As an Australian sole trader, every legitimate business expense you claim lowers your taxable income, and at a 30 percent marginal rate, $12,000 of deductions is worth about $3,700 in tax. This guide lists what you can claim, what you cannot, and the current ATO rates for 2025-26, with a full worked example.
Rates last reviewed: October 2026. All figures below are for the 2025-26 income year (1 July 2025 to 30 June 2026) unless stated otherwise.
What counts as a tax deduction for a sole trader?
A tax deduction is a business expense you subtract from your assessable income, so you pay tax on your profit, not your gross takings. The ATO applies three tests: you spent the money and were not reimbursed, the expense relates to earning your assessable income, and you have a record to prove it.
If an expense fails any one of those tests, it is not deductible, even if it feels work related. That rule explains most disputes with the ATO, because many everyday costs sit on the borderline between business and private use.
What can sole traders claim?
Start from this principle: if you spent it to run your business and earn income, it is usually claimable. The table below covers the categories freelancers claim most often, from advertising and software to car costs and home office expenses.
| Category | Typical claims | Watch point |
|---|---|---|
| Running your business | Advertising, website hosting, domain names, email marketing tools, bank and merchant fees, business insurance, accounting and bookkeeping fees | GST-registered: claim the GST-exclusive amount, GST via BAS |
| Software and subscriptions | Design and editing software, project management tools, accounting software, stock photo licences | Apportion anything you also use privately |
| Phone and internet | Mobile plan, home internet, business phone line | Claim only the business-use percentage from a four-week record of itemised bills |
| Home office | Running costs under the fixed rate or actual cost method, plus equipment depreciation | Never claim phone and internet on top of the fixed rate |
| Car and travel | Work trips, client visits, travel between workplaces, overnight accommodation and meals on business trips | Home-to-work commuting is private and not deductible |
| Equipment and tools | Computers, cameras, tools, office furniture, protective clothing and uniforms specific to your trade | Items under the instant asset write-off threshold can be written off immediately, others are depreciated |
| Learning and memberships | Courses that maintain or improve skills for your current work, industry association fees, professional licences | A course for a new career or to get your first job in a field is not deductible |
| Super contributions | Personal concessional super contributions, if you lodge a notice of intent with your fund first | Contributions count toward the $30,000 concessional cap for 2025-26, including any employer contributions |
If you are GST-registered, your deduction is the GST-exclusive price, and the GST goes on your Business Activity Statement as an input tax credit, not as a second deduction.
What can sole traders not claim?
The ATO disallows a consistent set of costs, and claiming them is one of the fastest ways to attract attention to your return. Private costs, entertainment, fines, ordinary clothing and your own drawings all sit firmly on the not-claimable side of the line.
- Private and domestic costs: rent or mortgage payments for your home (unless a room is used exclusively for business and you meet the occupancy test), groceries, childcare, school fees and gym memberships.
- Entertainment: client lunches, drinks, concert tickets and social events, even when business is discussed. Client meals are not deductible.
- Fines and penalties: speeding fines, parking fines and late lodgement penalties are never deductible.
- Ordinary clothing: everyday clothes you wear to work, even if you only wear them for work. Only protective clothing, occupation-specific uniforms and compulsory uniforms qualify.
- Your own wages: as a sole trader you are not an employee of your business, so money you draw for yourself is not a wage and not a deduction.
- Capital and private assets: the purchase price of land, or the private portion of any mixed-use asset.
- Expenses you were reimbursed for: if a client paid you back, you did not bear the cost, so there is nothing to claim.
Watch out: claiming your full phone bill, your full car costs or your full home internet when you also use them privately is the most common sole trader error. Apportion every mixed-use expense and keep the working out, because the ATO asks for the method, not just the number.
Car expenses: cents per kilometre or logbook?
For a car, the ATO lets you choose one of two methods each year: cents per kilometre, which pays a flat rate per business kilometre up to 5,000 kilometres, or the logbook method, which claims your business-use percentage of all actual running costs. You cannot use both methods for the same car in the same year.
