay as you go (PAYG) instalments and other obligations.

Sole trader income tax

As a sole trader, your business isn't a separate entity for tax purposes. Your business profits are treated as your personal income and taxed at individual income tax rates.

This means you lodge one tax return that covers both your personal and business income. You report your business income in the business and professional items schedule of your individual tax return. Your taxable income is your total income minus any allowable deductions.

One advantage of this structure is simplicity. You don't need to file a separate company tax return or deal with corporate reporting requirements. If your total taxable income falls below $18,200, you won't owe any income tax at all.

Sole trader tax rates 2025–26

Sole traders pay the same income tax rates as every other individual taxpayer in Australia. Your tax is calculated on your total taxable income for the financial year, which includes your business profit plus any other income such as wages or investment returns.

The Australian resident tax rates for 2025–26 are:

• $0 to $18,200: nil
• $18,201 to $45,000: 16 cents for each $1 over $18,200
• $45,001 to $135,000: $4,288 plus 30 cents for each $1 over $45,000
• $135,001 to $190,000: $31,288 plus 37 cents for each $1 over $135,000
• $190,001 and over: $51,638 plus 45 cents for each $1 over $190,000

Medicare levy

On top of income tax, most taxpayers also pay the Medicare levy. This is an additional 2% of your taxable income that funds Australia's public healthcare system. The Medicare levy is calculated on your total taxable income and is added to your income tax bill.

If your income is below certain thresholds, you may qualify for a reduced levy or a full exemption. Check the Australian Taxation Office (ATO) website for the current Medicare levy thresholds.

Small business income tax offset

If your sole trader business has an aggregated turnover of less than $5 million, you may be eligible for the small business income tax offset. This offset can reduce your tax payable by up to $1,000 per year.

The offset is calculated at 8% of the income tax payable on your business income. You don't need to apply for it separately; the Australian Taxation Office (ATO) works it out automatically when you lodge your tax return. It's a useful concession that can make a meaningful difference to your final tax bill.

How to calculate sole trader tax

Calculating your sole trader tax involves a few straightforward steps. Here's a worked example to show how it comes together.

Say you're a sole trader electrician who earned $95,000 in business income during the 2025–26 financial year. You had $20,000 in allowable business deductions, including tools, vehicle costs, and insurance.

1. Work out your taxable income. Subtract your deductions from your business income: $95,000 minus $20,000 equals $75,000 in taxable income.
2. Apply the tax rates. Using the 2025–26 brackets, the first $18,200 is tax-free. The next $26,800 (from $18,201 to $45,000) is taxed at 16%, which comes to $4,288. The remaining $30,000 (from $45,001 to $75,000) is taxed at 30%, which comes to $9,000. Your total income tax is $4,288 plus $9,000, equalling $13,288.
3. Add the Medicare levy. The 2% Medicare levy on $75,000 is $1,500.
4. Apply the small business income tax offset. If your turnover is under $5 million, the offset is calculated at 8% of your business income tax, up to $1,000. In this example, 8% of $13,288 is $1,063, capped at $1,000.

Your estimated total tax is $13,288 plus $1,500, minus the $1,000 offset, equalling $13,788. This doesn't account for other offsets, credits, or additional income you may have.

Sole trader tax deductions

Tax deductions reduce your taxable income, which means you pay less tax. As a sole trader, you can claim deductions for expenses directly related to earning your business income. The key rule is that the expense must have a clear connection to your business activities.

Common day-to-day sole trader deductions include:

• Home office expenses: a portion of rent, electricity, internet, and phone costs if you work from home
• Vehicle expenses: fuel, maintenance, registration, and insurance for business-related travel
• Business travel: transport, accommodation, and meals for work-related trips
• Professional services: fees for accountants, bookkeepers, tax agents, and legal advice
• Phone and internet: the business portion of your mobile phone and internet plans
• Marketing and advertising: costs for promoting your business, including website hosting and online ads

You can also claim deductions for business assets and other costs:

• Tools and equipment: items you use for your business, including computers, software, and trade tools
• Business insurance: premiums for public liability, professional indemnity, and income protection
• Training and education: courses and workshops directly related to your current business activities
• Uniforms and protective clothing: work-specific clothing and safety gear
• Depreciation: the decline in value of business assets over their effective life

Keep receipts and records for every deduction you claim. You need to be able to show the ATO that each expense was genuinely for business purposes. If an expense is partly personal and partly business, you can only claim the business portion.

Superannuation contributions

Unlike employees, sole traders aren't required to pay superannuation for themselves. However, you can make voluntary contributions to your super fund and claim a tax deduction for them.

