The short answer
Every time a client pays you, split the money into three before you spend any of it:
- If you are registered for GST, set aside 1/11 of the payment. That is the GST inside a GST-inclusive price. It was never your money. You will get some of it back as credits on your own business purchases, but reserve the full 1/11 and treat the credits as a bonus when the BAS is worked out.
- Set aside a percentage of the profit for income tax and the Medicare levy. Profit is the payment excluding GST, less the business costs that go with it. The percentage comes from the table below.
- What is left is yours.
For a sole trader whose only income is the business, the income tax plus the 2% Medicare levy works out as follows for the 2026–27 income year (1 July 2026 to 30 June 2027), which is the year you are earning in now:
| Taxable profit | Income tax after LITO | Medicare levy (2%) | Total | Share of profit |
|---|---|---|---|---|
| $40,000 | $2,695 | $800 | $3,495 | 8.7% |
| $60,000 | $8,420 | $1,200 | $9,620 | 16.0% |
| $80,000 | $14,520 | $1,600 | $16,120 | 20.1% |
| $100,000 | $20,520 | $2,000 | $22,520 | 22.5% |
| $120,000 | $26,520 | $2,400 | $28,920 | 24.1% |
| $150,000 | $36,570 | $3,000 | $39,570 | 26.4% |
| $200,000 | $55,870 | $4,000 | $59,870 | 29.9% |
So a practical rule: somewhere between 20% and 25% of profit if you expect to clear $80,000–$120,000, closer to 30% at $200,000, and round up rather than down. A few points over the true figure costs you nothing but a surplus you get to keep; a few points under costs you a bill you cannot pay.
The table assumes the business is your only income. If you have a job as well, your salary has already used up the tax-free threshold and the lower band, so every business dollar is taxed at your marginal rate. With a combined income between $45,001 and $135,000 in 2026–27, that is 30% plus the 2% Medicare levy: reserve 32% of business profit, not 22%.
The rates behind the percentages
These are the ATO’s published resident tax rates, which apply if you were a resident for the full year and entitled to the full tax-free threshold. They do not include the Medicare levy.
| Taxable income | 2025–26 | 2026–27 |
|---|---|---|
| $0 – $18,200 | Nil | Nil |
| $18,201 – $45,000 | 16c per $1 over $18,200 | 15c per $1 over $18,200 |
| $45,001 – $135,000 | $4,288 + 30c per $1 over $45,000 | $4,020 + 30c per $1 over $45,000 |
| $135,001 – $190,000 | $31,288 + 37c per $1 over $135,000 | $31,020 + 37c per $1 over $135,000 |
| $190,001 and over | $51,638 + 45c per $1 over $190,000 | $51,370 + 45c per $1 over $190,000 |
The 2025–26 table is the one you are lodging your return for now. It is the same as 2024–25, the first year of the rates that replaced the old 19%, 32.5%, 37% and 45% brackets (often called the stage 3 changes). The 2026–27 table is the one to reserve against, and it is law: the ATO describes the cut from 16% to 15% from 1 July 2026, and a further cut to 14% from 1 July 2027, as enacted. The difference between the two years is at most $268 of tax, so if you are unsure which table applies, reserving on the older one simply leaves you a little ahead.
Two adjustments sit on top:
- The Medicare levy is 2% of taxable income. Low incomes get a reduction: for a single person in 2025–26 it is nil at or below $28,011 and reduced up to $35,013. The separate Medicare levy surcharge can also apply, depending on your circumstances.
- The low income tax offset is up to $700, tapering to nothing at $66,667. It is already included in the first table, which is why the $40,000 and $60,000 rows are lower than the brackets alone would suggest.
GST is a separate pot
You must register for GST once your GST turnover — gross business income, not profit — reaches $75,000, measured either as this month plus the previous eleven or as this month plus the next eleven you expect. You have 21 days to register once you cross it. Taxi and ride-sourcing drivers must register regardless of turnover.
Once registered, GST is 10% on top of your price, so it is 1/11 of the GST-inclusive amount you receive. On a $5,500 invoice, $500 is GST. Not $550 — multiplying the received amount by 10% over-reserves, which is harmless, but it also tempts people to “correct” it later, which is where the mistakes come in.
Keep GST out of the income tax calculation entirely. It is not income, it is not part of the profit the table applies to, and it goes back to the ATO on your BAS, less the GST you paid on business purchases. If you are under the threshold and not registered, you charge no GST and this pot does not exist — but watch the rolling twelve-month figure, because the obligation starts the month you cross it, not at the end of the financial year.
PAYG instalments and the year-one squeeze
An employee has tax withheld from every pay. A new sole trader has nothing withheld, so the first year’s tax is due in one lump when the return is assessed. That is the first shock.
