Tax deductions reduce your taxable income, which means you pay tax on a smaller number. For a sole trader, understanding what you can and can't claim can make a meaningful difference to your annual tax bill. The problem is that a lot of deductions are either overclaimed (claiming personal expenses as business) or underclaimed (not knowing something qualifies).

This guide covers every major deduction category for Australian sole traders in 2026-27, what the ATO actually allows, common mistakes, and the records you need to keep.

Quick answer: Sole traders can deduct most genuine business expenses: home office costs, motor vehicle use, tools and equipment, training, professional fees, software, super contributions, insurance, and marketing. The golden rule is the expense must be incurred in earning your business income — not personal use. Keep records for every claim.

This is general information, not tax advice — see your registered tax agent for your specific situation.

Source: ato.gov.au — Deductions you can claim

The Golden Rule

A deduction is allowed when an expense is incurred in producing your assessable income. If the expense is partly private and partly business, you can only deduct the business portion.

You cannot deduct: capital expenses (though they may be eligible for depreciation or instant asset write-off), private or domestic expenses, penalties and fines, or expenses that are specifically excluded by tax law.

Home Office Expenses

Working from home generates two types of potential deductions. They operate differently, and conflating them is one of the most common mistakes.

Running Expenses (The 70c/hr Fixed Rate Method)

Running expenses cover the added cost of working from home: electricity, gas, internet, stationery, phone usage for work.

The ATO's fixed rate method lets you claim 70 cents per hour for every hour you work from home. This rate covers electricity and gas, home and mobile internet and data, home and mobile phone usage, and stationery and computer consumables — all in one, so you can't claim any of those separately. You can also claim depreciation on work-related equipment separately.

To use the fixed rate:

  • Keep a record of the total number of hours you worked from home for the entire income year (timesheet, roster, diary or other written record kept as you go — estimates are not acceptable)
  • A dedicated home office is not required for the fixed rate method (this requirement was removed when PCG 2023/1 introduced the revised rate). To also claim occupancy expenses (rent, mortgage interest, rates), part of your home must have the character of a "place of business", meaning it is used exclusively or almost exclusively for your business. This is separate from whichever running-expenses method you use
  • You must also retain receipts/invoices for at least one of each type of running expense the rate covers (e.g., one electricity bill) to demonstrate you incurred those costs

Example: You work from home 30 hours per week for 48 working weeks = 1,440 hours. 1,440 × $0.70 = $1,008 deduction

Occupancy Expenses (Rent/Mortgage Interest, Rates, Insurance)

You can only claim occupancy expenses (a proportion of rent, mortgage interest, council rates, home insurance) if your home has a dedicated area that is used for your business and is not suitable for domestic use.

This is a higher bar than it sounds. A study you also use as a guest bedroom generally doesn't qualify. A dedicated studio that clients visit, or a room fitted out purely as an office, might.

Claiming occupancy expenses when you sell your home can also affect your main residence CGT exemption — another reason to get advice before claiming these.

The Actual Cost Method

Instead of the 70c/hr fixed rate, you can track actual additional costs. This requires keeping more records but can yield a larger deduction if your actual expenses are high.

Motor Vehicle Expenses

Car expenses are one of the easiest deductions for sole traders to get wrong. There are two approved ATO methods.

Cents per Kilometre Method

  • Maximum claim: 5,000 km per year
  • Rate for 2026-27: 91 cents per km (it was 88c for 2024-25 and 2025-26)
  • Rates are reviewed annually, so use the rate for the income year you're claiming, published at ato.gov.au
  • No logbook required — but you need to be able to show how you calculated your business kilometres
  • Simple and low admin, suitable for lower-mileage users

Maximum claim for 2026-27 (at 91c/km): 5,000 × $0.91 = $4,550

Logbook Method

  • Keep a logbook for a continuous 12-week period recording every business trip (date, destination, purpose, start and end odometer readings, km)
  • Calculate your business use percentage from the logbook
  • Apply that percentage to ALL car expenses: fuel, insurance, rego, servicing, loan interest, depreciation
  • No 5,000 km cap — claim based on actual costs
  • The logbook is valid for five years if your usage pattern doesn't change materially

The logbook method requires more recordkeeping but typically produces a larger deduction for high-mileage business users.

See our full car expenses guide for a worked example comparing the two methods.

