Quick answer: As a sole trader there’s no separate “business tax” — your business profit is added to your personal income and taxed at individual marginal rates (15% to 45% in 2026-27, plus 2% Medicare levy). You register for an ABN (free), not an ACN — an ACN only enters the picture if you incorporate. The catch: nobody withholds tax for you, so your first year can produce a tax bill roughly double what you expected.
This guide covers the rates table, a worked calculation, the 47% no-ABN trap, PAYG instalments, PSI rules, and the honest maths on incorporating — alongside our 2026-27 income tax rates guide.
ABN vs TFN vs ACN — the three numbers, in plain English
Three identifiers get mixed up constantly, and mixing them up costs money:
- TFN (Tax File Number): your personal, confidential tax ID from the ATO — 9 digits, free, yours for life. You give it to your employer; no TFN within 28 days means 47% withheld from pay.
- ABN (Australian Business Number): your business’s public 11-digit identifier, issued by the Australian Business Register — free. It goes on every invoice. This is the sole trader’s number.
- ACN (Australian Company Number): the 9-digit number ASIC issues when a company is registered. You don’t have one as a sole trader, and you don’t need one. “ABN vs ACN” is really a structure decision — do you incorporate? — not a registration step.
Most working Australians need a TFN; sole traders need both. You can only get an ABN if you’re carrying on an enterprise — genuine business activity, not a hobby — and the ATO can cancel one that shouldn’t exist. An ABN doesn’t give you a business name either: trade as anything other than your own name and you register one separately ($47 for one year from 1 July 2026).
The 2026-27 rates that apply to you
Your business profit is taxed at the resident individual rates — and from 1 July 2026 the bottom rate dropped from 16% to 15%, worth $268 a year above $45,000.
| Taxable income | Tax rate | Tax on this bracket |
|---|---|---|
| $0 – $18,200 | 0% (tax-free threshold) | Nil |
| $18,201 – $45,000 | 15% | 15c per $1 over $18,200 |
| $45,001 – $135,000 | 30% | $4,020 + 30c per $1 over $45,000 |
| $135,001 – $190,000 | 37% | $31,020 + 37c per $1 over $135,000 |
| $190,001 and over | 45% | $51,370 + 45c per $1 over $190,000 |
On top sits the Medicare levy at 2% of taxable income (with a low-income shade-in band), plus the surcharge over $105,000 as a single without private hospital cover. And the offset no competitor guide mentions: the small business income tax offset hands unincorporated businesses with turnover under $5 million an automatic 16% of the tax on their business income, capped at $1,000 — calculated by the ATO when you lodge.
Step by step: working out what you owe
- Start with gross business income. Everything invoiced and received — cash, bank transfers, barter, even the no-ABN-withheld amounts (they’re still your income).
- Subtract allowable deductions — materials, subcontractors, vehicle costs, home office, accounting fees, insurance, your own deductible super contributions (see our deductions checklist for the full list).
- The result is your net business income. Add it to any other income (wages, interest, rent) for your taxable income.
- Apply the marginal rates from the table above to get your basic income tax.
- Subtract offsets — the small business income tax offset (up to $1,000) plus any others like the low income tax offset.
- Add the 2% Medicare levy (and the surcharge if it applies).
Our income tax calculator runs the bracket maths in seconds — handy for sense-checking an estimate before you talk to an accountant.
Worked example: Dan’s $110,000 web design profit
Dan runs a freelance web design business in Brisbane: $140,000 invoiced, $30,000 in deductions (software, home office, laptop, accounting). Net business income: $110,000, no other income.
| Step | Calculation | Amount |
|---|---|---|
| Income tax on $110,000 | $4,020 + 30% × ($110,000 − $45,000) | $23,520 |
| Small business income tax offset | 16% × $23,520 = $3,763 → capped | −$1,000 |
| Income tax after offset | $23,520 − $1,000 | $22,520 |
| Medicare levy | 2% × $110,000 | $2,200 |
| Total tax bill | $24,720 |
Dan keeps $85,280 — an effective rate of about 22.5%. The $1,000 offset does real work, and there’s no payroll tax, no company return, no ASIC fees. That simplicity is the whole pitch — until profit climbs into the 37% bracket, when the “should I incorporate?” question below gets serious.
PAYG instalments — the year-one double bill
Employees have tax withheld from every pay. Sole traders don’t, so the ATO collects it differently: PAYG instalments, usually quarterly, credited against your eventual bill.