The second follows immediately. Under the ATO’s entry rules, an individual is automatically entered into PAYG instalments when their latest return shows instalment income (gross business and investment income, excluding GST and capital gains) of $4,000 or more, tax payable on the latest notice of assessment of $1,000 or more, and estimated (notional) tax of $500 or more. Most people then pay quarterly, towards the current year:
| Quarter | Period | Usual due date |
|---|---|---|
| 1 | July – September | 28 October |
| 2 | October – December | 28 February |
| 3 | January – March | 28 April |
| 4 | April – June | 28 July |
So in the stretch after your first return, you can be paying last year’s full bill and instalments towards this year. If your reserve was built for one year of tax, it runs out partway through. The ATO bases the instalment amount on your latest return and adjusts it for GDP growth — 5% for 2026–27.
Three ways to soften it:
- Enter voluntarily in your first year. The ATO suggests this for people new to business, which turns the lump into quarterly payments from the start.
- Keep reserving at the full rate even after instalments begin. Instalments are paid out of the reserve, not on top of it.
- Vary carefully. You can vary instalments if your income drops, but if varied instalments come to less than 85% of the tax actually payable, the general interest charge can apply to the difference. The ATO’s own advice is that if you are not sure, don’t vary.
Worked example: a lumpy year
A GST-registered designer in 2026–27
She invoices $120,000 plus GST over the year, so receives $132,000. Her business costs are $14,000 plus $1,400 GST, spread evenly at $3,500 (ex-GST) a quarter. She has no other income. Profit is $120,000 − $14,000 = $106,000.
Income tax = $4,020 + 30% × ($106,000 − $45,000) = $22,320
Medicare levy = 2% × $106,000 = $2,120
Total = $24,440, or 23.1% of profit
She rounds up and reserves 25% of profit, plus 1/11 of everything received for GST. Her year arrives unevenly:
| Quarter | Received (incl. GST) | GST (1/11) | Profit | Tax reserve (25%) |
|---|---|---|---|---|
| Jul – Sep | $49,500 | $4,500 | $41,500 | $10,375 |
| Oct – Dec | $11,000 | $1,000 | $6,500 | $1,625 |
| Jan – Mar | $27,500 | $2,500 | $21,500 | $5,375 |
| Apr – Jun | $44,000 | $4,000 | $36,500 | $9,125 |
| Year | $132,000 | $12,000 | $106,000 | $26,500 |
The GST pot holds $12,000. Less the $1,400 of credits on her costs, $10,600 goes to the ATO across her BAS returns, and $1,400 stays with her.
The tax pot holds $26,500 against a bill of $24,440, leaving a $2,060 cushion — which matters, because the October–December quarter shows exactly how the trap works. That quarter she received $11,000, but her living costs did not fall to match. Without the September reserve already moved out of reach, the quiet quarter would have eaten it.
Note that she reserved 25% of profit, not of receipts. Twenty-five per cent of the $132,000 she received would have been $33,000 — $8,560 more than the actual bill, the kind of over-reserving that makes people abandon the habit.
The mechanics of doing this every month, on irregular income, are covered in more depth in reserving tax on irregular income. CashDesk does the same split automatically: it reserves income tax and the Medicare levy as payments come in, shows the next PAYG instalment, and lays out GST in BAS label order. It prepares the figures; it does not lodge anything.
Super: nobody is paying it for you
As a sole trader you don’t have to pay super guarantee for yourself. That is the good news for this year’s cash flow and bad news for retirement: nothing goes in unless you put it there.
You can make personal contributions, and most people can claim a tax deduction for them until they turn 75. To claim, you give your fund a notice of intent in the approved form and get its acknowledgment. A deducted contribution is taxed at 15% inside the fund and counts towards your concessional contributions cap, and going over the cap costs extra tax.
For reserving, the effect is that a deductible contribution lowers your taxable profit and therefore the tax you need to hold back. Plan it with the reserve, not after it: the deduction only helps if the notice is done properly and the contribution fits under the cap.
What this leaves out
- Other income. A salary, rent, interest or capital gains change the rate on your business profit. Reserve at your marginal rate on anything that sits on top.
- HELP and other study loans. Compulsory repayments are not included in any of the figures here.
- The Medicare levy surcharge and family thresholds. Both can move the levy away from a flat 2%.
- Structure. Everything above is for a resident individual trading as a sole trader. A company, trust or partnership is taxed differently.
- Future years. The 14% rate from 1 July 2027 will lower the numbers again. Re-work your percentage each July.
Use the table to set a starting percentage, then have a registered tax agent check it once against your actual figures. And make sure the rate you charge can carry the reserve in the first place — the contractor day rate calculator works that out from the other end.