Your Guide to the Tax Rate for Sole Trader: Brackets, Income, and Compliance

Operating as a Sole Trader is the simplest way to run a business. While you benefit from minimal setup complexity, your tax obligations are fundamentally linked to the individual tax system. You use your personal Tax File Number (TFN) and pay tax using the same progressive tax brackets as an employee. However, as the business owner, the burden of calculating your true taxable income and managing compliance—from deductions to superannuation—falls entirely on you.

Sole trader tax guide

I. Determining Sole Trader Taxable Income

For a Sole Trader, calculating taxable income is the most critical step, as it directly impacts your final tax bill. Unlike an employee, you must first calculate your net business profit before adding other personal income.

1. Defining Taxable Income

Taxable income is the final figure used to determine your tax rate and total tax liability.

• Gross Revenue: The total income generated by your business activities before any expenses are removed.

• Net Income (Net Business Profit): Calculated by subtracting all valid, Allowable Deductions from your Gross Revenue. This represents your business’s actual profit.

• Taxable Income: This is the figure that goes onto your tax return and is taxed by the ATO.

  Taxable Income = Net Business Profit + All Other Personal Income (e.g., Salary, Dividends

How to calculate taxable income

2. Allowable Deductions

A crucial part of being a Sole Trader is legitimately reducing your taxable income through deductions. Deductions must be directly related to earning your business income and must not be private or domestic expenses.

Key allowable deductions include:

• Motor Vehicle Expenses: Claiming costs related to business travel, often using a logbook method (tracking all business vs. private kilometres).

• Home Office Expenses: Claiming a portion of utilities, internet, and phone costs, or using the fixed-rate method (e.g., the revised $0.67 per working hour method).

• Depreciation: Claiming the declining value of business assets over their effective life (e.g., computers, equipment).

• Instant Asset Write-Off (IAWO): Allows for the immediate deduction of the full cost of eligible assets up to a specific threshold (e.g., the current $20,000 limit per asset for the 2024/25 financial year).

3. Tax-Free Threshold & Offsets

Sole Traders, like all tax residents, benefit from mechanisms designed to reduce the tax payable on their income:

• The Tax-Free Threshold: The first $18,200 of your annual taxable income is not taxed. If you are a resident for tax purposes for the full year, you are entitled to this benefit.

• Tax Offsets: These directly reduce the amount of tax you have to pay after your tax liability has been calculated. The most common offset for Sole Traders is the Low Income Tax Offset (LITO), which provides up to $700 for those earning less than $66,667.

II. Applying Individual Income Tax Rates and Calculation

As a Sole Trader, you are treated as an individual taxpayer. This means your Net Business Profit is simply combined with any other income you earn and is taxed according to the progressive resident tax scale.

1. Progressive Income Tax System

The progressive system ensures that as your income increases, you only pay the higher marginal rate on the portion of income that falls within that specific tax bracket. This system protects lower-income earners.

2. Current Tax Brackets (for Residents)

The table below details the current individual tax brackets and the corresponding tax rate for sole trader income. These rates exclude the Medicare Levy.

Taxable Income	Tax Rate	Tax Payable
$0 – $18,200	0%	Nil (Tax-Free Threshold)
$18,201 – $45,000	16%	Nil + 16c for each $1 over $18,200
$45,001 – $135,000	30%	$4,288 + 30c for each $1 over $45,000
$135,001 – $190,000	37%	$31,288 + 37c for each $1 over $135,000
$190,001 and over	45%	$51,638 + 45c for each $1 over $190,000

3. Medicare Levy

Almost all Sole Traders who are tax residents must pay the Medicare Levy.

• Rate: The Medicare Levy is a standard 2% of your taxable income.

• Purpose: This levy is a contribution to the public healthcare system and is applied on top of the income tax calculated using the brackets above.

• Exemptions/Reductions: Low-income earners and certain categories of people (e.g., those with specific medical exemptions) may be exempt or qualify for a reduced levy.

4. Calculating Tax Liability: Practical Example

To illustrate the calculation:

A Sole Trader has a Net Business Profit of $70,000 and no other personal income.

1. Taxable Income: $70,000

2. Tax Calculation (Using Brackets):

   • $0 – $18,200: $0 tax

   • $18,201 – $45,000 (Taxed at 16%): ($45,000 - $18,200) x 0.16 = $4,288

   • $45,001 – $70,000 (Taxed at 30%): ($70,000 - $45,000) x 0.30 = $7,500

   • Total Income Tax: $4,288 + $7,500 = $11,788$

3. Medicare Levy: $70,000 x 0.02 = $1,400

4. Tax Offsets (LITO): At this income level, the Sole Trader is entitled to the full Low Income Tax Offset (LITO) of $700.

5. Final Tax Payable (Before PAYG): ($11,788 + $1,400) - $700 = $12,488

III. Key Obligations and Compliance

For Sole Traders, managing cash flow for tax payments and fulfilling reporting obligations throughout the year is crucial for compliant operation.

1. PAYG Instalments

The Pay As You Go (PAYG) Instalment system is the ATO’s method for collecting Income Tax and Medicare Levy liability from Sole Traders before the end of the financial year.

PAYG income tax instalment

• Function: Unlike employees whose tax is withheld automatically, Sole Traders must make quarterly prepayments to the ATO towards their eventual tax bill.

• Avoidance of a Large Bill: This system helps Sole Traders avoid a massive tax bill when they lodge their annual return.

• Eligibility: The ATO will automatically enter you into the PAYG Instalment system once your annual tax liability exceeds a certain threshold.

2. GST Obligations

The Goods and Services Tax (GST) is a separate tax on most goods, services, and other items sold or consumed in Australia.

• Registration Threshold: You are required to register for GST if your business Gross Revenue (turnover) reaches or exceeds $75,000 in a 12-month period (or $150,000 for non-profit organizations).

• Business Activity Statement (BAS): If registered for GST, you must lodge a BAS (usually quarterly) to report and pay GST collected and claim GST credits (GST paid on business expenses).

3. Superannuation Management

As a Sole Trader, you are generally not required to pay the Super Guarantee (SG) for yourself, but you have key obligations and opportunities:

• Employee Obligations: If you hire staff, you must pay the SG (currently $11.5% for 2024/25) on their Ordinary Time Earnings.

• Personal Contributions: Sole Traders can choose to make voluntary contributions to their own Super fund. Crucially, you can then claim these contributions as a tax deduction (subject to annual caps), effectively reducing your taxable income further in Section I.

4. Record Keeping & The 5-Year Rule

Accurate record keeping is the foundation of tax compliance for Sole Traders.

• Documentation: You must keep records that explain all transactions related to your income and allowable deductions (e.g., invoices, receipts, logbooks, bank statements).

• Retention Rule: The ATO requires you to keep most business records for a minimum of five years after you lodge your tax return for that year.

IV. Conclusion

Mastering your obligations as a Sole Trader means understanding two primary areas: firstly, the process of accurately calculating your Net Business Profit and therefore your taxable income through the diligent use of allowable deductions; and secondly, managing the compliance processes like PAYG Instalments and GST to ensure consistent cash flow management and full compliance with the ATO.

Tax laws, thresholds, and government incentives (like the Instant Asset Write-Off) change annually. Proactive tax planning is not optional—it is essential for a Sole Trader’s financial health. We encourage you to stay updated with the latest ATO rulings and, for complex tax affairs or strategic planning, to seek expertise from professional tax agents.