These are called concessional contributions, and the cap for the 2025–26 financial year is $30,000. To claim the deduction, you need to lodge a "notice of intent to claim" form with your super fund before you lodge your tax return or before the end of the financial year following the year of contribution, whichever comes first. Your fund must acknowledge the notice before you can claim.

Contributing to super is worth considering because it reduces your taxable income now while building your retirement savings. Super contributions are taxed at just 15% inside the fund, which is lower than most individual tax rates.

Sole trader tax obligations

Running a sole trader business comes with several tax obligations. Staying on top of these requirements helps you avoid penalties and keeps your business compliant.

Your core obligations as a sole trader are to:

• obtain 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 GST if your annual turnover is $75,000 or more
• pay tax instalments through the pay as you go (PAYG) system if you meet the criteria
• keep accurate records of all business income and expenses for at least five years

GST registration

You must register for goods and services tax (GST) if your business has an annual turnover of $75,000 or more. Once registered, you charge 10% GST on most goods and services you sell and can claim GST credits for the GST included in your business purchases.

You report and pay GST through your Business Activity Statement (BAS), which is usually lodged quarterly. Even if your turnover is below $75,000, you can choose to register voluntarily. This lets you claim GST credits on business expenses, which can be beneficial if you make significant purchases.

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

Sole trader vs company tax

The main difference between sole trader and company tax is how your income is taxed. As a sole trader, your business profits are taxed at individual rates, which range from 0% to 45%. A company pays a flat tax rate of 25% for small businesses (aggregated turnover under $50 million) or 30% for larger companies.

As a sole trader, you and your business are one and the same for tax purposes. You lodge a single individual tax return and your business profits flow directly into your personal income. A company is a separate legal entity with its own tax return, and you pay yourself through wages or dividends.

The sole trader structure is simpler and cheaper to set up and run. Many businesses start as sole traders and transition to a company structure as they grow and their tax obligations become more complex.

When is your sole trader income tax return due?

Your income tax return is due by 31 October each year if you lodge it yourself. If you use a registered tax agent, you may have a later due date, often extending into the following year. The Australian financial year runs from 1 July to 30 June.

You must lodge your return every year, even if:

• your income is below the tax-free threshold
• you're already making PAYG instalments throughout the year
• your business made a loss

You can lodge your return online through myTax, by mail, or through a registered tax agent. After you lodge, the ATO calculates your final tax and sends a notice of assessment. Any tax owing is due within 21 days of receiving the notice. Late lodgement penalties apply if you miss the deadline.

What are PAYG instalments?

Pay as you go (PAYG) instalments are regular tax prepayments that spread your annual tax bill across the year. Instead of one large payment after lodging your return, you make smaller quarterly payments.

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

• your instalment income is $4,000 or more from your latest tax return
• your tax payable is $1,000 or more on your latest assessment
• your estimated tax is $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 don't meet these criteria, you pay your income tax as a lump sum by the date shown on your notice of assessment.

You can also enter the PAYG system voluntarily. This is a good option if you're in your first year of business or expect your income to grow, because it helps smooth your cash flow and avoids a large tax bill at the end of the year.

How are PAYG instalments calculated?

PAYG instalment amounts are based on your previous year's income and tax. There are two methods to choose from.

The first option is a predetermined instalment amount. The ATO calculates fixed quarterly amounts based on your last tax return, adjusted for expected income growth. Most sole traders use this method because it's straightforward.

The second option is a predetermined instalment rate. You pay a percentage of your actual instalment income for each quarter. The ATO sets the rate based on your previous return.

If you have no income in a quarter, your instalment is zero. This option suits sole traders with income that varies significantly from quarter to quarter.

If you're eligible to choose, both options appear on your first activity statement of the year. Your choice applies for the rest of the financial year. Talk to your accountant about which method suits your situation.

When are PAYG instalments due?

Most sole traders pay PAYG instalments quarterly. At the end of each quarter, the ATO sends you either a Business Activity Statement (BAS) or an Instalment Activity Statement (IAS). If you're registered for GST, you'll receive a BAS that covers both GST and PAYG.

The quarterly due dates are usually 28 days after the end of each quarter: 28 October, 28 February, 28 April, and 28 July. If you lodge online, you may get an extra two weeks. Tax agents can also receive extended deadlines.

How do you lodge and pay PAYG instalments?

You can lodge your PAYG instalments online through your myGov account linked to ATO online services, or through a registered tax agent or BAS agent.

