An ABN is the cheapest business structure in Australia and the one most people get wrong. There is no payroll, no company return and no separate tax rate: you and the business are the same taxpayer, which is simple until the first PAYG instalment notice arrives and you realise nobody has been withholding anything for you. This guide walks through the whole cycle for a sole trader, using the rates that applied to the 2025-26 year (which closed on 30 June 2026) and the rates that took effect on 1 July 2026.
What an ABN actually is, and what it is not
An Australian Business Number is an 11-digit identifier issued by the Australian Business Register. It is a registration, not a legal entity and not a tax structure. Getting one does not create a business separate from you, does not limit your liability, and does not change the rate at which your profit is taxed. It does three practical things: it lets you quote a number on invoices so payers do not have to withhold 47% under the no-ABN withholding rule, it is the key you use to add GST, PAYG withholding and other roles later, and it makes you findable in ABN Lookup so clients can verify you exist.
The important consequence is that your business profit lands on your personal tax return at label 15 (net business income), gets added to any salary, interest or rental income you have, and is taxed at your marginal rate. There is no 25% small business company rate for a sole trader. If people tell you a company pays less tax, they are comparing a company rate to your top marginal rate and ignoring what it costs to get the money out of the company.
Getting an ABN without getting knocked back
You apply free through the Australian Business Register. The application is short, but the entitlement test is real: you must be carrying on an enterprise, which means a genuine commercial activity with a profit motive, repetition and some business-like organisation. A single one-off sale of a personal item does not qualify. A hobby that never intends to profit does not qualify. Applications from people who are really employees in disguise get refused or later cancelled, and the ATO reviews inactive ABNs and cancels them.
Have ready: your tax file number, proof of identity, the date you want the ABN to start (you can backdate to the date you actually began trading), your main business activity code and your business address. If the application is straightforward you get the number on screen in minutes. If it is referred for review, allow up to 28 days. Register a business name separately through ASIC if you trade under anything other than your own legal name. That costs about $44 for one year or roughly $102 for three years, and it is a name registration only, not a trademark.
The tax-free threshold, and the rates that apply to your profit
As a resident sole trader your first $18,200 of total taxable income is tax free. That threshold is per person, not per income source, so if you also have a job the threshold is already being used by your employer's withholding and every dollar of business profit stacks on top of your salary. This is the single most common cash-flow shock for people running a side business: the profit is taxed at the marginal rate that sits above their wage, not at zero.
The rates published by the ATO for Australian residents changed on 1 July 2026. Only the second bracket moved, but it applies to almost everybody:
| Taxable income | 2025-26 rate (year ended 30 June 2026) | 2026-27 rate (from 1 July 2026) |
|---|---|---|
| $0 to $18,200 | Nil | Nil |
| $18,201 to $45,000 | 16% | 15% |
| $45,001 to $135,000 | 30% | 30% |
| $135,001 to $190,000 | 37% | 37% |
| $190,001 and above | 45% | 45% |
The one percentage point cut in the second bracket is worth a maximum of $268 per year (1% of the $26,800 that sits inside that bracket). It applies from the 2026-27 year onward. The return you lodge for the year ended 30 June 2026 still uses 16%, so do not let a 2026-27 calculator tell you what you owe for last year. Our Australia sole trader tax calculator lets you switch between the two years.
Medicare levy sits on top of all of it
The Medicare levy is 2% of your taxable income, not 2% of your tax. It is not built into the bracket table above and it has no tax-free threshold of its own beyond the low-income reduction, which phases out well below $30,000 for singles. For a sole trader on a $95,000 profit the levy is $1,900, which is a real quarterly cash item and one of the reasons a naive bracket calculation understates what you owe.
Separately, the Medicare levy surcharge of 1% to 1.5% applies if your income for surcharge purposes exceeds $101,000 (single) or $202,000 (family) for 2025-26 and you do not hold an appropriate private hospital policy. Sole traders get caught by this more often than employees because a good year pushes them over the line unexpectedly. Hospital cover for a single person typically costs less than the surcharge at those income levels, so it is worth running the numbers before June rather than after.
A worked example: $120,000 invoiced, $25,000 of expenses
Take a freelance designer, resident, no other income, no HELP debt. She invoices $120,000 (GST exclusive) and has $25,000 of deductible expenses, so her net business income is $95,000. For the 2025-26 year:
- $0 to $18,200 at nil: $0
- $18,201 to $45,000: $26,800 at 16% = $4,288
- $45,001 to $95,000: $50,000 at 30% = $15,000
- Gross tax: $19,288
- Less small business income tax offset (capped): $1,000
- Tax payable: $18,288
- Plus Medicare levy at 2% of $95,000: $1,900
- Total 2025-26 liability: $20,188
That is an effective rate of 21.25% on the $95,000, while her marginal rate is 32% (30% plus the levy). Run the identical figures under the 2026-27 rates and the second bracket produces $26,800 at 15% = $4,020, gross tax of $19,020, tax after the offset of $18,020, plus the same $1,900 levy, for a total of $19,920. The rate cut saves her exactly $268. Note that the low income tax offset does not help her: it cuts out at $66,667 of taxable income.
