Sole Trader Tax Rates in Australia: What You'll Pay and How to Reduce It

How Are Sole Traders Taxed? The Difference Between You and Employees 

Tax Rates for Sole Traders: Your Marginal Rate and What It Means

 

Taxable Income	Tax Rate
$0 to $18,200	0% (tax-free threshold)
$18,201 to $45,000	16% + 2% Medicare levy
$45,001 to $135,000	30% + 2% Medicare levy
$135,001 to $190,000	37% + 2% Medicare levy
$190,001 and above	45% + 2% Medicare levy

The Medicare levy of 2% is added on top of the income tax rates. Your effective marginal rate at the $45,001 to $135,000 bracket is therefore 32%, not 30%.
 

Working Example: $85,000 Taxable Income

You operate a consulting business and earn $110,000 in revenue. Your deductible business expenses total $25,000 (office supplies, subscriptions, travel, equipment depreciation). Your taxable income is $85,000.

Breaking down the tax at $85,000:
  

• $18,200 x 0% = $0
• $26,800 ($45,000 minus $18,200) x 16% = $4,288
• $40,000 ($85,000 minus $45,000) x 30% = $12,000
• Income tax subtotal: $16,288
• Medicare levy: $85,000 x 2% = $1,700
• Total tax payable: $17,988
• Effective tax rate: $17,988 divided by $85,000 = 21.2%

 
Your effective rate is 21.2% - well below your marginal rate of 32% - because the progressive system only applies the higher rate to income above $45,000.
 

The Medicare Levy and How It Adds to Your Tax Bill

The Medicare levy is a flat 2% tax on your taxable income, paid separately from income tax. It applies to most Australian residents earning above the tax-free threshold.

If your income exceeds certain thresholds and you do not hold eligible private hospital cover, you may also face the Medicare Levy Surcharge an additional 1% to 1.5% for singles earning over $101,000 in 2025-26. For families the threshold is higher. An H&R Block consultant reviews your private health insurance status and ensures the surcharge is correctly handled in your return.
 

The Low Income Tax Offset: Are You Eligible?

The Low Income Tax Offset (LITO) provides a direct reduction in tax for lower-income earners. For 2025-26, the maximum offset is $700 and applies to sole traders with taxable income up to $66,667. The offset phases out above $37,500 and disappears entirely at $66,667.

If your taxable income is under $37,500, you receive the full $700. Between $37,500 and $66,667, the offset reduces progressively. Above $66,667, no offset applies.
 

Six Proven Ways to Reduce Your Tax as a Sole Trader

Your marginal tax rate is fixed. But the amount you actually pay is not. Every dollar of legitimate business expense reduces your taxable income dollar-for-dollar. At a 30% marginal rate, an extra $5,000 in deductions saves $1,500 in tax. The six strategies below are the most effective ways sole traders legally reduce their bill.
 

Strategy 1: Maximise Your Work-Related Deductions

You can claim a deduction for any business expense directly related to earning your income. Common deductions for sole traders include office supplies and stationery, professional subscriptions and memberships, software and apps used in the business, professional development courses, business insurance, and accounting and tax consultant fees.

The ATO disallows deductions for private or personal expenses. But many expenses that seem personal have a legitimate business component. A sole trader who uses their mobile phone 60% for business purposes can generally claim 60% of their eligible phone expenses as a tax deduction.

Most sole traders underclaim because they do not keep receipts or do not realise something is deductible.Because H&R Block Tax Consultants work with a wide range of occupations and income types, they understand the deductions that may apply to your circumstances and can help ensure claims are not overlooked.
 

Strategy 2: Claim All Legitimate Home Office and Vehicle Expenses

Home office: Two methods apply:
 

• The fixed rate method (70 cents per hour for 2025-26) covers electricity, gas, phone, internet and stationery and computer consumable.
• The actual cost method allows you to claim the actual proportion of running costs and occupancy costs attributable to your dedicated home workspace. This method typically produces a higher deduction but requires more detailed records and a genuinely dedicated space.

 

Home office rate: 70 cents per hour The fixed rate is 70 cents per hour. The 70-cent rate has applied since 1 July 2024. Verify this rate annually before lodging - it is reviewed by the ATO each financial year. H&R Block consultants apply the current rate automatically.

Vehicle: If you are using your car for your business you can claim a deduction for the business percentage of the cost of running your car, including fuel, repairs, reigstration, insurance, interest on your car loan, depreciation of the car (or lease expenses). You will need to keep a log book to establish your business percentage and receipts to substantiate the claim. If you have not kept a log book you can claim the set rate of 88 cents per km (for the 2025-26 year) for up to 5,000 kms.
 

