A sole trader's business profit is taxed at the same individual marginal rates as employee income. There is no separate business tax rate. What you should set aside therefore depends on your total taxable income for the year, and — more importantly than most guides admit — on which rate you use to work it out.
Why there is no single sole trader tax rate
A company pays a flat rate on every dollar of profit. A sole trader's net business income (income minus deductible expenses) is added to any other income and taxed through the individual brackets, plus the Medicare levy, minus the small business income tax offset. There is also no employer super guarantee on your own drawings.
What you actually pay at each profit level
Total tax below is income tax after the small business offset, plus Medicare levy, assuming no other income, no study loan and no personal super contributions.
| Net profit | Total tax | Effective rate | Marginal rate | Take-home |
|---|---|---|---|---|
| $30,000 | $986 | 3.3% | 25.0% | $29,014 |
| $40,000 | $2,972 | 7.4% | 22.0% | $37,028 |
| $50,000 | $5,387 | 10.8% | 33.5% | $44,613 |
| $60,000 | $8,620 | 14.4% | 33.5% | $51,380 |
| $80,000 | $15,120 | 18.9% | 32.0% | $64,880 |
| $100,000 | $21,520 | 21.5% | 32.0% | $78,480 |
| $120,000 | $27,920 | 23.3% | 32.0% | $92,080 |
| $150,000 | $38,570 | 25.7% | 39.0% | $111,430 |
| $200,000 | $58,870 | 29.4% | 47.0% | $141,130 |
Two columns, and they answer different questions. The effective rate tells you what the whole year cost. The marginal rate tells you what the next invoice will cost. Set-aside is a question about the next invoice.
The 30% rule of thumb breaks where it matters most
"Set aside 30%" is the standard advice, and it is roughly right at the top of that table and roughly right at the bottom. It fails in the middle.
Look at the marginal column. Between $45,000 and $66,667 the rate is 33.5%, not 32% and not 30%. That is because the low income tax offset is still being withdrawn across that band — 1.5 cents of vanishing offset on top of the 30% bracket and the 2% Medicare levy. Every extra dollar of profit in that range costs you 33.5 cents.
So a sole trader whose profit is growing through the $45,000 to $66,667 band — which is most of them, at some point — is setting aside 30% against a real cost of 33.5%. That is $35 short on every $1,000 invoiced, accumulating quietly all year.
Above $66,667 the rate settles back to 32% and the rule of thumb becomes safe again. Below $45,000 it is generously conservative. The gap is narrow, specific and precisely where a growing business lives.
Set aside the marginal rate, not the average
What to hold back from the next invoice
Hold back this much of every $1,000 you invoice
$335.00
That is your marginal rate of 33.5%, which is what the next dollar is taxed at. The 30% rule of thumb leaves you $35.00 short per $1,000 at this level.
| Income tax | $8,420 |
| Less small business income tax offset | −$1,000 |
| Medicare levy | $1,200 |
| Total tax for the year | $8,620 |
| Effective rate on the whole profit | 14.4% |
| Rough quarterly PAYG instalment | $2,155 |
The small business offset has hit its cap here, so it stops growing with your profit — it is worth proportionally less the more you earn.
No study loan, no personal super contribution and no other deductions. The ATO sets your real instalment from your last return. Run your full position in the Sole Trader Tax Calculator.
The small business offset stops helping as you grow
The small business income tax offset is 16% of the basic income tax attributable to your net small business income, capped at $1,000 a year.
That cap does more work than the rate. It binds at about $52,400 of profit, and from there the offset is frozen at $1,000 no matter how much you earn. As a share of your tax it therefore shrinks steadily:
- At $50,000 of profit it is $883 — about 14% of the tax you would otherwise pay
- At $80,000 it is $1,000 — about 6%
- At $120,000 it is $1,000 — about 3.5%
- At $200,000 it is $1,000 — about 1.7%
One detail worth knowing because it is easy to get wrong: the offset is calculated on your basic income tax liability, meaning your tax before other offsets such as the low income tax offset are applied — not after. Calculating it on the post-LITO figure understates it, which matters most at exactly the incomes where the offset is not yet capped.
It also requires aggregated turnover under $5 million, and it is an offset rather than a deduction — a direct reduction of tax payable, applied after your deductions have already done their work.
What to set aside, in practice
Take your marginal rate from the table, not 30%, and hold that share of each payment the day it lands. Two habits make it work:
Separate the money the day it arrives. Tax you have already spent is the entire problem. A second account and a standing transfer removes it.
Set GST aside separately, and first. GST was never yours. If you are registered, or your turnover reaches the $75,000 threshold, one-eleventh of every GST-inclusive payment belongs to the ATO from the moment it arrives — see the GST calculator and the guide to BAS due dates for the quarterly cycle.
Run your own position, including other income and super contributions, on the Sole Trader Tax Calculator.
The two things that are not in the table
Superannuation. With no employer contribution, nothing is going into super unless you put it there. Setting aside 12% of net business income — the current super guarantee rate — is the common benchmark for an employee-equivalent outcome. Personal contributions are deductible, so they reduce the tax figures above as well, which makes the real cost of contributing meaningfully lower than the headline amount.
PAYG instalments. Once your first return shows business income the ATO generally puts you on quarterly instalments. This does not add tax — it changes the timing, from one bill to four prepayments. The year you enter the system can feel like double taxation because you may settle last year's bill and start prepaying this year's in the same window. See PAYG instalments for first-year sole traders.
Frequently Asked Questions
There is no separate sole trader rate. Business profit is taxed at individual marginal rates, combined with any other income you earn for the year.
Your marginal rate, not your average one, because the next invoice is taxed at the margin. That is 33.5% between $45,000 and $66,667 of income, 32% from there to $135,000, and higher above it. The common "30%" advice is short by about $35 per $1,000 in that first band.
The 30% bracket plus the 2% Medicare levy is 32%. Between $45,000 and $66,667 the low income tax offset is also being withdrawn at 1.5 cents in the dollar, so each extra dollar of income costs 33.5 cents in total.
No. It is an offset — a direct reduction of the tax payable — worth 16% of the basic income tax on your net small business income, capped at $1,000 a year. A deduction reduces taxable income instead.
At about $52,400 of net business profit, where 16% of the basic tax reaches the $1,000 cap. Above that it is a fixed $1,000, so it is worth a smaller share of your tax the more you earn.
No. There is no employer to pay it on your own drawings, so any retirement saving has to be contributed voluntarily. Personal contributions are generally deductible.
Once your GST turnover reaches $75,000. Below that it is optional — registering lets you claim GST credits on purchases, at the cost of charging GST and lodging a BAS each quarter.