How Business Structure Drives Your Tax Bill: Sole Trader, Trust or Company

How Your Business Structure Shapes What You Pay in Tax

Sole trader, partnership, trust or company: the structure you trade through isn't just a legal formality, it's one of the biggest levers on your tax outcome. This article looks at how entity choice drives that outcome: marginal rate differences, trust distributions to lower-taxed beneficiaries, and the practical limits of using a company to save tax.

The Same Profit, Four Different Tax Outcomes

A sole trader or partner pays tax on business profit at their own marginal rate: currently 15% on income between $18,201 and $45,000, 30% up to $135,000, 37% up to $190,000 and 45% above that, plus the 2% Medicare levy. A company pays a flat 25% if it qualifies as a base rate entity (aggregated turnover under $50 million and no more than 80% passive income), or 30% otherwise, regardless of profit level. A discretionary trust generally pays no tax itself: it streams net income to beneficiaries, taxed on their share at their own marginal rate, or to the trustee at the top rate if retained. Which produces the lowest bill depends on profit level, how many family members can genuinely share in it, and whether profit is reinvested or drawn out to live on.

Trust Distributions to Lower-Taxed Beneficiaries

A discretionary trust's main tax advantage is flexibility. Each year, the trustee can distribute net income to whichever beneficiaries are presently entitled, splitting income across family members on lower marginal rates rather than concentrating it all in one high-income earner. Done properly, this can meaningfully reduce a family group's overall tax where a spouse, an adult child or a related company is on a lower rate than the business owner. It has to be a genuine distribution, not a paper entitlement: the ATO's section 100A reimbursement agreement rules can unwind the benefit where a beneficiary is made presently entitled to income but someone else actually receives it as part of an arrangement entered into for a tax-reduction purpose.

The Proposed 30% Minimum Tax on Trusts

From 1 July 2028, if legislated, a discretionary trust's trustee would pay a minimum 30% tax on the trust's taxable income, with non-corporate beneficiaries receiving a non-refundable credit for tax the trustee already paid. Corporate beneficiaries would get no credit, which targets the common "bucket company" strategy of distributing trust income to a company to cap the rate at 25% to 30%. This was announced in the 2026-27 Federal Budget on 12 May 2026, and Treasury consulted on the design through July 2026. It is not law: no bill has been introduced into Parliament, and the design could still change. See our dedicated article on the proposed minimum tax for the detail; if your structure leans on trust distributions, review it before 2028.

A Company's Lower Rate Is Only Half the Story

The 25% company rate looks attractive next to a 47% top personal rate, but it only taxes profit retained inside the company. Getting that profit into your own hands as a dividend attracts further tax at your marginal rate, offset by franking credits for tax the company already paid. Draw funds out informally instead, as a loan, an asset transfer or personal expenses paid through the company, and Division 7A of the tax law can treat the amount as an unfranked dividend, taxed at your full marginal rate with no franking credit to soften it, unless it sits on a complying loan agreement with minimum annual repayments. A company genuinely helps where profit is reinvested in the business rather than drawn out to live on.

When Structure Doesn't Change the Outcome

Not every business benefits from interposing a company or trust. If your income is personal services income, earned mainly from your own skills or effort as an individual, as is common for consultants, contractors and many tradespeople, the PSI rules generally attribute that income straight back to you regardless of which entity it's paid to, unless you meet the personal services business tests. Structure also affects which concessions you can access: the small business income tax offset, worth up to $1,000 a year, is only available to sole traders and to individuals receiving a share of net small business income from a partnership or trust with turnover under $5 million. It doesn't apply to company dividends.

Getting the Structure Decision Right

Structure also shapes timing: a sole trader or partner is taxed as income is earned, while a company can retain profit and a trust can choose, within limits, which beneficiary a year's income goes to. At Finance & Tax Consultants, we treat structure as a standing part of tax planning, not a once-off start-up decision: the setup that suited your business at the start may not be the one that minimises tax once profit, family circumstances or the 2028 trust changes shift.

Disclaimer: This article contains general information only and does not constitute financial, legal or tax advice. It has been prepared without regard to your objectives, financial situation or needs. Tax and superannuation laws change frequently, and the information in this article may not reflect the current law or may become inaccurate over time. Before acting on anything in this article, you should consider its appropriateness to your circumstances and seek advice from a registered tax agent or qualified adviser.