Sole trader tax: a practical guide for 2025⁠–⁠26 and 2026⁠–⁠27

If you work for yourself on an ABN, sole trader tax can feel like a lot to keep track of. This guide is for sole traders and contractors lodging their 2025⁠–⁠26 return and planning for 2026⁠–⁠27. It covers the rates, thresholds and rules that matter most, with a couple of worked examples along the way.

How sole trader tax works

As a sole trader, you and your business are the same person for tax purposes. There's no separate business tax return and no separate tax rate. Your net business profit (business income minus allowable deductions) is added to any other income, such as wages, interest or rent, and taxed at individual rates.

A few things follow from that:

• You lodge an individual tax return using your own tax file number (TFN), with business details reported in the business and professional items schedule.
• You generally need to lodge a return even if your income is below the $18,200 tax-free threshold.
• You can't pay yourself a deductible wage. Money you take out for personal use (drawings) isn't a deduction, and you're taxed on the profit whether you withdraw it or not.

Tax rates for 2025⁠–⁠26 and 2026⁠–⁠27

Personal tax rates changed on 1 July 2026. The Treasury Laws Amendment (More Cost of Living Relief) Act 2025 cut the 16% rate to 15% for 2026⁠–⁠27, and it's legislated to fall again, to 14%, from 2027⁠–⁠28.

These are rates for Australian residents, and they don't include the 2% Medicare levy.

Example (illustrative only): a resident sole trader earns $80,000 of taxable income in 2025⁠–⁠26, all of it from the business.

• Income tax: $4,288 on the first $45,000, plus 30% of the next $35,000 ($10,500), which comes to $14,788
• Medicare levy (2%): $1,600
• Small business income tax offset: capped at $1,000 (explained below)
• Estimated total: about $15,388, before any other offsets or levies

On the same taxable income in 2026⁠–⁠27, income tax falls to $14,520, a saving of $268.

ABN and TFN: getting set up

You'll need an Australian business number (ABN) if you're carrying on, or starting, an enterprise. Applying through the Australian Business Register is free, and including your TFN in the application can speed things up. If you haven't started trading yet, the Register expects to see some commencement activity, such as a website, business insurance or advertising.

It also helps to open a separate bank account for the business. It isn't compulsory for a sole trader, but it makes record keeping, GST and year-end work much simpler.

GST: the $75,000 threshold

You must register for GST when your GST turnover reaches $75,000 or more, and you generally have 21 days to do it. Taxi and ride-sourcing drivers are the main exception: they must register regardless of turnover.

You can register voluntarily below the threshold. That lets you claim GST credits on business purchases, but you'll need to charge GST and lodge activity statements. If you're registered, our guide to BAS due dates for 2026⁠–⁠27 sets out when each statement is due.

If you should have registered and didn't, you may have to pay GST on past sales even though you didn't charge it, plus penalties and interest.

PAYG instalments: paying tax during the year

Once your business is profitable, the ATO may enter you into the pay as you go (PAYG) instalments system, so you pay tax towards the current year in instalments rather than as one lump sum after lodgment. Individuals are generally entered automatically when certain conditions are met, including instalment income of $4,000 or more on your latest return and tax payable of $1,000 or more on your latest notice of assessment.

You can usually pay the amount the ATO works out for you, or calculate each instalment using the rate it gives you. You can also vary your instalments if your income drops. Take care, though: if your varied instalments end up below 85% of your actual tax for the year, the general interest charge may apply. Base any variation on a careful, realistic estimate.

Record keeping: what to keep and for how long

Keep most business records for five years, generally from when you prepared or obtained them or completed the transaction, whichever is later. Some records, such as those for assets you still own, may need to be kept for longer.

