Business Structure Guide
Australia’s three most common business structures are sole trader, company (Pty Ltd), and discretionary trust. The one you choose affects how much tax you pay, how well your assets are protected, how much admin you carry, and how easy it is to grow or eventually sell. Getting this right is one of the most consequential financial decisions a small business owner can make.
What is a sole trader?
A sole trader is the simplest and most common business structure in Australia. You operate as an individual. The business isn’t a separate legal entity. You use your personal ABN, lodge a single individual tax return (which includes your business income), and take full personal responsibility for any debts or legal claims.
Advantages of sole trader
- Lowest setup cost. Register for an ABN at no charge, with optional business name registration (~$43/year)
- Minimal ongoing admin. One tax return, no separate ASIC reporting
- Business losses can offset other personal income in the same yea
- Full control. No shareholders, directors, or trustees involved
Disadvantages of sole trader
- Unlimited personal liability. Your home, savings, and car are exposed to business debts
- Taxed at personal income tax rates, up to 47% (45% + 2% Medicare levy) on income above $190,000
- No income splitting. All profit is assessed in your hands
- Harder to raise capital or bring in partners
- The business cannot continue if you die or become incapacitated
Best for: Freelancers, consultants, and tradespeople starting out, or low-risk service businesses with modest income and no employees.
What is a company (Pty Ltd)?
A proprietary limited company (Pty Ltd) is a separate legal entity. It can own property, enter into contracts, employ people, and sue or be sued in its own name. You become a shareholder and (usually) a director. Your personal liability is generally limited to your share capital, though directors can still be held personally liable for insolvent trading or unpaid PAYG and GST obligations.
Advantages of a company
- Limited liability. Personal assets are generally protected from business debts
- Flat company tax rate of 25% (base rate entities) or 30%, compared to up to 47% personally
- Retaining profits in the company allows tax capping at certain rates
- Easier to raise capital by issuing shares to investors or partners
- Perpetual succession. The company continues if an owner leaves or dies
- Greater credibility with clients, banks, and government contracts
Disadvantages of a company
- Higher setup cost
- Ongoing ASIC fees (~$310/year for a small proprietary company as of 2026)
- More administration. Separate tax return, financial statements, director obligations
- Losses cannot be distributed to shareholders; they are carried forward to offset future company profit only. Exception from 1 July 2026: eligible companies with aggregated turnover under $1 billion can carry a current-year revenue tax loss back against tax paid in the prior two income years and receive a cash refund from the ATO, capped by the company’s franking account balance.
- Distributing profits requires paying dividends (which may be franked), which can be less flexible than a trust
Best for: Growing businesses with employees, businesses carrying liability risk, owners earning over $120,000 from the business, or businesses looking to bring on investors or partners.
What is a discretionary trust?
A discretionary trust (often called a family trust) is a legal arrangement where a trustee holds and manages assets for the benefit of a group of beneficiaries. The trustee, whether a company (known as a corporate trustee) or an individual, decides each year how income is distributed among beneficiaries.
Unlike a company, a trust is not a separate legal entity in the same sense. The trustee (which is best practice to be a company) enters into contracts and owns assets in their capacity as trustee. Income is not retained in the trust. It is distributed to beneficiaries, who pay tax at their own rates.
Advantages of a discretionary trust
- Income splitting. Distribute income each year to beneficiaries in lower tax brackets, such as a spouse, adult children, or related companies
- Strong asset protection. Assets held in trust are generally not available to a beneficiary’s personal creditors
- 50% CGT discount on assets held longer than 12 months (unlike companies, which do not access this discount). Note: From 1 July 2027, the 50% CGT discount will be replaced by CPI indexation for gains accruing after that date, with a 30% minimum tax on real gains. Gains accrued before 1 July 2027 are grandfathered under the existing discount rules.
- Flexibility. The trustee decides distributions each year based on each beneficiary’s tax position
- Privacy. Trusts are not registered on a public register like ASIC
Disadvantages of a discretionary trust
- Most complex and expensive to set up, typically $1,500–$3,000 for a proper trust deed
- Losses cannot be distributed. They stay in the trust until offset by future trust income
- ATO scrutiny. Trust distributions must have a genuine commercial basis; artificial income splitting attracts penalties
- Annual tax return required for the trust as a separate entity
- Trustee obligations are significant, covering duty of care, record-keeping, and compliance with the trust deed
Best for: Established business owners with family members on lower incomes, businesses with significant assets to protect, and owners focused on long-term wealth and estate planning.
