Tax Deductions for Sole Traders in Australia: What You Can Claim in 2025–26
Running your own business as a sole trader gives you freedom and flexibility — but it also means navigating Australia’s tax system largely on your own. The good news? The Australian Taxation Office (ATO) allows sole traders to claim a wide range of deductions that can significantly reduce your taxable income. The key is knowing what qualifies, how to calculate it correctly, and what records to keep.
With the 2025–26 tax return season now open, here’s your practical guide to maximising your deductions — and staying on the right side of the ATO.
The Golden Rule: Business vs. Private
Before diving into specific categories, every sole trader needs to understand the fundamental test the ATO applies to every deduction claim:
Was the expense incurred in carrying on your business or earning assessable income?
If the answer is yes, it’s generally deductible. If the expense is private or domestic — or a mix of both — you can only claim the business portion. And critically, you need evidence to prove it.
A bank statement alone is rarely enough. The ATO expects invoices, receipts, and supporting calculations that show the supplier, what was purchased, the amount, and the date.
Home Office and Home-Based Business Expenses
Millions of Australian sole traders work from home, at least part of the time. The ATO recognises two types of home-based costs: running expenses and occupancy expenses.
Running Expenses
Running expenses cover the additional costs of working from home — electricity, gas, phone and internet use, stationery, and the decline in value of office equipment and furniture.
For 2025–26, you can use the fixed-rate method of 70 cents per hour for every actual hour you work from home. This rate covers energy, phone, internet, stationery, and computer consumables in one simple calculation. You don’t need a dedicated home office to use it — but you do need a contemporaneous record of every hour worked from home (not an estimate).
Important: If you use the fixed rate, you cannot separately claim the costs it already covers. However, you can still claim the decline in value of computers, desks, and chairs separately, as these are not included in the 70-cent rate.
Alternatively, the actual-cost method lets you calculate the precise business portion of each expense. This requires bills, receipts, and a reasonable usage calculation — such as a diary showing your pattern of business and private use.
Occupancy Expenses
Occupancy expenses — rent, mortgage interest, council rates, land tax, and home insurance — are only deductible where part of your home has the character of a place of business. This generally means an area that is clearly identifiable for business use, not suitable for ordinary private use, and used exclusively or almost exclusively for business (or regularly used for client visits).
A word of caution: Claiming occupancy expenses can affect your main-residence capital gains tax (CGT) exemption when you sell the property. This is a significant consequence that warrants careful consideration — and professional advice.
Vehicle and Car Expenses
If you use a car for business purposes, you can claim the business portion of your vehicle costs. The ATO offers two methods for a qualifying car (a vehicle designed to carry fewer than nine passengers and less than one tonne):
Cents-Per-Kilometre Method
The 2025–26 rate is 88 cents per business kilometre, capped at 5,000 kilometres per car. This rate is all-inclusive — it covers fuel, registration, insurance, servicing, repairs, and depreciation. You cannot claim any of these costs separately if you use this method.
You don’t need a formal logbook, but you do need records showing how you calculated your business kilometres.
Logbook Method
The logbook method applies your vehicle’s business-use percentage to actual expenses. You’ll need a logbook covering a continuous 12-week period, plus odometer readings at the start and end of each income year. A valid logbook can be used for up to five years if your usage pattern remains representative.
For 2025–26, the car cost limit for depreciation is $69,674. If your car cost more than this, the depreciation deduction is capped at that amount.
Note: Ordinary home-to-work travel is private and not deductible — even if you work from home. Travel must have a genuine business purpose to be claimed.
Equipment, Tools, and the Instant Asset Write-Off
Computers, tools, office furniture, and other business equipment may be deductible — but the timing depends on the cost and the applicable depreciation rules.
For 2025–26, eligible small businesses with aggregated annual turnover below $10 million can immediately deduct the business portion of an eligible asset costing less than $20,000 under the instant asset write-off. The asset must be first used or installed ready for use between 1 July 2025 and 30 June 2026.
Assets costing $20,000 or more are not eligible for an immediate write-off. Instead, they go into the small-business depreciation pool, with deductions at 15% in the first year and 30% in subsequent years.
Remember: you can only claim the business-use portion of any asset. If you use a laptop 60% for business and 40% personally, you can only claim 60% of its cost or depreciation.