Strategy 3: Contribute to Super and Claim a Tax Deduction

This is the single most powerful tax-deferral strategy available to sole traders, and it is consistently underused.

As a sole trader you receive no employer super. But concessional contributions you make yourself are taxed at only 15% inside the fund, compared to your marginal rate outside it. If you are earning $90,000 (30% marginal rate plus 2% medicare) and contribute $10,000 to super before 30 June, you save $3,200 in income tax (the $10,000 is deducted from taxable income). The contribution is taxed at 15% inside the fund, giving you a net saving of  $1,700.

The concessional contribution cap is $30,000 per year. Sole traders with a total super balance below $500,000 may have unused carry-forward capacity from prior years, allowing larger contributions in a single year.
  

Important: Super fund lodgement cut-off Contributions must be received and allocated by your super fund before 30 June, not just initiated. Most super funds require lodgement at least 5 business days before the end of June - check your fund's specific cut-off date. You must also lodge a valid Notice of Intent to Claim a Deduction with your fund before you lodge your tax return.Our Tax Experts can advise on the correct documentation sequence.

   

Strategy 4: Harvest Capital Losses Before 30 June

If you hold shares, managed funds, cryptocurrency, or other investments worth less than you paid for them, selling before 30 June realises a capital loss. That loss offsets any capital gains made during the same financial year, reducing your net taxable gain.

For example, an $8,000 capital gain from the sale of an investment offset by a $3,000 realised loss reduces the net gain to $5,000, saving tax at your marginal rate on the $3,000 difference. Net capital losses that exceed gains cannot be claimed against ordinary income but carry forward indefinitely to offset future gains.

Before selling assets solely to harvest a loss, confirm the exit is genuinely intended and that transaction costs make the strategy worthwhile. Selling and immediately repurchasing the same asset to create an artificial loss may attract ATO scrutiny. An H&R Block tax consultant reviews your capital position as part of your return.
 

Strategy 5: Time Your Income and Expenses Strategically

For cash-basis sole traders, the timing of income receipt and expense payment affects which financial year each falls into. If your income is expected to be higher next year, bringing deductible expenses into the current year (paying before 30 June) and deferring income into the next year can reduce your current-year tax burden.

An invoice sent on 1 July falls into the next financial year for a cash-basis sole trader. A business expense paid on 25 June falls into the current year. This is legal and widely used in business tax planning.

Note that accrual-basis taxpayers cannot use this strategy because income is derived when earned, not when received. H&R Block tax consultant confirms which basis applies to your circumstances and implements timing strategies correctly.
 

Strategy 6: Review Your Business Structure

As business income grows, the gap between sole trader and company tax rates widens. A sole trader in the 45% bracket pays 47% on income above $190,000 (including Medicare levy). A company with turnover under $50 million pays a flat 25%.

On $200,000 of net profit, the sole trader pays approximately $60,000 in tax. A company on the same profit pays approximately $50,000 - a $10,000 difference. The company structure involves additional compliance costs, but at this income level the saving is substantial.

The right threshold for restructuring varies by individual circumstances, profit retention plans, and long-term strategy. If your turnover is consistently above $150,000 or net profit consistently above $80,000, an our tax experts can model both structures and show you the actual dollar difference before you commit to a change.
  

Tax planning for sole traders is not a once-a-year job.  H&R Block's tax accoountants work with sole traders across every industry and income level. We prepare your return, identify every deduction you are entitled to, and review your super, structure, and timing strategies to reduce what you pay. If you have been managing your own tax and wondering whether you are missing something - you probably are.  Book your sole trader tax return appointment at your nearest H&R Block office today.

    

PAYG Instalments: When Must You Pay Tax Throughout the Year?

Unlike employees, sole traders do not have tax withheld throughout the year. The ATO places sole traders with a prior-year tax liability above a threshold into the PAYG instalment system, requiring quarterly payments.

Two methods apply. The instalment amount method uses a fixed quarterly amount calculated by the ATO based on your prior year's liability. The instalment rate method applies a percentage rate provided by the ATO to your actual quarterly income - you pay more in strong quarters and less in slower ones.

The single most important practice for sole traders not yet in the PAYG instalment system is to set aside 25 to 30 percent of net profit every quarter into a separate account. The ATO does not prompt you to do this in your first year of business. The first year's tax bill - payable in one amount - consistently surprises sole traders who did not anticipate it.

