Sole trader tax rates for 2026-27: how your business income is taxed

You are taxed on profit, not turnover

Your taxable business income is your business income minus allowable deductions. A consultant who invoices $120,000 and has $20,000 of deductible expenses has $100,000 of business profit. That profit goes on your individual tax return alongside any wages, interest or other income, and the total is taxed at marginal rates.

What you draw out of the business account during the year does not matter for tax. If the business made $100,000 and you transferred $60,000 to your personal account, you are still taxed on $100,000. See how to pay yourself as a sole trader.

How marginal rates work

Australia uses progressive brackets. The first $18,200 of your total income is tax-free. Income above that is taxed in slices, with each slice taxed at the rate for its bracket, and higher slices at higher rates. The rate on your last dollar is your marginal rate; the average rate across everything you earn is always lower.

The practical effect for a sole trader: an extra $1,000 of profit is taxed at your marginal rate, and an extra $1,000 of deductions saves you tax at that same rate. Knowing your bracket tells you what a deduction is worth.

Where to find the 2026-27 rates

We do not reproduce the rate table here because it changes, and a stale table is worse than none. The government legislated a reduction to the lowest bracket rate taking effect from 1 July 2026, with a further step in 2027-28, so the 2026-27 figures differ from the previous year. Confirm the current individual income tax rates on the ATO website before you rely on any number.

What does not change often: the $18,200 tax-free threshold, the fact that non-residents have no tax-free threshold and a different table, and the structure of the brackets.

Medicare levy and offsets

On top of income tax, most residents pay the Medicare levy of 2% of taxable income. Low-income earners pay a reduced or nil levy below thresholds the ATO publishes each year. If you earn above the Medicare levy surcharge thresholds and do not hold appropriate private hospital cover, a surcharge of 1% to 1.5% can apply as well.

On the other side, the low income tax offset reduces tax for people on lower incomes automatically. You do not need to claim it; the ATO applies it in your assessment.

Estimating your bill

A quick estimate is worth doing early in the year so you can set money aside:

• Estimate your business profit for the year (income minus deductions).
• Add any other income: wages, interest, dividends.
• Apply the current ATO rate table to the total, then add 2% Medicare levy.
• Subtract any tax already withheld from wages and any PAYG instalments you have paid.

Our sole trader tax calculator does the arithmetic with the current rates. As a rough rule for planning, many sole traders put aside 25% to 30% of profit for income tax and adjust once they know their bracket.

Paying through the year

Once you have lodged a return showing business profit, the ATO will usually enter you into PAYG instalments, which pre-pay your tax each quarter. In your first year there are no instalments, so the whole year’s tax is due after you lodge. Plan for that from the first invoice.

What lowers the bill

Three things move the number more than anything else: claiming every legitimate deduction, keeping the records to support them, and contributing to super. Deductible super contributions reduce taxable income and are taxed at 15% inside the fund rather than your marginal rate; see sole trader super contributions. For deductions, start with sole trader tax deductions.