Professional Development and Self-Education
Investing in your skills is often tax-deductible — but only if the education maintains or improves skills used in your current business activities, or is likely to increase your income from those existing activities.
Deductible costs can include:
- Course fees and seminar registrations
- Textbooks, journals, and study materials
- Eligible internet use for study
- Travel to attend courses
- Decline in value of study equipment
What’s not deductible: Education that prepares you for a new career or a different profession. Also note that FEE-HELP and VET Student Loan repayments are never deductible, even where the underlying course fees are. The former $250 reduction for self-education expenses no longer applies — it was removed from 1 July 2022, so the full eligible amount is deductible for 2025–26.
Insurance Premiums
Business insurance — such as public liability and professional indemnity premiums — is generally deductible as a business operating expense, provided the policy relates to carrying on your business.
Income protection insurance is treated differently. Premiums that protect against loss of income are deductible, but they’re claimed under Other deductions in your individual tax return — not as a business expense. And if you receive a benefit payment, it’s assessable income.
Life insurance, trauma cover, and critical-care policies are not deductible. If you have a combined policy, only the identifiable income-protection component can be claimed.
Personal Superannuation Contributions
As a sole trader, you’re not required to pay superannuation guarantee for yourself — but you can make personal contributions and claim them as a deduction. This is one of the most powerful tax strategies available to self-employed Australians.
For 2025–26, the concessional contributions cap is $30,000 (including any employer or salary-sacrifice contributions). If your total super balance was below $500,000 on 30 June 2025, you may also be able to carry forward unused cap amounts from up to five previous financial years.
Critical steps to claim the deduction:
- Make the contribution to a complying super fund before 30 June 2026.
- Lodge a valid notice of intent to claim with your fund.
- Receive written acknowledgment from the fund.
- Claim the deduction in the Personal super contributions section of your individual tax return — not as a business expense.
Miss any of these steps and you lose the deduction. Don’t leave this to the last minute.
Record-Keeping: The Foundation of Every Claim
The ATO requires you to keep records for at least five years from the date you lodge your return. Records can be paper or electronic, but must be in English (or readily translatable) and clearly explain each transaction.
Key records to maintain:
- Invoices and receipts for all business expenses
- Home-working hours log and utility evidence
- Vehicle logbook and odometer readings (if using the logbook method)
- Floor-area calculations for home occupancy claims
- Asset purchase records and business-use calculations
- Course records showing the connection to your current business activities
- Super fund acknowledgments of your notice of intent
The ATO’s free myDeductions tool (in the ATO app) can help you track income and expenses throughout the year — making tax time much simpler.
Common Mistakes to Avoid
The ATO actively monitors sole-trader returns and flags common errors. Watch out for:
- Claiming 100% of mixed-use costs without evidence of the business portion
- Double-claiming phone, internet, or energy costs already covered by the 70-cent home rate
- Separately claiming fuel or depreciation after using the cents-per-kilometre method
- Treating every equipment purchase as immediately deductible — check the $20,000 threshold
- Claiming occupancy expenses without establishing a genuine place of business
- Deducting training for a new career rather than your current business
- Recording personal super contributions as a business expense — they belong in a different section
- Claiming super without the fund’s acknowledgment of your notice of intent
Sources
- ATO — Deductions for business
- ATO — Home-based business expenses (sole trader)
- ATO — Fixed-rate method for working from home
- ATO — Motor vehicle expenses (small business guide)
- ATO — $20,000 instant asset write-off for 2025–26
- ATO — Self-education expenses
- ATO — Income protection insurance
- ATO — Personal super contributions
- ATO — Concessional contributions cap
- ATO — Records you need to keep
- ATO — Handy tax time tips for sole traders
Ready to Maximise Your Sole Trader Deductions?
Navigating sole-trader tax deductions can be complex — and getting it wrong can mean either leaving money on the table or attracting unwanted ATO attention. At TaxServe Australia, our experienced tax professionals work with sole traders and self-employed Australians every day to ensure you claim every deduction you’re entitled to, with the right records to back it up.
Contact TaxServe Australia today to book a consultation and make the most of your 2025–26 tax return. We’re here to take the stress out of tax time — so you can focus on running your business.