Side-by-side comparison
The table below compares sole trader, company, and trust structures across the criteria most important to Australian small business owners.
| Feature | Sole Trader | Company (Pty Ltd) | Trust (Discretionary) | Best For |
|---|---|---|---|---|
| Setup cost | ~$50–$100 | ~$800–$3,000 | ~$2,500–$5,000 | Sole trader |
| Ongoing admin | Very low | Medium–High | Medium–High | Sole trader |
| Tax rate | Personal rate (up to 45%) | Flat 25–30% | Distributed to beneficiaries | Company or Trust |
| Income splitting | No | Limited | Yes, flexible | Trust |
| Asset protection | None | Moderate | Strong | Trust or Company |
| Raising capital | Very difficult | Easier (shares) | Difficult | Company |
| Losses | Offset personal income | Carried forward | Carried forward | Sole trader |
| Succession | Cannot transfer | Shares transferable | Flexible | Company or Trust |
| GST obligations | Once >$75k turnover | Once >$75k turnover | Once >$75k turnover | Same for all |
| Complexity | Simple | High | High | Sole trader or Company |
| Privacy | Public | ASIC-registered | Private | Trust |
| Ideal stage | Solo | Growth phase | Established/family | Depends on goals |
How Each Structure Is Taxed in Australia
Sole Trader Tax
Sole traders pay tax at individual marginal rates. In 2026–27:
- $0–$18,200: 0% (tax-free threshold)
- $18,201–$45,000: 15%
- $45,001–$135,000: 30%
- $135,001–$190,000: 37%
- $190,001+: 45%
These rates do not include the 2% Medicare levy. A sole trader earning $200,000 in business profit pays approximately $55,870 in income tax plus Medicare levy of $4,000, totalling approximately $59,870, assuming they are an Australian resident for tax purposes with no additional offsets, deductions beyond profit calculation, or levy reductions. This is $268 less than the 2025-26 figure of $60,138, reflecting the rate cut in the lower bracket.
Looking ahead: the $18,201–$45,000 rate is legislated to fall again to 14% from 1 July 2027.
Company Tax
Base rate entities (most small businesses with aggregated turnover of less than $50 million and at least 80% passive income) pay 25% company tax. All other companies pay 30%. That same $200,000 profit retained in a company is taxed at $50,000, compared to $55,870 for a sole trader on the same income in 2026–27. The company saves approximately $5,870 at the primary tax level before dividend distributions are considered.
From 1 July 2026, eligible companies with aggregated annual global turnover under $1 billion can also carry a current-year revenue tax loss back against tax paid in the prior two income years, receiving a cash refund from the ATO. This loss carry-back measure is permanent and does not apply to sole traders, trusts, or partnerships.
Keep in mind, profits eventually need to be distributed to shareholders as dividends (which come with franking credits). The shareholder then pays tax on the grossed-up dividend minus the franking credit. There is no free tax advantage here, just deferral and rate differences.
Trust Tax
In most circumstances, a trust itself does not pay tax. The trustee distributes income to beneficiaries, who pay tax at their own marginal rates. Distributing $200,000 strategically across two adults, each earning $40,000 could result in a combined tax bill of roughly $16,000 to $20,000 under current law, a meaningful saving compared to a sole trader at the top rate. This advantage will be significantly reduced from 1 July 2028. See the note below.
The ATO’s trust anti-avoidance rules (including the much-discussed section 100A provisions) mean distributions must reflect genuine economic entitlements. Work with a specialist accountant to make sure your distributions are defensible.
Important update, 2026-27 Federal Budget (12 May 2026): The Government has announced a 30% minimum tax on the taxable income of discretionary trusts from 1 July 2028. This measure is not yet law. From 2028, the trustee will pay 30% tax at the trust level. Non-corporate beneficiaries will receive a non-refundable credit for that tax. For beneficiaries currently taxed below 30% (the people that income splitting targets). The excess credit will not be refundable, removing the income-splitting advantage. A rollover relief window is available from 1 July 2027 to 30 June 2030 to restructure out of a discretionary trust into a company or fixed trust without triggering immediate income tax or CGT. If you currently use a trust, or are considering one, seek advice from a specialist accountant before 2028.
Which structure is right for your business?