Records worth keeping:

• tax invoices and receipts for business expenses
• sales records and bank statements
• a car logbook or record of business kilometres
• a record of hours worked from home, if you claim home office running costs
• contracts, asset purchases and loan documents

Common sole trader deductions

You may be able to claim expenses you incur in carrying on your business, as long as you only claim the business portion. Common examples include:

• tools and equipment, including an immediate deduction for eligible assets costing less than $20,000 under the instant asset write-off, if your aggregated turnover is under $10 million (available for 2025⁠–⁠26 and now permanent from 1 July 2026)
• car expenses, using the cents per kilometre method (88 cents for 2025⁠–⁠26 and 91 cents for 2026⁠–⁠27, up to 5,000 business kilometres) or the logbook method
• home office running costs, for example using the fixed rate of 70 cents per hour for 2025⁠–⁠26
• phone and internet, business software and subscriptions
• business insurance, advertising and website costs
• fees paid to a registered tax agent to prepare and lodge your returns

Our full guide to small business tax deductions goes through the rules and records for each of these in more detail.

Super for yourself: optional, but potentially deductible

The super guarantee doesn't apply to your own earnings as a sole trader. Contributing for yourself is voluntary, but you may be able to claim a tax deduction for personal contributions, which reduces your taxable income.

To claim, you generally need to:

1. make the contribution to a complying super fund
2. give your fund a valid notice of intent to claim a deduction, in the approved form
3. receive the fund's acknowledgment before you claim the deduction in your return

The notice must be given by the earlier of the day you lodge your tax return for that year and the end of the following income year. Miss that window and the deduction may be lost.

Deductible contributions count towards your concessional contributions cap:

• $30,000 for 2025⁠–⁠26
• $32,500 for 2026⁠–⁠27

If your total super balance was under $500,000 at 30 June of the previous year, you may be able to use unused cap amounts from up to five earlier years. If you're aged 67 to 74, you need to meet the work test (or the work test exemption) to claim a deduction.

Jan can explain the tax side of contributions. He doesn't give advice about super funds or investments.

The small business income tax offset

If your business has aggregated turnover under $5 million, you may be entitled to the small business income tax offset. The rate has been 16% since 2021⁠–⁠22. It applies to the part of your income tax that relates to your net small business income, and it's capped at $1,000 a year per person.

Example (illustrative only):

• If the income tax on your business income is $4,000, the offset is $640 (16%).
• If it's $10,000, 16% would be $1,600, so the offset is capped at $1,000.

The ATO works out the offset from the information in your return, so the key is reporting your business income correctly.

Personal services income: a quick note

If most of your income is a reward for your personal skills or effort, such as a consultant or contractor working mainly for one client, the personal services income (PSI) rules may apply. They don't apply if you qualify as a personal services business, for example by passing the results test, or by meeting the 80% rule and one of the other tests.

When the PSI rules do apply, some deductions are limited. For example, you can't claim rent, mortgage interest, rates or land tax for your home, or payments to your spouse for support work. PSI earned through a company or trust can also be attributed back to you, so a new structure won't necessarily change the result.

When sole traders consider a company or trust

Plenty of businesses run well as sole traders for years. People often start asking about a company or trust when:

• profits are growing and they'd like to keep some money in the business
• they want to take on staff, a partner or an investor
• limiting personal liability becomes more important
• they're thinking about succession or an eventual sale

A company pays tax at its own rate (25% for most small companies that are base rate entities in 2025⁠–⁠26). That can look attractive, but the company's money isn't your money. Taking profits out has its own tax consequences, and strict rules apply if you use company funds personally. Companies and trusts also mean set-up costs, separate returns and more administration.

If you're weighing up a trust, note that the 2026⁠–⁠27 Budget announced a minimum 30% tax rate for discretionary trusts from 1 July 2028. Draft legislation was released for consultation in September 2026. It isn't law yet, and the details may change.

There's no one-size-fits-all answer. A tax planning conversation well before 30 June is usually the best time to look at the numbers for your situation.

How Jan can help

Jan works with sole traders and contractors on the Northern Beaches and online Australia-wide, from ABN and GST set-up to BAS, tax returns and planning ahead. You deal with Jan directly and get a fixed-fee quote before any work begins. Book a free intro call to talk through your 2025⁠–⁠26 return or your plans for 2026⁠–⁠27.