Key Highlights

  • Business income earned as an individual counts towards the new $250 offset from 2027–28.
  • The ATO's draft guidance leaves sole-trader income out of the $1,000 standard deduction.
  • Sole traders qualify for the offset but cannot use the standard deduction.
  • The guidance is a draft and has not yet been finalised.

Australia's two new tax breaks for workers do not treat the self-employed the same way. Sole traders will be eligible for the $250 Working Australians Tax Offset from the 2027–28 income year, because the law counts income from running a Business as an individual. They will miss out on the $1,000 standard deduction, which the ATO's draft guidance limits to wages and similar income. With the deduction's first year already under way, the difference matters now.

Both measures are already law, passed as part of the Treasury Laws Amendment (Tax Reform No. 1) Act 2026. Neither applies to the 2025–26 tax return most people have just lodged.

The offset: what the law says

The Working Australians Tax Offset, or WATO, sits in a new Subdivision 61-E of the Income Tax Assessment Act 1997. The ATO says the measure "is now law" and that it is available from the 2027–28 income year.

An Australian resident is entitled to the offset if their net labour income is more than the tax-free threshold of $18,200.

The offset is the lesser of $250 or the basic income tax that would be payable if Taxable Income consisted only of net labour income. It is non-refundable, so it can only reduce tax to nil. It cannot be transferred or carried forward.

The ATO says it will be applied automatically after a tax return is lodged. The Budget papers said "the WATO will also be available to sole traders running their own business".

Why sole traders qualify

The Act defines net labour income as labour amounts minus labour deductions.

Labour amounts include assessable labour income such as wages, and also "an amount you derive from carrying on a business as an individual". They include personal services income and certain labour hire payments as well.

Labour deductions include expenses "necessarily incurred in carrying on a business as an individual", plus related Depreciation deductions. In short, a sole trader's net business profit counts.

The same list of labour deductions also includes the $1,000 standard deduction. For an employee who takes the flat deduction, net labour income for the offset is calculated after it.

Contractors whose income is mainly a reward for their personal efforts are also covered, because personal services income is listed separately as a labour amount.

There is an important limit. The business income definition does not include income from a business carried on by a Partnership or a trust. Someone who trades through a family trust or a partnership, rather than in their own name, may not have that income counted as labour income for the offset.

The deduction: why sole traders miss out

The $1,000 standard deduction starts a year earlier, in 2026–27. It lets eligible workers claim a flat amount instead of itemising work-related expenses.

The ATO's draft guidance, Law Companion Ruling LCR 2026/D5, says the deduction is available against assessable labour income. It describes that as an exhaustive list covering payments to employees, company directors, office holders and religious practitioners, plus return-to-work payments, certain retirement and termination payments, and parental leave pay. Business income earned as a sole trader is not on it.

The Budget papers also described the instant deduction as available to employees. The draft ruling is not final, but it explains a definition that is already in the Act.

Sole traders continue to claim actual business expenses, which have no $1,000 ceiling. For a sole trader with substantial costs, losing a flat $1,000 option may make little practical difference.

Hypothetical example: sole trader versus employee in 2027–28

The figures below are hypothetical and simplified. They use the legislated 14% rate on income between $18,201 and $45,000 from 2027–28, and exclude the Medicare levy and other offsets such as the low income tax offset.

Consider a sole trader cleaner with $30,000 of net business profit after expenses. Tax on that income is 14% of the $11,800 above $18,200, or $1,652. The WATO takes $250 off, leaving $1,402.

Now consider an employee earning $30,000 in wages with only small work expenses, who takes the $1,000 standard deduction. Taxable income falls to $29,000. Tax is 14% of $10,800, or $1,512. After the $250 WATO, the bill is $1,262.

The difference between the two is $140, which is the value of the $1,000 deduction at 14%.

If the sole trader also worked a part-time Job for wages, the standard deduction could be claimed against that wage income, because the cap is set by a person's assessable labour income.

Who gets the full $250

The Budget papers estimated that around 13 million workers would receive the WATO in 2027–28, and that 97% of them would get the full $250.

The offset lifts what the government calls the effective tax-free threshold for workers to $19,985, or up to $24,985 for workers eligible for the low income tax offset. Those figures follow from the 14% rate: $250 at 14% covers tax on about $1,785 of income above $18,200.

Because the offset is capped at the tax payable on net labour income, a sole trader with a very small profit might get less than $250, or nothing. Someone whose net labour income is at or below $18,200 is not eligible at all.

There is no phase-out in the law for higher incomes, so a high-earning sole trader is entitled to the same maximum $250.

What to watch

  • 2026–27 (now): the first year of the $1,000 standard deduction for employees. Sole traders keep claiming actual business costs.
  • Final LCR 2026/D5: the ATO is yet to finalise its draft ruling on the standard deduction. Comments closed on 9 October.
  • 1 July 2027: the lowest tax rate is legislated to fall from 15% to 14%, and the WATO year begins.
  • Trusts: separately, the Tax Reform No. 3 Bill, which would impose a 30% minimum tax on discretionary trusts from 1 July 2028, is before the Senate, with a committee report due on 13 November. It is a bill, not law. Under the WATO law, business income from a trust is already outside the labour amounts definition.
  • From 1 July 2028: 2027–28 tax returns lodged, with the WATO applied on assessment.