If your income drops significantly from the prior year, the PAYG instalment amount may overstate your actual liability. H&R Block can review your position and lodge a variation to reduce quarterly payments to a more accurate amount, improving your cash flow during the year.
 

GST Registration: How It Affects Your Tax Position

Once your annual business turnover reaches or is expected to reach $75,000, GST registration becomes compulsory. Below that threshold, registration is optional.

GST does not directly change your income tax position, but it has three practical effects. First, you collect 10% GST from customers on taxable sales and remit the net amount to the ATO quarterly via a Business Activity Statement. Second, you can claim GST credits on eligible business purchases, reducing the net GST you pay. Third, GST registration requires more detailed record-keeping and quarterly BAS lodgements.

For sole traders with turnover just below $75,000 who make significant business purchases, voluntary GST registration can sometimes be worth considering - the input tax credits on purchases may exceed the compliance cost. An H&R Block consultant can calculate whether voluntary registration makes sense for your specific situation and handle all BAS lodgements on your behalf.
 

Sole Trader vs Employee: Why Your Tax Bill Differs

On paper the tax rates are the same. In practice, the experience is very different.

A sole trader earning $85,000 in net profit must set aside approximately $18,000 themselves, pay it quarterly, and lodge a return that correctly accounts for every income source and deduction. They receive no super guarantee from an employer, no sick leave, and no paid holiday that absorbs tax obligations. All of that responsibility sits with them.

The upside of being a sole trader is that the deduction landscape is significantly broader than for employees. Our tax experts are here to ensures you maximise your deductions and minimise your tax payable.
 

Common Sole Trader Tax Mistakes and How to Avoid Them

Mistake 1: Not setting money aside for tax. Many first-year sole traders spend revenue without accounting for the tax bill coming at year end. Set aside 25 to 30 percent of net profit every quarter. An H&R Block tax consultant can help you model the right amount for your income level.
 
Mistake 2: Underclaiming deductions. Most sole traders leave thousands on the table by not claiming expenses they are entitled to. If you spent money earning income, it is likely deductible. Keep receipts and let a professional review what you have spent.

Mistake 3: Mixing personal and business expenses. A subscription to a business publication is deductible. A subscription to a streaming service is not, even if you watch it while working. Separate accounts for business and personal spending makes this problem disappear.

Mistake 4: Not keeping records. The ATO can amend returns up to two years after lodgement  for small and medium business taxpayers and four years for other taxpayers. A deduction without a receipt or written record is a deduction at risk. Keep all invoices and receipts for five years.

Mistake 5: Missing the 30 June super contribution deadline. Contributions must reach the fund before 30 June, not merely be initiated. Most super funds have processing cut-off times of five to ten business days before the end of June. Missing this deadline by one day costs the deduction for the entire contribution.

Mistake 6: Not registering for GST when required. Once turnover reaches $75,000, registration is compulsory. Missing the deadline may result in owing GST retrospectively on past sales where it was not collected.
 

Your EOFY Tax Planning Checklist for Sole Traders

Use this checklist in late June to maximise your tax position before the financial year closes:
 

• Review all invoices. If you operate on a cash basis and expect to be paid soon, check whether invoices issued near 30 June are dated correctly for your preferred income timing approach.
• Review all business expenses for the year. Gather receipts for items purchased. Identify expenses you may have overlooked. An H&R Block tax consultant can run through your spending categories and identify anything claimable that was not captured.
• Confirm your home office method. Run both the fixed rate (70 cents per hour) and actual cost calculations if you have a dedicated space. Out tax experts can help apply whichever produces the better result.
• Check whether you have capital losses available to offset capital gains. H&R Block reviews your investment position as part of your return.
• Make any final super contributions before your fund's cut-off date. Contact your super fund to confirm the lodgement deadline - usually 5 to 10 business days before 30 June. Confirm with your H&R Block consultant the maximum deductible contribution available to you based on your super balance and carry-forward capacity.
• Confirm your annual turnover. If you have crossed or are likely to cross $75,000, ensure GST registration is in place. H&R Block handles GST registration and all BAS lodgements.
• If you employ staff, ensure super guarantee contributions for the April to June 2026 quarter are processed in time to reach the fund by 28 July. From 1 July 2026 super guarnatee payments must be made at the same time an employee is paid, and must reach the super fund within 7 business days of paying the employee.
• Book your tax return/ BAS appointment with your nearest H&R Block office. Tax agents identify deductions that self-prepared returns consistently miss, and strategic advice about your specific situation produces better outcomes than a checklist alone.