After your first tax return is assessed, the ATO automatically enters you if all three hold: instalment income (gross business income, not profit) of $4,000 or more, tax payable of $1,000 or more, and estimated notional tax of $500 or more. Most working sole traders trip all three.
The year-one sting: nothing has been collected, so you owe the full year’s bill when you lodge — and the ATO enters you into instalments for the following year at the same time. Last year’s bill and this year’s first instalment can land within weeks of each other. It isn’t a double tax year — instalments are a credit, not extra tax — but the cash-flow shock is real. Blunt it by voluntarily entering PAYG instalments in year one through myGov, and by setting aside 25–30% of every invoice.
Sources: ATO — Starting PAYG instalments; ATO — Small business income tax offset.
The 47% no-ABN withholding trap (both directions)
If you invoice a business and don’t quote your ABN, the payer must withhold 47% of the payment and send it to the ATO — unless an exception applies (the main one: a signed “Statement by a Supplier” declaring the supply is a hobby or private supply). On a $2,200 invoice that’s $1,034 gone; you get it credited back at tax time, but your cash flow just took a body blow for an 11-digit number.
The mirror image: once you pay subcontractors, you must withhold. If a subbie doesn’t quote an ABN and the payment is over $75 (excluding GST), you withhold 47% and report it at label W4 on your BAS. Check every new supplier’s ABN on ABN Lookup first — the cheapest compliance you’ll ever do.
Source: ATO — PAYG withholding (no-ABN rules).
Contractor or employee? The question your ABN doesn’t answer
Having an ABN does not make you a contractor. The ATO decides by the substance of the working arrangement — control over the work, whether you can delegate, who provides the tools, who bears the risk, and whether you’re paid for a result or for time. A “contractor” on set hours with the client’s equipment, unable to send someone else and paid hourly may legally be an employee — entitled to super, leave and award rates.
If you’re the one engaging contractors, getting it wrong is sham contracting: backdated super guarantee charges plus interest, backdated PAYG withholding, and Fair Work civil penalties running into the hundreds of thousands. The ATO and Fair Work Ombudsman data-match contractor payments against tax returns, ABN records and Single Touch Payroll to find this pattern. Run the ATO’s employee/contractor decision tool before any arrangement starts.
PSI: the rule that decides whether a company would even help
Personal services income (PSI) is income earned mainly from your personal effort or skills — freelancers, IT contractors, consultants, solo tradies. The PSI rules stop people funnelling it through a company or trust to split it with a spouse or park it at the 25% company rate: fail the four personal services business (PSB) tests (results, unrelated clients, employment, or business premises) and the income is attributed straight back to you, with some deductions denied. Even passers face the ATO’s PCG 2025/5 scrutiny of income-splitting and profit-retention under the anti-avoidance rules, with a 30 June 2027 deadline.
Bottom line: for most solo service businesses, incorporating saves little or no tax, because PSI attribution pulls the income back to your personal rates. The company only starts winning on genuinely business income — employees, equipment, multiple clients — not your own labour in a different wrapper.
Should I incorporate? The 2026-27 maths
A company pays a flat 25% on profits as a base rate entity (under $50 million turnover, passing the passive income test) or 30% otherwise — no tax-free threshold, and money comes out as salary or franked dividends taxed on your personal return. The company only wins when profits are retained at 25% instead of your top marginal rate.
Three profit levels, all retained — income tax only, before the ~$2,000–3,000/yr a company costs in accounting plus ASIC’s $342 annual review:
| Profit | Sole trader (2026-27) | Company (25%) | Winner |
|---|---|---|---|
| $80,000 | $13,520 (after $1,000 offset) | $20,000 + compliance costs | Sole trader, comfortably |
| $130,000 | $28,520 (after $1,000 offset) | $32,500 + compliance costs | Sole trader, still ahead |
| $180,000 | $46,670 (after $1,000 offset) | $45,000 + compliance costs | Company, if costs stay lean |
The break-even for retained profit sits roughly around $130,000–$150,000 — before the PSI caveat above. Below ~$100,000 the sole trader almost always wins on tax and is dramatically simpler; above ~$130,000 of profit you don’t need to live on, a company starts paying for itself — if the income isn’t PSI and compliance stays cheap. Non-tax reasons often decide it first anyway: limited liability on bigger contracts, hiring staff, a partner, selling the business, or clients who prefer a Pty Ltd.
