A sole trader does not have a business tax rate. Your net business profit — income less deductible expenses — is added to any other income you have and taxed at the ordinary individual income tax rates, with the tax-free threshold and the Medicare levy applying as normal. You lodge one return, not two. The rates and thresholds change most years, so take the current table from ato.gov.au rather than from an article.
How the calculation actually runs
- Business income — everything you invoiced or received, depending on your accounting basis.
- Less deductible expenses — the costs of earning it. See sole trader tax deductions.
- Equals net business profit, which is what goes on the business schedule of your individual return.
- Plus other income — salary from a job, interest, dividends, rent.
- Equals taxable income, taxed at the individual rates.
- Less offsets and credits — including any PAYG instalments you already paid and any tax withheld from wages.
Two consequences follow immediately, and both surprise people:
- A side business on top of a salary is taxed at your marginal rate from the first dollar. There is no second tax-free threshold. If your job already uses it up, business profit is taxed at whatever bracket your total income reaches.
- A deduction saves you your marginal rate, not the whole amount. A $1,000 expense does not save $1,000 of tax. Spending money in June purely to reduce tax leaves you worse off in cash than not spending it.
GST is not income tax
Worth stating plainly, because it is the most common confusion. If you are registered for GST, the GST you collect was never yours — you are holding it for the ATO and remitting it on your BAS. It is not income and it is not taxed as income. Your income figures for tax purposes are GST-exclusive.
Treating GST as revenue is how a business ends up unable to pay its quarterly BAS. Whether you need to be registered at all is a separate question — see do I need to register for GST?
How to pay yourself
You cannot employ yourself. As a sole trader you and the business are the same legal person, so money you take out is drawings, not wages:
- No PAYG withholding on your own drawings, and nothing to report through Single Touch Payroll for yourself.
- Not a deductible expense. Drawings reduce your equity in the business, not its profit. Coding them to an expense account is a real error — see chart of accounts.
- You are taxed on the profit, not on what you withdrew. Leaving money in the business account does not defer the tax on it.
- No superannuation guarantee on yourself. Contributions are voluntary, and personal contributions may be deductible if you lodge a notice of intent with your fund and it is acknowledged before you lodge your return.
Setting money aside
The whole difficulty of sole trader tax is that nobody withholds it for you. The mechanism that works is boring and mechanical:
- Open a second account and do not attach a card to it.
- Move a fixed percentage of every payment into it, on the day it arrives. Not monthly, not when you remember — on the day.
- Add the GST on top if you are registered, because that portion was never yours either.
- Pay the BAS and the tax bill out of that account, and leave whatever is left over there as the buffer for next time.
What percentage depends on your total income and your deductions, which is exactly the sort of thing a registered tax agent can size for you in one conversation. Setting aside too much is a solvable problem; setting aside too little is not.
When a company starts to look better
A company pays a flat rate on its profits rather than progressive individual rates, which is why people ask about incorporating once profits get substantial. The comparison is more involved than the two headline rates suggest:
| Sole trader | Company | |
|---|---|---|
| Tax rate on profit | Individual rates, progressive, plus Medicare levy | A flat company rate, lower for small base rate entities |
| Tax-free threshold | Applies, shared across all your income | None — a company is taxed from the first dollar |
| Getting the money out | Drawings, no further tax — you were already taxed on the profit | Wages or dividends, taxed again in your hands with a credit for company tax paid |
| Losses | May be offset against other income, subject to the non-commercial loss rules | Trapped in the company and carried forward, subject to continuity tests |
| Cost to run | An ABN and a tax return | ASIC registration, annual review fee, annual statement, a separate company return, director obligations |
| Liability | Personal, and unlimited | Limited, with real exceptions including director guarantees and director penalty notices |
The flat rate is a deferral, not a discount — money taken out of a company is taxed again in your hands, with a credit for the tax the company already paid. The structures page goes into this properly: sole trader, partnership, company or trust?
Related reading
- Sole trader tax deductions — what reduces the profit figure
- PAYG instalments — paying it through the year instead of in one hit
- Sole trader, partnership, company or trust? — when the structure should change
- Cash vs accrual accounting — which year the income falls in
Frequently asked questions
There is not one. A sole trader’s business profit is added to their other income and taxed at the individual income tax rates that apply to any resident, including the tax-free threshold and the Medicare levy. Those rates and thresholds change most years, so take the current table from ato.gov.au.
It depends on your total income, your deductions and whether you have other work, so no single percentage is right for everyone. The mechanism matters more than the number: move a fixed percentage of every payment into a separate account on the day it arrives, add the GST on top if you are registered, and ask a registered tax agent to size the percentage for your situation.
Yes. As a sole trader you are taxed on the profit the business made, not on what you withdrew. Leaving money in a business account does not defer anything — there is no separate business entity for it to sit inside. That is precisely why setting money aside for tax matters as the income arrives.
No. GST you collect is never your income — you hold it and remit it to the ATO on your BAS. Your income for tax purposes is the GST-exclusive amount. Counting GST as revenue is the classic reason a business finds it cannot pay the quarterly BAS.
The tax-free threshold applies once, across all of your income. If you also have a job and claim the threshold there, your business profit is taxed at your marginal rate from the first dollar. If the business is your only income, the threshold applies to it in the ordinary way.
Sources
Individual income tax rates, the treatment of sole trader business income, drawings, and personal super contribution deductions come from the Australian Taxation Office. Rates and thresholds change most years — take the current figures from ato.gov.au or a registered tax agent, not from this page. Balaana is bookkeeping software, not a tax agent — this article is general information, not personal tax advice.