More than 1.5 million Australians operate as sole traders. It's the simplest business structure, but the tax obligations can catch new business owners off guard. Here's what you need to know.

Your ABN (Australian Business Number)

An ABN is essential for invoicing clients. Without one, clients must withhold 47% (the top marginal rate + Medicare levy) from payments to you. Get your ABN free through the Australian Business Register. You must be genuinely running a business (not just a hobby) to qualify.

GST Registration

You must register for GST if:

Your GST turnover is $75,000 or more per year
You provide taxi or ride-sourcing services (any turnover)
You want to claim fuel tax credits
You voluntarily register (useful if your clients are GST-registered businesses)

Business Activity Statements (BAS)

If registered for GST, you'll lodge BAS either quarterly (most common) or monthly. BAS reports:

GST on sales (GST collected from customers)
GST on purchases (GST you paid — claim it back)
PAYG instalments (if applicable)
PAYG withholding (if you have employees)
FBT (if you provide fringe benefits)

Use the ATO's BAS agent or accounting software (Xero, MYOB, QuickBooks) to stay on top of lodgements. Late lodgement penalties start at $330.

PAYG Instalments

Once your business tax bill exceeds $1,000, the ATO will likely put you on the PAYG instalment system. Instead of a huge lump sum at tax time, you pay quarterly instalments based on your previous year's tax. You can vary the instalments if your income drops.

Income Tax for Sole Traders

Your business income is added to your personal income and taxed at marginal rates. You don't pay a separate business tax. Key deductions include:

Vehicle expenses (logbook method or cents per km)
Home office expenses (fixed rate or actual cost)
Tools, equipment, and software
Professional development and training
Accounting and bookkeeping fees
Insurance (public liability, professional indemnity)
Marketing and advertising
Phone and internet (apportioned for business use)
Bank fees and merchant processing fees

Superannuation for Sole Traders

Unlike employees, sole traders must organise their own super contributions. While not compulsory, contributing to super is one of the most tax-effective ways to save for retirement. Concessional contributions (taxed at 15%) are deductible against your business income.

Record Keeping

The ATO expects all business records to be kept for 5 years. Use accounting software to track income and expenses in real-time. Store digital copies of all receipts. A separate business bank account makes record-keeping significantly easier.

Common Mistakes

Claiming personal expenses as business expenses
Failing to register for GST when turnover exceeds $75,000
Not setting aside money for tax (save 20-30% of every invoice)
Missing BAS lodgement deadlines
Not separating business and personal finances

How Sole Trader Tax Is Calculated

As a sole trader, your business income is added to your personal income and taxed at the same marginal rates that apply to employees — 16% on income from $18,201 to $45,000, 30% up to $135,000, 37% up to $190,000, and 45% above that for 2025-26, plus the 2% Medicare levy. Your business deductions (expenses incurred to earn that income) reduce the total, and you pay tax on the combined result when you lodge your return. You also pay the Medicare levy, and if your business income is significant, the ATO will require PAYG instalments — quarterly prepayments of tax that are credited against your final bill.

The personal services income (PSI) rules matter here: if your business is essentially your personal labour (like a contractor's), you generally cannot use business structures or trusts to split income — the ATO treats the income as personal services income and applies the rules strictly.

GST and BAS Calendar for 2025-26

Register for GST when your business turnover reaches $75,000 (or $150,000 for non-profit organisations) — the threshold has not changed despite proposals to raise it.
Lodge your Business Activity Statement (BAS) quarterly — due by the 28th of the month after the quarter ends (or monthly if you choose that cycle).
If you have employees, super guarantee is 12% of ordinary time earnings from 1 July 2025, and from 1 July 2026 super must be paid on payday — within 7 business days of each pay run.
Keep GST records separate from private expenses so your BAS claims are clean.

Action Plan for New Sole Traders

Apply for an ABN — it is free and usually instant.
Set up separate business bank accounts so you can prove income and expenses.
Choose accounting software (Xero, MYOB, QuickBooks, or similar) and reconcile it monthly.
Put aside roughly 25–30% of every invoice for tax — the ATO does not withhold tax for you.
Consider a personal deductible super contribution before 30 June — it reduces your taxable income and your super gets the same 15% contributions tax rate as employees.