How self-employed people are taxed in Australia
If you run your own business in Australia as a sole trader, you and your business are the same legal person. There is no separate business return and no company tax rate. Your net business profit (income after allowable deductions) is added to any other income and taxed at the ordinary individual resident rates through your personal tax return.
It is the simplest structure and the most common for freelancers, contractors, tradespeople and small operators. You trade under your own Tax File Number (TFN), usually register for an Australian Business Number (ABN), and lodge one return covering the income year from 1 July to 30 June. The 2026 income year ran from 1 July 2025 to 30 June 2026, so the figures below are the official Australian Taxation Office (ATO) rates for 2025-26: the ones you use for the return you lodge now.
Income tax rates for sole traders in 2025-26
Australia uses a progressive system, so only the slice of income inside each band is taxed at that band's rate. The first $18,200 is tax free. The following resident rates published by the ATO apply to your taxable income for 2025-26 (they exclude the Medicare levy, covered below).
| Taxable income | Marginal rate | Tax on this band |
|---|---|---|
| $0 to $18,200 | 0% | Nil (tax-free threshold) |
| $18,201 to $45,000 | 16% | 16c per $1 over $18,200 |
| $45,001 to $135,000 | 30% | $4,288 + 30c per $1 over $45,000 |
| $135,001 to $190,000 | 37% | $31,288 + 37c per $1 over $135,000 |
| $190,001 and above | 45% | $51,638 + 45c per $1 over $190,000 |
From 1 July 2026 the 16% band is legislated to drop to 15%, and to 14% from 1 July 2027, but for all of 2025-26 it stays at 16%.
Two automatic offsets reduce the result. The Low Income Tax Offset (LITO) is worth up to $700 if taxable income is $37,500 or less, phasing out at $66,667. The Small Business Income Tax Offset (SBITO) is worth 16% of the tax payable on your net small business income, capped at $1,000 a year, for sole traders with aggregated turnover under $5 million. You do not claim either: the ATO works them out from your return.
The Medicare levy and superannuation
Most residents also pay the Medicare levy of 2% of taxable income, calculated on the same profit figure as your income tax. Offsets such as LITO and SBITO reduce income tax but they do not reduce the levy.
Low-income earners get relief. For 2025-26 the thresholds were lifted by 2.9%, so a single person with taxable income at or below $28,011 pays no levy at all. Between $28,011 and $35,014 a reduced (shaded-in) levy phases in at 10 cents per dollar above the lower threshold, with the full 2% applying only from $35,014. The family threshold starts at $47,238. See the ATO page on the Medicare levy reduction for low-income earners. Higher earners without private hospital cover may also face the separate Medicare Levy Surcharge.
A point that surprises new sole traders: there is no compulsory superannuation on your own drawings. Employees receive employer super at the Superannuation Guarantee rate of 12% in 2025-26, but you need not pay super to yourself. Voluntary personal contributions are generally tax-deductible up to the concessional cap of $30,000 for 2025-26 (a cap that also counts any employer super if you have a job on the side). If you hire staff, you must pay them the 12% Superannuation Guarantee.
GST and the $75,000 registration threshold
Goods and Services Tax (GST) is a 10% tax on most goods and services. You must register once annual business turnover reaches $75,000, or as soon as you expect to, within 21 days of crossing the threshold. Below $75,000 it is optional.
Once registered, you add 10% GST to sales, claim back GST on business purchases, and report the net amount on a Business Activity Statement (BAS), usually quarterly. GST does not increase your profit or your tax bill, because you collect it on behalf of the government. Businesses under $10 million turnover can account for GST on a cash basis, remitting it only once a customer has actually paid you: a real cash-flow advantage if clients are slow payers.
Ride-share and taxi drivers must register regardless of turnover, and non-profits have a higher threshold of $150,000. If turnover falls back below $75,000 you can cancel your registration, but you generally must have been registered 12 months first, and you may have to repay GST credits claimed on assets you still hold.
PAYG instalments: paying tax through the year
In your first year of self-employment you typically pay the whole bill after you lodge. After that, the ATO usually moves you into Pay As You Go (PAYG) instalments, quarterly prepayments toward your expected tax. As an individual you are generally entered automatically once your latest return shows instalment income of $4,000 or more, tax payable of $1,000 or more, and estimated (notional) tax of $500 or more.
There are two calculation methods. The amount method gives a fixed dollar figure set by the ATO, which for 2025-26 was uplifted by a GDP adjustment factor of 4%. The rate method gives a percentage to apply to your actual quarterly income, which suits seasonal earnings because the instalment falls automatically when a quarter is quiet. You can vary an instalment down if income drops, but varying to less than 85% of your true liability can attract interest. Instalments are not an extra tax: they are income tax paid in advance, credited against your final assessment.
Two worked examples: $80,000 and $150,000 profit
Suppose your net sole trader profit for 2025-26 is $80,000, with no other income. Tax builds up band by band:
- First $18,200 at 0% = $0
- Next $26,800 ($18,201 to $45,000) at 16% = $4,288
- Next $35,000 ($45,001 to $80,000) at 30% = $10,500
That gives income tax of $14,788. The SBITO would be 16% of that ($2,366), but it is capped, so you receive $1,000, bringing income tax to $13,788. Add the Medicare levy of 2% on $80,000, which is $1,600, and your total liability is about $15,388, leaving roughly $64,612. That is an effective rate near 19.2%, even though your top marginal rate is 30%.