For 2025-26 the rate is 88 cents per kilometre, capped at 5,000 business kilometres per car, for a maximum claim of $4,400. It already covers fuel, registration, insurance, servicing, repairs and depreciation, so claim none of those separately. You need no fuel receipts, but you must show how you worked out your business kilometres, for example with a diary, calendar entries or the ATO app’s myDeductions tool.
The logbook method suits you when you drive more than 5,000 business kilometres a year or run an expensive car. A 12-week logbook sets your business-use percentage for five years, and you claim that percentage of fuel, registration, insurance, repairs, loan interest and depreciation. The same driving can differ sharply: 9,200 business kilometres in a car costing $11,400 a year to run at 80 percent business use gives $4,400 under cents per kilometre but $9,120 under logbook.
One trap: travel from home to your regular workplace is private commuting, not a claim. It only becomes deductible in narrow cases, such as carrying bulky tools to a site with no secure storage.
Working from home: fixed rate or actual cost?
The ATO offers two methods for home office running costs: the fixed rate method, which pays a set amount per hour worked from home, or the actual cost method, which claims the work-related portion of each bill. The fixed rate is simpler and suits most freelancers, while actual cost can win when your bills are high and you keep records.
For 2025-26, the fixed rate is 70 cents per hour worked from home, the same as 2024-25. It covers electricity and gas for heating, cooling and lighting, home and mobile internet and data, mobile and home phone usage, and stationery and computer consumables. You cannot claim any of those again separately. What you can still claim on top of the fixed rate is the decline in value of equipment such as computers, desks and chairs, plus repairs to those items. You must keep a record of your actual hours worked from home for the full year, and have evidence of at least one covered expense. The ATO does not accept estimates of hours. See the ATO’s fixed rate method guidance for the full eligibility rules.
The actual cost method needs receipts for everything plus a reasonable calculation of the work-related portion, for example floor area and hours for electricity. A dedicated home office can also bring cleaning and occupancy costs into play, but only where a room is set aside exclusively for business, and claiming occupancy costs can affect your home’s capital gains tax treatment, so get advice first.
What is the instant asset write-off?
The instant asset write-off lets small businesses deduct the business portion of an asset costing less than $20,000, instead of depreciating it over years. For 2025-26 the threshold is $20,000 per asset for businesses with aggregated turnover under $10 million, and the asset must be first used or installed ready for use between 1 July 2025 and 30 June 2026.
The threshold applies per asset, not in total, so a $2,400 laptop, a $900 monitor and a $600 office chair can all be deducted in full in 2025-26. Assets costing $20,000 or more go into the general small business pool instead, at 15 percent in the first year and 30 percent later. The test applies to the total cost of the asset, not the business portion, so a $40,000 vehicle used half for business still exceeds the limit. See the ATO’s $20,000 instant asset write-off for 2025-26 page for the eligibility rules.
Worked example: a freelance designer’s deduction list
Meet Mia, a freelance graphic designer in Melbourne who earned $95,000 of assessable income in 2025-26 and kept clean records all year.
| Deduction | Working | Amount |
|---|---|---|
| Working from home, fixed rate | 1,200 hours x 70 cents | $840 |
| Car, cents per kilometre | 3,800 business km x 88 cents | $3,344 |
| Phone and internet, business portion | $1,800 of bills x 70 percent business use | $1,260 |
| Software subscriptions | Design software and stock licences, fully business use | $1,450 |
| Advertising | Portfolio site hosting and social media ads | $900 |
| Professional development | Advanced illustration course for her current work | $650 |
| Laptop, instant asset write-off | Cost $2,400, under the $20,000 threshold, fully business use | $2,400 |
| Accountant fees | Return preparation and BAS advice | $880 |
| Business insurance | Professional indemnity premium | $620 |
| Total deductions | 840 + 3,344 + 1,260 + 1,450 + 900 + 650 + 2,400 + 880 + 620 | $12,344 |
Her taxable income is $95,000 minus $12,344, which equals $82,656. Both figures sit inside the 2025-26 resident 30 percent band ($45,001 to $135,000), so her tax saving is $12,344 x 30 percent, which equals $3,703.20. Check it: tax on $95,000 is $4,288 plus 30 percent of $50,000, which is $19,288, while tax on $82,656 is $4,288 plus 30 percent of $37,656, which is $15,584.80. The difference is $3,703.20, before the separately calculated Medicare levy.