Choose sole trader if:
- Your income will be below $80,000–$100,000 and you have no employees
- Your business carries minimal liability risk
- Simplicity is your priority
- You have no plans to scale your business
Choose the company if:
- Your profit exceeds $100,000–$120,000 and the tax saving justifies the admin
- You employ staff or take on contracts with legal liability exposure
- You want to bring in investors, partners, or eventually sell the business
- You operate in a higher-risk industry such as construction, trades, or professional services
Choose trust if:
- You have a spouse or family members on lower incomes
- You own significant business or investment assets worth protecting
- You earn well above $120,000 and want flexible income distribution
- You’re thinking ahead to estate planning and intergenerational wealth transfer
Note: From 1 July 2028, a 30% minimum tax on discretionary trust income is proposed (not yet law as of May 2026). The income-splitting advantage described above will be significantly reduced for beneficiaries currently taxed below 30%. A rollover relief window from 1 July 2027 to 30 June 2030 allows eligible business owners to restructure out of a trust without triggering immediate CGT. If income splitting is a primary reason for choosing a trust, seek advice before committing to this structure.
Common Structuring Mistakes (and how to avoid them)
- Staying as a sole trader for too long. Many business owners stick with the simplest structure well past the point where it makes sense. Once you’re consistently earning $100,000+ or taking on liability risk, you’re likely overpaying tax and leaving your assets exposed.
- Setting up a trust without the right trustee. Using an individual as a trustee means the trust assets are exposed if the trustee is personally sued. A corporate trustee (a company set up solely to act as trustee) adds an extra layer of protection.
- Mixing personal and business assets. Running personal expenses through the business, or holding personal assets inside the business entity, creates tax problems and weakens asset protection. Keep your structures clean and separate.
- Using DIY trust deeds. Online templates are cheap upfront and costly later. A poorly drafted trust deed can limit your distributions, create unintended tax consequences, or fail to achieve the asset protection you intended. Use a solicitor.
- Structuring without a plan. Your business structure should be reviewed at every significant milestone: $100k profit, first employee, major asset acquisition, or a business partnership. Don’t wait until a problem forces the conversation.
- Setting up a company without a trust shareholder. If you don’t have a trust in place at the start, you will likely need to pay Capital Gains Tax to get one in place.
- Not reviewing your structure after a loss year. From 1 July 2026, eligible companies with aggregated annual global turnover under $1 billion can carry a current-year revenue tax loss back against tax paid in either of the prior two income years, receiving a cash refund from the ATO. Sole traders, trusts, and partnerships cannot do this. If you operate in a cyclical or higher-risk industry such as construction, trades, professional services. A bad year now costs significantly more as a sole trader than it would inside a company structure.
Frequently Asked Questions
Reflects 2026–27 Federal Budget measures announced 12 May 2026.
What is the main difference between a sole trader and a company in Australia?
There are three important differences between operating as a sole trader and an Australian company (Pty Ltd). They are separate legal entity, tax rate, and personal liability.
The biggest difference between operating as a sole trader vs a company is that as a sole trader you have no separate legal existence. For tax purposes this means all profits earned are taxed at the individual marginal rate. Currently this rate goes up to 45% with a Medicare levy of 2% taxed on income over $190,001. Another implication is that all debts owed by the business are also the responsibility of the individual.
A Pty Ltd, however, is its own separate legal entity. It can own property, enter contracts, and be sued in its own name. Profits are taxed at a flat 25% for base rate entities (those with aggregated turnover under $50 million and at least 80% passive income), or 30% for all others. The owner’s personal assets are generally protected from business debts, though directors can still be held personally liable for insolvent trading or unpaid PAYG and GST obligations. A company also allows profit retention at the lower rate (creating tax deferral), easier capital raising through share issuance, and perpetual succession if an owner leaves or dies.
Finally, a company has the benefit of being able to retain profits in the company taxed at the lower rate (tax deferral) and can raise capital by selling shares. If a sole owner leaves the business or dies, the company can continue regardless known as perpetual succession.
Most business owners should consider switching to a company structure once taxable income is consistently above $100,000 to $120,000 per year.
What are the income tax rates for sole traders in Australia in 2025-26?
The 2026-27 individual marginal tax rates, which apply to Australian sole trader business income, are as follows:
$0 to $18,200: 0% (tax-free threshold). $18,201 to $45,000: 15%. $45,001 to $135,000: 30%. $135,001 to $190,000: 37%. $190,001 and above: 45%.
These rates do not include the 2% Medicare levy, which applies to most Australian residents on top of their income tax.
