Updated 26 July 2026
In this guide
How sole trader tax works
Your business profit (income minus deductions) is added to any other income and taxed at individual marginal rates plus the 2% Medicare levy. There is no separate business tax return; the business schedule sits inside your individual return. For 2025-26 the rates are 16% from $18,201, 30% from $45,001, 37% from $135,001 and 45% from $190,001, with the first bracket dropping to 15% from 1 July 2026.
Unincorporated small businesses also get the small business income tax offset: 16% of the tax on business income, capped at $1,000, applied automatically when the return is prepared correctly.
What you actually pay: three profit levels
Full-year sole trader, business profit as only income, 2025-26 rates, Medicare levy included, small business income tax offset and low income tax offset applied where relevant:
| Business profit | Tax + Medicare (approx.) | Effective rate |
|---|---|---|
| $45,000 | ~$4,200 | ~9% |
| $85,000 | ~$17,000 | ~20% |
| $150,000 | ~$38,800 | ~26% |
Rounded to the nearest hundred; your exact position depends on offsets, HELP debts and private health cover. The jump between rows is the story: the marginal system means each extra dollar above $45,000 loses 32c, and above $135,000 loses 39c, which is exactly why deductions, super and eventually structure matter more as profit grows.
The deductions that matter for sole traders
- Everything a small business claims. The full list in our small business deductions guide applies: instant asset write-off (currently $20,000, legislated to 30 June 2026 with the continuation before Parliament and not yet law), prepayments, vehicle claims via logbook or 88c/km, home office, professional fees.
- Personal super contributions. Not compulsory for yourself, but concessional contributions up to the $30,000 cap (2025-26) are deductible and taxed at 15% in the fund instead of your marginal rate. At the 32% marginal band that is a 17c saving per dollar, and the single biggest lever most sole traders ignore. Lodge the notice of intent before claiming.
- Income protection insurance. Deductible outside super.
The systems that keep you out of trouble
- A separate business bank account from day one. Not legally required for sole traders, operationally non-negotiable.
- PAYG instalments. After your first profitable return, the ATO enters you into quarterly instalments, calculated off that first year. The trap is the first year itself: nothing is withheld, so the whole year's tax lands as one bill after lodgment, right when instalments for the following year also start. Put aside 25-30% of profit from the first invoice.
- GST at $75,000. Registration is compulsory once turnover hits or is projected to hit $75,000 over 12 months. Register late and the GST is still payable on the sales you already made, out of your own margin.
- Invoicing basics. Quote your ABN on every invoice. Businesses paying a supplier with no ABN must withhold 47% from the payment, so a missing ABN literally costs you the top tax rate up front. Once GST-registered, invoices over $82.50 must be valid tax invoices showing the GST.
- The moment you hire. Your first employee brings PAYG withholding registration, Single Touch Payroll reporting from the first pay, super at 12% on ordinary time earnings paid each payday under payday super, and workers compensation insurance. Contractor arrangements do not automatically escape any of this; substance beats labels, and misclassification is an active ATO audit program.
- Records for five years. Bank feeds into proper software beat shoeboxes; the bookkeeping decision has its own guide.
When a company starts to win
The company comparison is not just the 25% base rate entity tax rate against your marginal rate, because company profits still get taxed again when extracted. A company genuinely starts winning when:
- Profit consistently exceeds roughly $120,000 to $150,000 and you do not need every dollar personally, so retained profits sit at 25% instead of 37% or more
- Asset protection matters, because sole traders carry unlimited personal liability
- You are bringing in partners, investors or employees with equity
- Personal services income rules do not apply; if the income is really payment for your personal labour, PSI rules can strip most structuring benefits regardless of entity
Structure changes have CGT, duty and rollover considerations, so the move is planned, not improvised. Our structuring guide covers the options, including trusts.
Frequently asked questions
How much tax does a sole trader pay in Australia?
Individual marginal rates plus 2% Medicare on business profit. Roughly $4,200 at $45,000 profit, $17,000 at $85,000, and $38,800 at $150,000 for 2025-26, before personal circumstances.
Do sole traders pay the company tax rate?
No. Sole trader profit is taxed at individual rates. The 25% base rate entity rate only applies to companies.
Do I have to pay myself super as a sole trader?
No, it is optional. But deductible concessional contributions are usually the most tax-effective saving available to a profitable sole trader.
When do I need to register for GST?
When GST turnover reaches or is projected to reach $75,000 over 12 months. Registration is immediate at that point, not at year end.
What are PAYG instalments?
Quarterly prepayments of income tax the ATO requires after your first profitable year, based on that year's result. They offset your final bill at lodgment.
When should I switch from sole trader to a company?
Commonly once profit sustainably exceeds $120,000 to $150,000 with retained earnings, or when liability, partners or investment enter the picture. It is a planned restructure, not a form.
Set the foundations properly
One planning session covers structure, PAYGI, GST timing and the super lever for your actual numbers. Talk to our business accountants.
Talk to our business accountantsThis article provides general information only, current at the date of publication, and does not constitute personal tax, legal or financial advice. Consider your circumstances or speak with us before acting. Liability limited by a scheme approved under Professional Standards Legislation.
