If you're one of the 1.5 million Australians operating as a sole trader, your business income is your personal income. That means every legitimate deduction you claim directly reduces the tax you pay.
The problem? The ATO doesn't send you a checklist. If you don't claim it, you don't get it.
This guide covers the major deductions available to sole traders for the 2025–26 financial year, with current ATO rates and practical examples.
How sole trader tax works
As a sole trader, your business profit is added to your personal income and taxed at individual marginal rates. For 2025–26, those rates are:
- $0 – $18,200: Tax-free
- $18,201 – $45,000: 16 cents per dollar over $18,200
- $45,001 – $135,000: 30 cents per dollar over $45,000
- $135,001 – $190,000: 37 cents per dollar over $135,000
- $190,001+: 45 cents per dollar over $190,000
Plus the 2% Medicare levy on your entire taxable income.
This progressive structure is exactly why deductions matter so much. A few well-claimed expenses can drop your income into a lower bracket, saving you real money.
Home office expenses
If you work from home — even part-time — you can claim a portion of your running costs. The ATO gives you two methods.
Fixed rate method: Claim 70 cents per hour worked from home. This covers electricity, gas, phone, internet, and stationery. You need to keep a record of your actual hours worked for the entire year — a simple timesheet or diary is fine.
Actual cost method: Calculate the business-use percentage of your actual home running costs. This takes more effort but can produce a larger deduction if your expenses are significant. You'll need to work out the floor area used exclusively for business as a percentage of your total home.
Claimable expenses under the actual cost method include electricity and gas, internet and phone (business portion), office supplies, and depreciation on office furniture and equipment.
Important: If you claim occupancy expenses (rent, mortgage interest, rates), this may affect your main residence CGT exemption. Get advice before going down this path.
Vehicle expenses
If you use your car for business — visiting clients, picking up supplies, attending meetings — you can claim the running costs. Two methods are available.
Cents per kilometre: Claim 88 cents per business kilometre (2025–26 rate), up to a maximum of 5,000 km per car per year. You need to be able to show how you calculated your business kilometres, but you don't need detailed receipts for fuel and servicing.
Logbook method: Keep a logbook for a continuous 12-week period to establish your business-use percentage. Then apply that percentage to your total car expenses for the year — fuel, registration, insurance, servicing, depreciation, and finance interest. This method has no kilometre cap and often produces a larger deduction for heavy business use.
You cannot claim for travel between home and your regular place of work — that's commuting, not business travel.
Equipment and tools
Items you buy for your business can be claimed. The rules depend on the cost.
Items under $300: Immediately deductible in the year of purchase (if used predominantly for business and not part of a set costing more than $300).
Instant asset write-off: For small businesses with aggregated turnover under $10 million, eligible assets costing less than the threshold can be immediately deducted. Check the ATO for the current threshold and eligibility, as this changes frequently.
Items over the threshold: Depreciated over their effective life. The ATO publishes effective life tables for common business assets.
Common examples include laptops, tablets, and phones (business-use portion), software and subscriptions, tools and trade equipment, and office furniture.
Phone and internet
If you use your personal phone or internet connection for business, you can claim the business-use portion. The ATO accepts a four-week representative diary as the basis for calculating your annual claim.
For example, if your diary shows 40% business use of your mobile over four weeks, you can claim 40% of your annual mobile bill.
Insurance
Business-related insurance premiums are fully deductible, including professional indemnity insurance, public liability insurance, income protection insurance (if payments would be assessable income), business asset insurance, and cyber insurance.
Professional development
If you undertake training or study that directly relates to your current business activities, you can claim the cost. This includes courses, workshops, seminars, conferences, industry publications, and professional memberships (for example, CA ANZ or The Tax Institute).
The study must have a direct connection to how you currently earn your income. You cannot claim the cost of a qualification that would allow you to start a new career.
Superannuation contributions
No one is paying super for you as a sole trader. But if you make personal contributions to your super fund, you can claim a deduction up to the $30,000 annual concessional contributions cap.
The tax benefit is significant: contributions are taxed at just 15% inside super, compared to your marginal rate outside. For a sole trader with $90,000 taxable income (30% marginal rate), contributing $10,000 to super saves $1,500 in tax.
To claim the deduction, you must lodge a Section 290-170 Notice of Intent with your super fund and receive acknowledgement before lodging your tax return.
Accounting and tax agent fees
The cost of having your tax return prepared, bookkeeping services, tax advice, and BAS preparation are all deductible.
Advertising and marketing
Expenses for promoting your business are deductible, including website hosting and domain costs, social media advertising, business cards, flyers, and signage, Google Ads and Meta campaigns, and SEO and content marketing.
What you can't claim
Not everything is deductible. Common items the ATO will reject include private or personal expenses, fines and penalties, entertainment (with limited exceptions), the cost of initial professional qualifications, commuting between home and work, and clothing that isn't a compulsory uniform or protective gear.
New for 2025–26: ATO interest charges (GIC and SIC) are no longer deductible from 1 July 2025. If you have a tax debt, pay it on time or consider alternative funding to avoid non-deductible interest.
Record keeping
Keep receipts and records for five years after you lodge your return. The ATO can and does audit sole traders, and "I forgot" isn't a defence.
Good habits that save you at tax time: use accounting software (Xero, MYOB, or even a simple spreadsheet), photograph receipts when you get them, separate your business and personal bank accounts, and reconcile monthly rather than scrambling in June.
The bottom line
Every dollar you legitimately deduct reduces your taxable income. Over a year, missed deductions can easily add up to thousands in unnecessary tax.
If you're not sure whether something is deductible, or you want to make sure you're not leaving money on the table, it's worth getting professional advice — especially in the lead-up to 30 June.
Need help with your sole trader tax return? Book a free 30-minute consultation with a CA-qualified adviser at Nebula Accounting. We'll review your situation and make sure you're claiming everything you're entitled to.
Disclaimer: This article is general information only and does not constitute tax advice. Tax law changes frequently. Always consult a registered tax agent or refer to the ATO's official resources before making decisions about your tax return.