A sole trader earning $200,000 in business profit pays approximately $55,870 in income tax plus the Medicare levy of $4,000, for a total tax obligation of approximately $59,870, assuming standard Australian resident status with no additional offsets, deductions beyond profit calculation, or levy reductions. This is $268 less than the equivalent 2025-26 figure of $60,138, reflecting the rate cut in the lower bracket.
This compares to a company retaining the same $200,000 profit, which would be taxed at $50,000 at the 25% base rate, a saving of roughly $5,870 at the primary tax level before dividend distributions are considered.
Looking ahead: The $18,201 to $45,000 rate is legislated to fall again to 14% from 1 July 2027. A new Working Australians Tax Offset (WATO) of up to $250 will also apply from 2027-28 for Australians earning income from employment or sole trader business activity, raising the effective tax-free threshold for eligible workers by nearly $1,800.
Is a discretionary trust better than a company for tax in Australia?
The answer depends on your circumstances and, critically, on timing. The tax treatment of discretionary trusts is changing materially from 1 July 2028 as a result of the 2026-27 Federal Budget.
Until 30 June 2028: trusts can still outperform companies
Under current law, a discretionary trust does not pay tax itself. The trustee distributes income to beneficiaries each year, who pay tax at their own marginal rates. Distributing $200,000 across two adults each earning $40,000 can result in a combined tax liability of roughly $16,000 to $20,000, compared to $60,138 for a sole trader or $50,000 in a company at 25%.
Trusts also access the 50% CGT discount on assets held longer than 12 months, which companies do not. The ATO actively scrutinises trust distributions under section 100A anti-avoidance provisions. Distributions must reflect genuine economic entitlements, and the beneficiary must genuinely benefit.
From 1 July 2028: 30% minimum tax at trustee level
From 1 July 2028, trustees of discretionary trusts will pay a minimum tax of 30% on the trust’s taxable income. This is announced Government policy from the 2026-27 Federal Budget. As of May 2026, this measure is not yet law.
Beneficiaries other than corporate beneficiaries will receive a non-refundable credit for the tax paid by the trustee. This means:
If a beneficiary’s marginal rate is above 30%: they pay top-up tax, and the total outcome is roughly the same as before.
If a beneficiary’s marginal rate is below 30%: the excess credit is lost. The trust’s income is effectively taxed at 30% regardless of the beneficiary’s actual rate. The income-splitting advantage to low-income beneficiaries is removed.
For corporate beneficiaries (bucket companies): no credit is available. The income is taxed twice: once at the trustee level at 30%, and again at the corporate level at 25-30%. This makes bucket company arrangements unworkable from 2028.
What is excluded from the minimum tax
The 30% minimum tax applies only to discretionary trusts. The following are excluded: fixed and widely held trusts, complying superannuation funds, special disability trusts, deceased estates, charitable trusts, and income from assets of discretionary testamentary trusts that existed at 7:30pm AEST on 12 May 2026 (Budget night). Primary production income and certain income relating to vulnerable minors are also excluded.
The restructure rollover window: 1 July 2027 to 30 June 2030
To help business owners adjust, the Government is providing expanded rollover relief for three years from 1 July 2027, closing 30 June 2030. Eligible taxpayers can transfer assets out of discretionary trusts into other entity types, such as companies or fixed trusts, without triggering immediate income tax or CGT consequences. This window is time-limited. Business owners who want to restructure should start planning now, as the complexity of a restructure typically requires 12 to 18 months of preparation.
What this means for the trust vs company comparison
From 2028, the tax outcome for a discretionary trust distributing to low-income beneficiaries becomes broadly equivalent to a company at 25-30%, removing the key income-splitting advantage. Trusts retain their asset protection benefits and remain useful for estate planning purposes, but the tax efficiency argument changes significantly.
According to Simon Burke CA of Acctivate Business Accountants Brisbane, business owners with existing discretionary trusts should seek specialist advice before the 2028 change takes effect, and before the rollover window closes in 2030. The right answer will depend on your specific structure, asset base, and family circumstances.
What does it cost to set up a company or trust in Australia?
Business structure setup costs in Australia vary significantly by entity type, and the cost of changing structure later is one of the strongest arguments for getting the decision right the first time.
Sole trader: Almost no setup cost. ABN registration is free through the Australian Business Register. Optional business name registration costs approximately $43 per year.
Pty Ltd company: Typically, $1,500 to $4,000 in professional fees for setup, depending on complexity. Ongoing costs include ASIC annual review fees of approximately $310 per year for a small proprietary company (as of 2026), plus a separate company tax return and financial statements.