If you lodge a BAS, your PAYG instalment is reported and paid as part of that statement alongside your GST. If you receive an IAS with a predetermined amount, you don't need to lodge it; just pay the amount shown on the notice.

Payment options include BPAY, credit card, debit card, or direct debit. Consider setting up a separate bank account for your tax obligations so you always have the cash ready when a payment falls due.

Record keeping for sole traders

Good record keeping is one of the most practical things you can do for your business. You need to keep records of all income and expenses for at least five years from when you lodge your tax return.

Records you should retain include:

• invoices you've issued and received
• receipts for all business purchases and expenses
• bank and credit card statements
• vehicle logbooks (if claiming vehicle expenses)
• records of any assets you've bought or sold

Organised records make tax time faster and help you claim every deduction you're entitled to. They also protect you if the ATO audits your return. Accounting software can automate much of the tracking, capturing transactions in real time and storing digital copies of receipts so nothing gets lost.

Tips for managing sole trader tax

Staying on top of your tax throughout the year saves you time, money, and stress. These practical tips can help you manage your sole trader tax more effectively.

• Separate your business and personal finances. Open a dedicated business bank account so your business income and expenses are clearly identified. This makes record keeping simpler and helps you track your true business performance.
• Set aside money for tax throughout the year. A common approach is to transfer a percentage of each payment you receive into a separate savings account. This way, you won't be caught off guard by a large tax bill.
• Use accounting software to track income and expenses as they happen. Automated bank feeds and receipt capture reduce manual data entry and give you a clearer picture of your tax position at any point in the year.
• Work with a registered tax agent or accountant. A qualified professional can help you identify deductions you might miss, ensure your return is accurate, and advise on structuring your business for tax efficiency.
• Review your PAYG instalments regularly. If your income changes significantly during the year, you can vary your instalment amount to avoid overpaying or underpaying.

Common sole trader tax mistakes to avoid

Even experienced sole traders can make errors that cost time or money. Being aware of common mistakes helps you avoid them.

• Mixing personal and business expenses. Claiming personal costs as business deductions, or failing to separate the two, is one of the most common audit triggers.
• Not keeping adequate records. Missing receipts or incomplete records mean you could miss out on legitimate deductions or face penalties during an audit.
• Forgetting to lodge on time. Late lodgement attracts penalties from the ATO, even if you don't owe any tax.
• Overlooking deductions you're entitled to. Many sole traders miss deductions for depreciation, home office costs, or superannuation contributions simply because they aren't aware of them.
• Not registering for GST when required. If your turnover exceeds $75,000 and you haven't registered, you could face backdated GST liabilities and penalties.
• Underestimating your tax bill. Failing to set money aside for tax during the year can leave you short when the bill arrives.

Simplify your sole trader tax with Xero

Managing sole trader tax doesn't have to be complicated. Xero accounting software automates bank reconciliation, tracks expenses in real time, and keeps your records organised throughout the year. With features like automated receipt capture through Hubdoc and built-in reporting, you can stay on top of your tax position without the manual effort.

Xero also connects directly with your accountant or tax agent, making it easier to collaborate at tax time. Whether you're tracking deductions, preparing for BAS lodgement, or reviewing your cash flow, Xero brings everything together in one place; get one month free.

FAQs on sole trader tax

Here are answers to frequently asked questions about sole trader tax.

How much tax does a sole trader pay?

A sole trader pays income tax at individual rates ranging from 0% to 45%, plus the 2% Medicare levy, with the first $18,200 tax-free for 2025–26. The amount you owe depends on your total taxable income for the financial year, including business profit and any other income.

What is a sole trader taxed on?

You're taxed on your business profit, which is your total business income minus allowable business expenses. This profit is combined with any other personal income you earn, and you pay tax on the total at individual rates.

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), a unique 11-digit identifier for tax and business purposes. You can apply for free through the Australian Business Register.

Can I claim home office expenses as a sole trader?

Yes, if you regularly work from home, you can claim a deduction for the business portion of costs like electricity, internet, phone, and office furniture. You'll need to calculate the percentage of use that relates to your business and keep records to support your claim.

Can I claim superannuation contributions as a sole trader?

Yes, sole traders can claim a tax deduction for concessional super contributions up to the $30,000 annual cap. You must lodge a valid "notice of intent to claim" with your super fund before claiming the deduction on your tax return.

What happens if my sole trader business makes a loss?

If your business expenses exceed your income, you make a tax loss, which you can generally carry forward to offset against future income in later years. Non-commercial loss rules may apply depending on your income level, so check the ATO guidelines or speak with your tax agent.