A sole trader is the simplest business structure in Australia. All business income flows directly to you as an individual and is taxed at your personal marginal income tax rates — the same brackets that apply to salary income. There is no separate company tax rate and no complex entity structure. In return for this simplicity, you are personally liable for all business debts.
How Sole Trader Income Is Taxed
As a sole trader, you report your business income on your individual tax return using the Business and Professional Items schedule. Your net business profit (income minus allowable deductions) is added to any other income you have (salary, rental, interest) and taxed at the applicable marginal rate.
FY2025–26 Individual Tax Rates (Including Medicare Levy)
| Taxable income | Effective rate (approx.) |
|---|---|
| $0 – $18,200 | 0% (tax-free threshold) |
| $18,201 – $45,000 | 16% + 2% Medicare levy |
| $45,001 – $135,000 | 30% + 2% Medicare levy |
| $135,001 – $190,000 | 37% + 2% Medicare levy |
| Over $190,000 | 45% + 2% Medicare levy |
See Australian Tax Brackets Guide for full rates including offsets.
Example
A freelance designer earns $95,000 from clients and has $15,000 in allowable business deductions. Their net business income is $80,000. This is taxed at individual marginal rates, with the Low Income Tax Offset (LITO) phasing out at these income levels.
Allowable Business Deductions
Sole traders can deduct expenses that are incurred in earning their business income. Common deductions include:
- Home office costs — see Work From Home Deductions
- Phone and internet — business-use proportion — see Phone and Internet Deductions
- Motor vehicle costs — business travel (cents per km or logbook method) — see Vehicle Tax Deductions
- Equipment and tools — immediately deductible if under the instant asset write-off threshold, or depreciated over time
- Professional development and education — if directly related to your current business
- Professional memberships and subscriptions
- Accounting and bookkeeping fees
- Insurance — public liability, professional indemnity, income protection (if not claimed elsewhere)
- Superannuation contributions — personal super contributions you make are deductible (up to the $30,000 concessional cap for FY2025–26) if you lodge a notice of intent with your fund
Non-Deductible Expenses
- Personal living costs (food, clothing, rent — unless a genuine home office claim applies)
- Capital expenditure exceeding the instant asset write-off threshold (depreciated, not immediately deducted)
- Fines and penalties
- Entertainment (generally not deductible for sole traders)
The Business Schedule (myTax / Tax Return)
In your individual tax return, sole trader income and expenses are reported in the Business and Professional Items section (previously called the business schedule). You report:
- Gross income from business activities
- Each category of expense (cost of goods sold, rent, wages, depreciation, other expenses)
- Net business income (or loss)
If your business makes a net loss, you may be able to offset it against other income (such as salary) subject to the non-commercial loss rules. These rules limit loss offsetting for higher-income earners unless certain tests are met (income test, assessable income test, profits test, real property test, or other assets test). See a registered tax agent if your business is making consistent losses.
PAYG Instalments
Once your business income results in more than $1,000 in tax payable and your income exceeds a threshold, the ATO places you into the PAYG instalment system. Rather than paying your entire income tax at year end, you pay quarterly instalments throughout the year. See PAYG Instalments for Self-Employed.
Superannuation Obligations
Sole traders have no compulsory obligation to pay superannuation for themselves (unlike employees). However, you should consider making super contributions — they are tax-deductible (up to the concessional cap) and compound over time.
If you hire employees or engage certain contractors, you may have Superannuation Guarantee (SG) obligations to pay their super at 11.5% of their ordinary time earnings (FY2024–25 rate).
GST Registration
If your annual GST turnover reaches $75,000, you must register for GST, lodge BAS, and charge GST on your taxable supplies. See When Do You Need to Register for GST?.
Record-Keeping
Sole traders must keep records for 5 years from the date the record was prepared, obtained, or the transaction completed (whichever is latest). This includes:
- Bank statements
- Invoices issued and received
- Receipts for expenses
- Logbooks (if claiming vehicle expenses)
- Payroll records (if applicable)
Related Articles
- How to Set Up an ABN
- When Do You Need to Register for GST?
- PAYG Instalments for Self-Employed
- Work From Home Deductions
- GST and Business Tax hub
Frequently Asked Questions
Do I pay tax on sole trader income if the business makes a loss? If your business makes a loss and you meet the non-commercial loss rules, you can offset the loss against other income, reducing your overall tax bill. If you do not meet those rules, the loss is deferred and carried forward to offset future business income.
Can I pay myself a salary as a sole trader? No. There is no legal separation between you and your sole trader business. Any money you draw from the business is not a salary — it is simply a personal drawing. Your tax is calculated on the net profit of the business, not on what you pay yourself.
Should I operate as a sole trader or a company? This depends on your income level, liability concerns, and growth plans. Companies are taxed at a flat 25% (for small businesses) rather than the top marginal rate, which may be advantageous at higher income levels. However, companies involve more compliance costs. Speak with an accountant to assess your specific situation.
This article provides general tax information. Tax rules for sole traders can be complex, particularly around non-commercial losses, GST, and super. For advice tailored to your situation, speak with a registered tax agent. Find one through the Tax Practitioners Board register.