Now take a profit of $150,000. Income tax is $31,288 on the first $135,000, plus 37% on the remaining $15,000 ($5,550), giving $36,838. The SBITO caps at $1,000 again, so income tax becomes $35,838, and the 2% Medicare levy adds $3,000. Total tax is about $38,838, an effective rate of 25.9%, and you keep roughly $111,162. At this turnover GST registration is compulsory, so that $150,000 must be profit excluding any GST you collected.
One trap at higher incomes: a HELP or other study loan repayment sits on top. From 2025-26 repayments use a marginal system with a threshold of $67,000, charging 15c per dollar between $67,000 and $125,000, then $8,700 plus 17c per dollar above $125,000 (see the ATO repayment thresholds). On $150,000 that is $8,700 plus 17% of $25,000, a further $12,950, taking the bill to about $51,788. Employees have this withheld from every pay. Sole traders do not, so it arrives as a lump sum at lodgement. Run your figures through the Australia sole trader tax calculator before you spend the money.
Key dates, how you pay, and what late costs you
Sole trader tax is not a single annual event. The dates that matter for 2025-26:
| Obligation | Due date |
|---|---|
| Income year ends | 30 June 2026 |
| Tax return, self-lodged via myTax | 31 October 2026 |
| Tax return via registered tax agent | Up to 15 May 2027 (be on their books by 31 October) |
| BAS and PAYG instalment, Q1 (Jul to Sep) | 28 October |
| BAS and PAYG instalment, Q2 (Oct to Dec) | 28 February |
| BAS and PAYG instalment, Q3 (Jan to Mar) | 28 April |
| BAS and PAYG instalment, Q4 (Apr to Jun) | 28 July |
You pay through ATO online services, BPAY or card, using the payment reference number on your notice of assessment or BAS. Two penalties deserve respect. Failure to lodge on time costs one penalty unit for each 28 days (or part) a return or BAS is late, up to five units: at the current penalty unit value of $330, a maximum of $1,650 per document. Unpaid tax also attracts the general interest charge, which compounds daily, has recently sat above 11%, and since 1 July 2025 is no longer tax-deductible. Lodge on time even when you cannot pay, because a payment plan is far cheaper than a late-lodgement penalty stacked on interest.
Deductions, concessions and record keeping
You only pay tax on profit, so every legitimate deduction reduces your bill. The figures most sole traders need for 2025-26:
| Item | 2025-26 figure |
|---|---|
| Instant asset write-off (turnover under $10m) | Assets costing under $20,000, deducted immediately |
| Car expenses, cents per kilometre method | 88c per km, maximum 5,000 business km |
| Working from home, fixed rate method | 70c per hour worked from home |
| Deductible personal super contribution | Up to the $30,000 concessional cap |
| Record retention | 5 years from lodgement |
The $20,000 instant asset write-off applies per asset, so several qualifying purchases can each be written off in full, provided each was first used or installed ready for use by 30 June 2026. From 1 July 2026 the legislated threshold reverts to $1,000 unless a further extension becomes law, so timing a large purchase matters. Other common deductions: tools, insurance, accounting fees, software and depreciation on larger assets.
Practically: open a separate business bank account, and move 25% to 30% of every payment into a savings account the day it lands. If you are registered for GST, set aside the GST portion too, because that money was never yours. Keep receipts and a vehicle logbook, and reconcile monthly rather than in a panic each June.
Sole trader or Pty Ltd: when the company starts to win
Once profit climbs, the question is whether to incorporate. A company pays a flat rate: 25% for a base rate entity (aggregated turnover under $50 million and no more than 80% passive income), or 30% otherwise. That looks attractive beside a 37% or 45% marginal rate, but the comparison is not that simple.
Money inside a company is not yours to spend. To use it personally you must pay yourself a salary or dividend, both taxed in your own hands at individual rates (with a franking credit for tax the company already paid), and taking money out informally can trigger the Division 7A deemed-dividend rules. A company also costs more to run, and you lose both the tax-free threshold and the SBITO. The real advantages are limited liability and retaining profits at 25% to release in a lower-income year. As a guide, incorporating pays for itself when profit consistently exceeds what you need to live on, so money can stay in the company. Model both structures with the Australia Pty Ltd company tax calculator before you commit.
Common mistakes and who these rules do not cover
The most expensive mistake is spending gross revenue. Money received is not profit, and if you are GST-registered then roughly one dollar in every eleven you are paid belongs to the ATO. The second is assuming the tax-free threshold applies twice: if you also have a job, you claim the $18,200 once, and business profit stacks on top of your salary, taxed at your highest marginal rate from the first dollar.
Three groups need different rules. If you earn mainly from your personal skills or labour under a contract, the Personal Services Income (PSI) rules can restrict your deductions and attribute income back to you, even if you invoice through another entity. Foreign residents get no tax-free threshold and pay 30% from the first dollar, though they do not pay the Medicare levy. And if what you do is genuinely a hobby, not a business (no profit motive, no commercial scale), you do not declare the income, but you cannot claim losses either.
Being a sole trader keeps tax simple: one return, individual rates, a 2% Medicare levy, and no compulsory super on your own earnings. Plan for GST once you cross $75,000, PAYG instalments after your first profitable year, and a set-aside so the annual bill is never a shock. These are the official ATO figures for 2025-26, but tax law changes and your circumstances may differ. Use the BizTaxCalc sole trader calculator for your own numbers, and confirm anything significant with a registered tax agent or the ATO.