Discretionary trust: Typically, $2,500 to $5,000 for a professionally drafted trust deed from a solicitor, plus setup of a corporate trustee company if used. Annual compliance includes a trust tax return and ongoing accounting fees.
Changing structure retrospectively: Moving from sole trader to company typically costs $2,000 to $5,000 in professional fees. Adding a trust once a company is already in place can trigger Capital Gains Tax. According to Acctivate Business Accountants, the most common and expensive structuring mistake is waiting too long, turning a straightforward restructure into a complex, taxable event.
Rollover relief window for existing trust holders: 1 July 2027 to 30 June 2030
If you already operate through a discretionary trust, the 2026-27 Federal Budget has created a time-limited opportunity to restructure without incurring the usual tax costs. The Government announced a three-year rollover relief window, available from 1 July 2027 to 30 June 2030, to help business owners transfer assets out of discretionary trusts into other entity types, such as companies or fixed trusts, without triggering immediate income tax or CGT consequences.
This window is directly relevant to setup-cost decisions because the normal costs of restructuring (professional fees, CGT on asset transfers, potential stamp duty) are significantly reduced for eligible taxpayers during this period. The rollover relief is designed to support the transition ahead of the 30% minimum tax on discretionary trust income that takes effect from 1 July 2028.
This measure is announced Government policy from the 2026-27 Federal Budget and is not yet law as of May 2026. State and territory stamp duty relief is not guaranteed to align, so professional advice is essential before any restructure is undertaken.
What is a corporate trustee and why does it matter for asset protection in Australia?
A corporate trustee is a proprietary limited company whose sole purpose is to act as the trustee of a discretionary trust, rather than appointing an individual (such as one of the business owners) to that role.
The distinction matters significantly for asset protection. If an individual trustee is personally sued, their personal creditors can potentially access trust assets to satisfy a judgment against them. A corporate trustee creates a legal separation: the trustee company owns nothing in its own right, so personal legal action against its directors generally cannot reach the trust assets held within the structure.
A corporate trustee also provides continuity. An individual trustee who becomes incapacitated, dies, or leaves a business partnership creates administrative and legal complexity. A company as trustee does not have these vulnerabilities.
The setup cost is higher, as it requires establishing a separate company for the trustee role. But for business owners holding significant assets within a trust structure, the protection and clarity that a corporate trustee provides is generally considered worth the additional cost and ongoing compliance.
According to Simon Burke CA of Acctivate Business Accountants Brisbane, using a corporate trustee is best practice when setting up a discretionary trust in Australia, and failure to do so is one of the most common structuring mistakes among small business owners.
When is the right time to restructure from sole trader to company in Australia?
The decision to restructure from sole trader to company is best made proactively, not reactively. According to Acctivate Business Accountants, waiting until a problem forces the issue is one of the most common and expensive mistakes business owners make.
There are four conditions that typically signal the right time to make the switch:
First, income threshold. When taxable income consistently exceeds $100,000 to $120,000 per year. At this point, the flat company tax rate of 25% produces meaningful savings compared to the personal rate of 30% to 37% in that income band, often justifying the additional administration.
Second, liability exposure. When you hire staff or take on contracts with significant legal liability. As a sole trader, your personal assets are exposed to every business debt and legal claim. A company structure provides a legal buffer.
Third, capital and succession. When you want to bring in investors, business partners, or plan to eventually sell. Share issuance, partnership structures, and business valuations all work more cleanly within a company framework.
Fourth, higher-risk industries. When you operate in construction, trades, professional services, or any field where client or public liability is a real consideration.
New from 1 July 2026: loss carry-back for companies
The 2026-27 Federal Budget has added a fifth reason to consider company structure, particularly relevant to businesses in higher-risk or cyclical industries. From 1 July 2026, eligible companies with aggregated annual global turnover under $1 billion can carry a current-year tax loss back against tax paid in either of the prior two income years, generating a cash refund from the ATO.
Important note: These are general guidelines. The right structure depends on your income, assets, family situation, industry, and growth goals. A qualified accountant who knows your business will give you advice tailored to your circumstances, not a generic tick-box recommendation.
Simon Burke, CA
Simon Burke is a Chartered Accountant (CAANZ), Registered Tax Agent and Co-Founder of Acctivate Business Accountants, with a decade of experience in accounting and business advisory. Holding dual degrees in Business Management and Commerce and a Xero Advisor certification, Simon specialises in helping businesses build stronger foundations through smarter structures, cash flow strategy, and operational efficiency.
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