Two asymmetries worth knowing. A sole trader’s business loss can offset other income (a day-job salary), subject to the non-commercial loss rules — broadly, the ATO quarantines losses from hobby-scale or persistently unprofitable activities; a company’s losses are trapped and carried forward. If you later incorporate, CGT roll-over relief can move business assets in without an immediate CGT bill — get advice first. In 2026-27 the 50% CGT discount still applies to business assets held over 12 months; from 1 July 2027 it’s replaced by cost-base indexation with a 30% minimum tax on gains accruing after that date.
Super, GST and the rest of the obligations
Three obligations trip up sole traders who focus only on income tax:
- Your own super is voluntary — but deductible. Nobody pays it for you. Personal contributions you claim as a deduction (lodge a notice of intent with your fund first) reduce your taxable income, and the concessional cap is $32,500 for 2026-27. See our super calculator and contribution caps guide.
- Your employees’ super is mandatory — on payday. From 1 July 2026 the 12% super guarantee for staff must land on payday, not quarterly. Miss it and the super guarantee charge (shortfall + interest + admin fee, non-deductible) applies — and a contractor engaged wholly for their labour can be deemed an employee for super.
- GST at $75,000. Threshold, 21-day clock and BAS cycle apply whatever your structure — our GST guide and GST calculator cover the detail.
Keep records for five years — every invoice, receipt and the workings behind every claim. The ATO’s myDeductions tool photographs receipts at the point of purchase.
The mistakes that cost sole traders real money
1. Spending the tax money. Nothing is withheld — every invoice is part yours, part the ATO’s. The 25–30% set-aside account is the single highest-value habit in this article.
2. Invoicing without an ABN. One missing number triggers the 47% withholding rule. Put your ABN on your invoice template once and never think about it again.
3. Treating drawings as deductible wages. Paying yourself weekly and claiming it as a wage is fiction — the ATO disallows it.
4. Missing the $75,000 GST trigger. The test looks at current and projected turnover, and the ATO can backdate your registration — retrospective GST, plus penalties.
5. Ignoring super entirely. Voluntary for yourself, yes — but every skipped year is a year of compounding you don’t get back.
6. Assuming a company would fix everything. Incorporating without modelling PSI attribution, the lost $1,000 offset and the compliance overhead routinely leaves people paying more tax.
Practical tips for staying ahead
- Open a separate tax account on day one and sweep 25–30% of every payment into it. Reconcile quarterly.
- Voluntarily enter PAYG instalments early via myGov — four smaller payments beats one shocking bill.
- Review your structure yearly once profit passes $100,000. The right answer at $80,000 isn’t the right answer at $180,000.
- Check PSI exposure before incorporating. If 80%+ of your income is your own labour for one main client, a company is unlikely to save tax.
- Get a tax agent before your first June 30, not after. Agent-lodged returns get an extended deadline (generally mid-May the following year).
- Lumpy creative income? (writing, art, sport) — ask about the special professionals averaging offset, which smooths tax across irregular years.
FAQ: the questions sole traders actually ask
Can I be a sole trader and an employee at the same time?
Yes. Your employer withholds tax from your wages, your business profit is added on top in the same return, and the combined total is taxed at marginal rates. Bracket creep: $60,000 salary plus $60,000 profit is taxed as $120,000.
Do I have to pay super for myself?
No — it’s voluntary. But personal deductible contributions reduce your taxable income and count toward the $32,500 concessional cap (lodge the notice of intent with your fund first).
A client withheld 47% because my ABN was missing. Is that money gone?
No — it’s a credit, not a fine. The withheld amount is credited against your tax bill; anything above what you owe is refunded. Fix your invoice template so it doesn’t happen again.
At what income should I switch from sole trader to a company?
No legislated number. On tax alone the rough break-even for retained profit is around $130,000–$150,000 — and PSI rules mean most solo service businesses never get there. Liability, staff, partners and exit plans are usually better reasons than tax.
Can my business loss reduce the tax on my salary?
Sometimes. A sole trader’s net business loss can generally offset other income, but the non-commercial loss rules can quarantine losses from hobby-scale or persistently unprofitable activities.
The bottom line
Sole trader tax is simple in design — one return, marginal rates, a free ABN, a $1,000 offset most guides forget — and treacherous in practice, because every obligation your employer used to handle (withholding, super, GST registration, quarterly prepayments) now sits with you. Get the ABN on the invoice, set aside a quarter of everything that lands, enter PAYG instalments before the ATO does it for you, and pay your future self some super. Do that, and the structure that costs nothing to set up will serve you well into six figures — at which point, with the PSI maths done properly, the company conversation becomes worth having.