Tools, Equipment and Technology

Low-Cost Business Items: Instant Asset Write-Off, Not the $300 Rule

The $300 immediate deduction you may have heard about applies only to items used mainly to produce non-business income, such as an employee's work tools. It isn't available for assets you use mainly in your business. As a sole trader, you claim business items under the instant asset write-off (if you use the simplified depreciation rules) or depreciate them.

Instant Asset Write-Off

The instant asset write-off allows eligible small businesses to immediately deduct the cost of eligible assets rather than depreciating them over time. For small businesses with aggregated turnover under $10 million that use the simplified depreciation rules, the limit is $20,000 per asset (each asset must cost less than $20,000) for assets first used or installed ready for use on or after 1 July 2026. This limit is now permanent law under the Treasury Laws Amendment (Tax Reform No. 2) Act 2026. Check the current ATO guidance for the current limit and rules — do not rely on figures from previous years' returns or media articles.

Higher-Value Equipment: Depreciation

If you use the simplified depreciation rules, assets costing $20,000 or more go into the small business pool, where you deduct 15% in the first year and 30% each year after. If you don't use the simplified depreciation rules, you depreciate assets over their effective life. A car limit also caps the cost of passenger cars for depreciation. Common examples: vehicles, machinery, high-end equipment.

Common Claimable Items for Sole Traders

  • Laptop, tablet, phone (business use portion)
  • Trade tools and equipment
  • Work safety gear, uniforms with logos or required protective function
  • Camera equipment for photographers
  • Musical instruments for working musicians

Common mistake: Claiming 100% of a mobile phone that's 60% personal use. Only the business use proportion is deductible.

Training and Professional Development

Course fees, textbooks, and online subscriptions directly related to your current business activity are deductible. Examples:

  • Bookkeeping course if you run your own books
  • Industry certifications relevant to your trade
  • Online courses on skills you use in your business
  • Professional conferences and seminars

Not deductible: Courses that help you get into a new career or qualify for a different job. The training must relate to your existing income-earning activities.

Professional Fees

Fees paid to accountants, tax agents, BAS agents and bookkeepers are fully deductible. This includes:

  • Tax return preparation
  • BAS lodgment
  • Bookkeeping services
  • Business structuring advice (in some circumstances — get specific advice)

Common mistake: Thinking only the tax return portion is deductible. Any professional fee for business financial services counts.

Software Subscriptions

Software you use in your business is a deductible expense. This covers:

  • Accounting and bookkeeping software (Summed qualifies)
  • Project management tools
  • Design software
  • CRM platforms
  • Website hosting and domain registration
  • Cloud storage services used for business

If you use software for both personal and business purposes, claim the business use proportion.

Superannuation Contributions

Sole traders can make personal super contributions and claim them as a tax deduction — but this requires following the correct process.

The superannuation guarantee rate is 12%. It rose from 11.5% to 12% on 1 July 2025 and stays at 12% for 2026-27. Note: this rate applies to what you'd pay employees. For yourself as a sole trader, you're not required to pay super — but you should, and you can deduct the contributions you make to your own super fund.

To claim a deduction for personal super contributions:

  1. Make the contribution to a complying super fund
  2. Lodge a Notice of Intent to Claim form with your super fund before lodging your tax return
  3. Receive an acknowledgment from the fund
  4. Claim the deduction in your tax return

The concessional contributions cap for 2026-27 is $32,500 per year, up from $30,000 in 2024-25 and 2025-26. This includes any employer contributions if you have them. Contributions above this cap are taxed differently. Check current ATO limits before contributing.

Insurance

Business insurance premiums are deductible. This includes:

  • Professional indemnity insurance
  • Public liability insurance
  • Business property insurance
  • Income protection insurance (premiums deductible; benefits are assessable income)
  • Theft and loss insurance for business assets

Not deductible: Life insurance, trauma/critical illness insurance (even if business-related), and income protection held through your super fund where the premiums come out of your super (you can't claim those premiums yourself).

Marketing and Advertising

Costs to promote your business are deductible:

  • Google Ads and social media advertising
  • Website design and development
  • Business cards, flyers, signage
  • Photography for marketing purposes
  • Sponsorship of local events (subject to conditions)
  • SEO services and content creation

Common mistake: Claiming a new iPhone as a marketing expense because you use it for social media. If it's also your personal phone, only the business-use proportion is deductible — not the full cost.