The small business income tax offset almost nobody claims correctly
The small business income tax offset gives you 16% of the income tax attributable to your total net small business income, capped at $1,000 per person per year, and you qualify if the business has aggregated turnover under $5 million. It is non-refundable, so it can reduce your tax to zero but not below.
Two traps. First, the cap is per person across all your small business income, not per business, so running three ABNs does not get you three lots of $1,000. Second, the 16% applies only to the tax on the business slice of your income. If you earn $60,000 in wages and $20,000 from an ABN, the offset is 16% of the tax attributable to the $20,000, not 16% of your whole tax bill. In the example above the calculation was 16% of $19,288 = $3,086, which is over the cap, so the offset is $1,000. Anyone with a business profit above roughly $57,000 will hit the cap.
PAYG instalments: the bill that arrives before the bill
Nobody withholds tax from your invoices, so the ATO makes you pre-pay. You are entered into the system automatically once your latest return shows instalment income (gross business and investment income, excluding GST and capital gains) of $4,000 or more and tax payable on your notice of assessment of $1,000 or more, per the ATO's entry rules.
The catch is timing. In your first profitable year nothing is withheld, so you lodge, get a lump-sum bill, and then start quarterly instalments on top of it. Our designer with a $20,188 liability would face instalments of roughly $5,047 a quarter, due 28 October, 28 February, 28 April and 28 July. Two important levers: you can vary an instalment down if your income has genuinely fallen (but if you under-vary by more than 15% the ATO can charge the general interest charge), and you can choose the instalment rate method instead of the fixed amount so the payment moves with your actual quarterly income. If your business is seasonal, the rate method is usually kinder.
GST: the $75,000 line and the 21-day rule
GST registration becomes compulsory once your GST turnover reaches $75,000 in a 12-month period, and you must register within 21 days of crossing it. Turnover here means gross business income excluding GST, tested on a rolling basis: current month plus the previous 11, and current month plus the next 11 projected. It is not the financial year, and it is not profit. A sole trader who bills $6,500 a month crosses $78,000 on a rolling 12-month basis regardless of what the July-to-June figure says. See the ATO registration guidance for the exceptions (taxi and rideshare drivers must register from the first dollar).
If you register late, the ATO can still assess the GST on sales you made after the threshold date, and you may not be able to go back to clients to collect it. That is a straight 1/11th out of your own pocket. Model both sides with the Australian GST calculator before you decide, and use the ABN tax calculator to see the combined income tax and GST position.
Deductions that survive an audit
The test is simple to state and harder to apply: the expense must be incurred in earning your assessable income, it must not be private or capital in nature, and you must have a record. Common sole trader claims that hold up include software subscriptions, professional indemnity and public liability insurance, accounting and bookkeeping fees, industry association memberships, advertising, contractor payments (with an ABN or you withhold), bank and merchant fees, and the business portion of phone and internet.
Home office: the fixed-rate method for 2025-26 is 70 cents per hour, which bundles electricity, gas, phone, internet, stationery and computer consumables. You need a record of the actual hours worked from home for the whole year, not a four-week diary, plus one bill for each item covered. The actual cost method usually beats it for anyone with a dedicated room and high energy costs, but it needs floor-area apportionment and receipts. Motor vehicle: the cents-per-kilometre rate is 88 cents for 2025-26, capped at 5,000 business kilometres, or you keep a 12-week logbook and claim the business percentage of real costs. Do not claim home-to-work travel, and be careful with clothing: only occupation-specific, protective or logoed uniforms qualify.
Records, super and the three mistakes that cost the most
Keep every record for five years from the date you lodge the return that relies on it, in English, and in a form you can produce (a photo of a receipt is fine). Reconstruct nothing at the last minute: bank feeds plus a cloud ledger cost less per month than one hour of an accountant untangling a shoebox.
Superannuation is optional for sole traders, which is exactly why it gets skipped. Personal deductible contributions are capped at $30,000 of concessional contributions for 2025-26 (and you may be able to use unused cap from the previous five years if your total super balance was under $500,000 on the preceding 30 June). You must lodge a notice of intent to claim with your fund and get their acknowledgement before you lodge your return, or the deduction is lost.
The three expensive mistakes, in order of how often they show up: spending the GST you collected because it sat in the same account as your income, ignoring the first PAYG instalment notice and compounding the general interest charge, and treating turnover as income when calculating how much to set aside. A workable rule for a full-time sole trader with no other income is to move 30% of every payment received into a separate account, plus the GST if you are registered. It will usually be slightly more than you need, which is the point.