ABN Contractor Tax Australia: How to Handle Tax When You're Self-Employed

What Tax Do ABN Contractors Pay?

As a sole trader operating under an ABN, your business income is treated as personal income. You pay:

• Income tax — at the standard Australian resident marginal rates (same as employees)
• Medicare levy — 2% (if eligible; some visa holders are exempt)
• GST — 10% on top of your prices, collected and remitted to the ATO quarterly (only if your GST turnover is $75,000 or more)

Unlike employees, no one pre-pays this tax for you. You collect it, hold it, and pay it to the ATO via your Business Activity Statement (BAS) and your individual tax return.

Do You Need to Register for GST?

You must register for GST if your annual gross income (from all business activities) is $75,000 or more. This is not your profit — it is your total revenue before expenses.

For ride-share and taxi drivers, the threshold is $0 — you must register from the first dollar.

Once registered, you charge GST on every invoice (10% on top of your prices), collect it from clients, and pay the net amount to the ATO after deducting GST credits you paid on business expenses.

How Much Tax Should You Set Aside?

The most important habit as a contractor is setting aside tax on every payment you receive. A practical rule:

These percentages cover income tax plus Medicare levy. If you are also registered for GST, the GST component of each invoice is not your income — it belongs to the ATO — so keep it in a separate account and do not touch it.

Worked Example: $120,000 Contractor Income

Suppose you earn $120,000 in the 2025–26 financial year as a sole trader (GST-exclusive):

1. Income tax on $120,000 (Scale 1, after tax-free threshold):
   • $0 – $18,200: $0
   • $18,201 – $45,000: 19% = $5,092
   • $45,001 – $120,000: 32.5% = $24,375
   • Total income tax: $29,467
2. Medicare levy: $120,000 × 2% = $2,400
3. Total tax payable: $29,467 + $2,400 = $31,867 (~26.5% of income)

On $120,000 gross, setting aside 30% ($36,000) would cover your tax with a small buffer for any surprises.

What Is PAYG Instalments?

Once your tax assessment shows you owe more than $1,000 in income tax, the ATO will enrol you in the PAYG instalments system. Instead of owing a lump sum at year end, you pay instalments quarterly — like an employer withholds from employees, but you do it yourself.

The ATO sets your instalment rate or amount based on your previous year's income. You can vary the amount if your income has changed significantly. Instalments are reported on your BAS.

The Business Activity Statement (BAS)

The BAS is the form where you report and pay your GST and PAYG instalments to the ATO. Most contractors lodge quarterly:

On each BAS you report: total GST collected (from your sales), total GST credits (from business purchases), PAYG instalment amount, and any other tax obligations.

What Business Expenses Can You Deduct?

As a sole trader you can deduct expenses that are directly related to earning your income. Common deductions include:

• Tools and equipment (depreciable over time or instant asset write-off if under the threshold)
• Vehicle expenses (cents per kilometre method or logbook method)
• Mobile phone and internet (the work-related percentage)
• Home office expenses (if you work from home)
• Professional software subscriptions
• Accounting fees
• Work-related training and courses
• Public liability and professional indemnity insurance

Superannuation as a Sole Trader

As a sole trader, nobody pays super for you. However, you can make voluntary super contributions and claim a tax deduction for them (subject to the concessional contributions cap of $30,000 per year in 2025–26). This reduces your taxable income dollar-for-dollar.

For example: if your taxable income is $90,000 and you contribute $10,000 to super:

• Taxable income reduces to $80,000
• Tax saving at 32.5% marginal rate: approximately $3,250
• The $10,000 is taxed at 15% inside super: $1,500
• Net benefit: $1,750 in your pocket, plus the $10,000 is invested for retirement

The ABN Withholding Rule (No TFN)

If you provide services under an ABN but do not quote your ABN on an invoice, the paying business is required to withhold 47% of the payment under the no-ABN withholding rules. Always include your ABN on every invoice to avoid this.

Similarly, if you quote an ABN but the payer has set up under the Pay As You Go withholding system for contractors — typically for certain payment types — they may still withhold at your nominated rate if you complete a voluntary agreement.

Keeping Good Records

Good records make tax time painless and protect you in an audit. You need to keep:

• All tax invoices you issue (5 years)
• All invoices and receipts for business expenses (5 years)
• Bank statements showing business income and expenses
• Any contracts with clients
• A logbook if you claim vehicle expenses