The lesson is not to spend for the sake of spending, because a deduction only returns your marginal rate, not the full amount. But every legitimate dollar you fail to claim is tax you did not need to pay. Mia’s two biggest items, the car claim and the laptop, needed no extra spending at all, just records she already had.
Once you know your real profit after deductions, LancerBill’s profit margin calculator shows what it means as a margin on your revenue, and LancerBill’s invoice generator keeps the income side of your records tidy. If you are GST-registered, LancerBill’s GST calculator separates the GST from any amount so your deduction and BAS claim never overlap.
What records do you need to keep, and which mistakes get claims knocked back?
Keep every tax record for five years from the date you lodge, in digital form if you like. Your records must show the amount, date, supplier and business purpose, plus a diary or logbook for cars and a full-year hours record for working from home.
The ATO accepts digital records, so photos of receipts and a spreadsheet are fine, but the records must show the amount, the date, the supplier and the business purpose. For cars, keep a diary or logbook. For working from home under the fixed rate, keep a record of your actual hours for the whole year. For mixed-use costs, keep the working out that produced your business percentage.
The mistakes that get claims knocked back are predictable: claiming the full amount of a mixed-use cost, phone and internet on top of the fixed rate, home-to-work travel as a business trip, client entertainment as marketing, and a course for a new career as professional development. A second trap is claiming the same expense twice, as a deduction and as a GST credit.
Two planning points close the loop. First, decide how much tax to set aside from every payment, because deductions lower the bill but do not remove it, and PAYG instalments may apply once your bill passes the entry threshold. Second, get professional advice before claiming occupancy costs for a dedicated home office.
Key takeaways
- A deduction must pass three tests: you spent it, it relates to earning your income, and you have a record to prove it.
- For 2025-26: 88 cents per kilometre (capped at 5,000 kilometres), 70 cents per hour for working from home, and a $20,000 instant asset write-off per asset for businesses under $10 million turnover.
- Apportion every mixed-use cost and never claim phone or internet on top of the fixed rate method.
- Commuting, entertainment, fines, ordinary clothing and your own drawings are not deductible.
- Keep records for five years, and if you are GST-registered, split each expense between the income tax deduction and the BAS credit.
- At a 30 percent marginal rate, $12,344 of deductions saves $3,703.20 of income tax, so missed claims are money left on the table.
Can a sole trader claim rent for a home office?
You can claim occupancy costs such as rent or mortgage interest only if part of your home is set aside exclusively for business and you meet the ATO’s interest deductibility test. Most freelancers claim running costs under the fixed rate or actual cost method instead. Claiming occupancy costs can affect the capital gains tax treatment of your home, so get advice first.
How many kilometres can I claim without a logbook?
Under the cents per kilometre method you can claim up to 5,000 business kilometres per car per year without a logbook, for a maximum of $4,400 at the 2025-26 rate of 88 cents. You still need to show how you worked out your business kilometres, for example with a diary or calendar record.
Can I claim my phone bill in full if I use it for work?
No, unless the phone is used solely for business. For a mixed-use phone, claim only the business-use percentage, worked out from a representative four-week period of itemised bills. If you use the working-from-home fixed rate method, phone usage is already included in the 70 cents per hour, so you cannot claim it separately as well.
What is the instant asset write-off threshold for 2025-26?
The threshold is less than $20,000 per asset for businesses with aggregated turnover under $10 million, for assets first used or installed ready for use between 1 July 2025 and 30 June 2026. Assets at or above $20,000 go into the small business depreciation pool instead.
Can sole traders claim super contributions as a tax deduction?
Yes, personal concessional super contributions are deductible if you lodge a valid notice of intent to claim with your super fund before you lodge your return. For 2025-26 the concessional contributions cap is $30,000, including any employer contributions. Contributions above the cap are taxed differently, so check your total before you contribute.
How long do I need to keep tax records in Australia?
Keep your tax records for five years from the date you lodge your return. Digital records are acceptable. For cars claimed under the logbook method, keep the logbook until the end of the latest year you rely on it, and then for another five years.
This guide is for general information only and is not financial, tax or legal advice.