Bank Fees and Interest

  • Bank fees on business accounts: deductible
  • Interest on a business loan or overdraft: deductible for the business-use proportion
  • Interest on a home loan with a business component (e.g., offset account used for business): complex — get advice

Not deductible: Interest on a loan used for personal purposes, even if the loan is technically in the business name.

Rent for Business Premises

If you rent a dedicated business space — an office, studio, workshop, market stall — the rent is deductible. If the space is shared with personal use, only the business proportion is claimable.

Phone and Internet

If you use your phone and home internet for business:

  • Calculate the business use percentage (e.g., 60% business use)
  • Claim that proportion of your bill

Keep a record for a representative 4-week period to establish your usage percentage — a detailed phone log or records showing the proportion of work calls is sufficient. If you use the 70c/hr fixed rate method for working from home, your phone and internet costs are already covered by that rate, so you can't claim them here as well.

Meals, Travel and Entertainment

Meals while travelling for work: Deductible when you're away from home overnight for business purposes. Day-to-day lunch is not deductible.

Accommodation while travelling: Deductible for genuine business travel.

Client entertainment: The rules around entertainment are complex, and many expenses that feel like business costs are not deductible (and may also trigger FBT if you have employees). A working lunch with a client generally isn't deductible. Get specific advice if entertainment is a significant expense for your business.

Commuting: Travel between home and a fixed workplace is never deductible. It's personal travel regardless of how much you need to be at work.

This is general information, not tax advice. Deduction rules, thresholds and depreciation rates change frequently and depend on your specific business circumstances. The 70c/hr fixed rate, $20,000 instant asset write-off, $32,500 concessional super cap (2026-27) and other figures cited reflect ATO guidance and legislation current as at October 2026 — verify before lodging. Speak to a registered tax agent for advice tailored to your situation.

Tools That Make This Easier

Tracking deductions all year is significantly easier than reconstructing them at tax time. If your records are organised throughout the year — transactions categorised, receipts attached — your accountant has everything they need and you're not scrambling in June.

Summed handles BAS prep automatically — try it free for 30 days at $9/mo. Start free →

FAQ

Q: Can I claim expenses I paid from my personal bank account?

A: Yes. The ATO doesn't require a separate business account (though it makes recordkeeping cleaner). What matters is that the expense was incurred for business purposes. Keep the receipt and note what it was for.

Q: Can I claim my home office if I rent?

A: Yes — the running expenses (70c/hr method) apply whether you own or rent. Occupancy expenses such as rent would require a dedicated-use area that isn't suitable for private use, which is a higher bar.

Q: I bought a $2,500 laptop. Can I claim it all this year?

A: It depends on the current instant asset write-off threshold and rules, your business's aggregated turnover, and the asset's eligibility. The $20,000 instant asset write-off is now a permanent feature of the law for small businesses with aggregated annual turnover under $10 million that use the simplified depreciation rules. The Treasury Laws Amendment (Tax Reform No. 2) Act 2026 (Royal Assent 26 August 2026) set the limit at $20,000 for assets first used or installed ready for use on or after 1 July 2026, with no end date. It follows the earlier temporary $20,000 limit, which ran to 30 June 2026. Under this rule, a $2,500 laptop used wholly for business may be eligible to be written off in full in the income year it's first used or installed ready for use. If your business doesn't qualify or doesn't use the simplified depreciation rules, you depreciate the asset over its effective life instead. Verify current eligibility on the ATO instant asset write-off page and consult your registered tax agent before claiming.

Q: Can I claim clothes I wear to work?

A: Only if they're occupation-specific (e.g., chef's whites, branded uniforms required by your employer, or safety gear). Conventional clothing — even if you only wear it at work — is not deductible.

Q: What records do I need to keep?

A: Tax invoices for all purchases, bank statements, receipts, and records substantiating the business-use proportion of mixed-use items. Generally, keep business records for five years from when you prepared or obtained them, or completed the transaction they relate to, whichever is later. Some records, such as those for depreciating assets and capital gains, must be kept longer.

Q: My partner does admin work for my business. Can I deduct wages I pay them?

A: You can deduct wages paid to a genuine employee, including a spouse or family member, provided the work is real and the rate is commercially reasonable. The ATO scrutinises this area closely. Excessive payments to associates are specifically targeted.

Q: Can I claim the cost of setting up my business (pre-revenue expenses)?

A: Some pre-business costs can be claimed once you start operating. Others (like incorporation costs) are treated as capital. Get advice from a registered tax agent about your specific start-up costs.