Optimal Tax Structures for Businesses in Australia
There Is No One-Size-Fits-All Answer
Executive answer
There is no universally “best” business structure. The right structure depends on who owns the business, whether profits will be retained or distributed, the commercial risks, how new investors will enter, whether the income is personal services income, what assets may appreciate, and the likely exit. A company often suits a scalable or higher-risk trading business that will retain profits or admit investors. A discretionary trust may suit a closely held family business needing distribution flexibility, while a unit trust can suit unrelated co-owners who require fixed economic interests. Sole traders and partnerships are inexpensive and transparent but expose their owners more directly to business liabilities. Frequently, the most effective result is a deliberately designed combination—such as a trading company whose shares are held by a family trust—rather than one entity chosen by tax rate alone.
The tax rate is only the opening submission
For 2026–27, an Australian-resident individual pays marginal income tax rates from nil to 45%, before the generally applicable 2% Medicare levy. A company that qualifies as a “base rate entity” generally pays 25%; other companies pay 30%. Broadly, the 25% rate requires aggregated turnover below $50 million and no more than 80% of assessable income to be base-rate-entity passive income.
That comparison can be misleading. Company tax is often a deferral, not the final tax cost. When after-tax profits are paid to an individual shareholder, the dividend and its franking credit enter the shareholder’s assessable income and the credit offsets tax already paid by the company. A high-rate shareholder may pay top-up tax. Conversely, retaining working capital in a company can defer that shareholder-level tax and fund growth.
Trusts are generally conduits rather than low-tax vaults. Beneficiaries presently entitled to trust income are usually assessed on their shares of the trust’s net income. Income accumulated in a discretionary trust may be taxed to the trustee at the top marginal rate, subject to the particular rules. Tax outcomes therefore depend on lawful distributions, the deed, beneficiary profiles, trust resolutions and anti-avoidance provisions—not on the label “family trust”.
Structure comparison
Sole trader: inexpensive, direct and exposed
A sole trader has minimal establishment and governance cost. Income and deductions are returned by the owner, cash can be drawn without dividend formalities, and eligible capital gains may obtain the general 50% CGT discount after 12 months.
The price of simplicity is that the owner and business are the same legal person. Business debts, negligence claims and contractual liabilities can reach personal assets, subject to insurance and the ordinary law. Marginal tax rates apply as profit rises, and there is no separate entity in which to retain profit at a company rate. The non-commercial-loss rules may defer losses from an activity that does not satisfy an applicable test or exception.
Partnership: effective co-ownership needs more than a split of profit
A general partnership is not taxed like a company. It lodges a return, but the partners are assessed on their shares of net partnership income; losses similarly flow to partners subject to the tax rules applying to each. A written partnership agreement should address contributions, drawings, authority, leave, deadlock, restraint, insurance, retirement, death and valuation.
Tax transparency can be useful, but a general partnership offers limited liability protection. Each partner may expose the others through acts within the partnership business. Changes in membership can also have CGT and duty consequences.
Company: strong for reinvestment and capital raising, but not a tax-free reservoir
A company is often the practical default for a trading business that has employees, contractual risk, retained earnings or growth investors. It has perpetual succession; ownership can be divided into shares; governance rights can be documented; and profits can remain available for working capital after company tax.
Three qualifications matter.
First, the company has no general 50% CGT discount. If the company sells appreciating goodwill or another CGT asset, the gain is calculated without that discount. An exit by shareholders selling their shares may produce a different result, but buyers often prefer an asset purchase and tax warranties, liabilities and eligibility for small-business CGT concessions must be tested.
Second, company money is not the controller’s personal money. Division 7A of the Income Tax Assessment Act 1936 can treat payments, loans, debt forgiveness and certain trust-related benefits to shareholders or associates as unfranked dividends. A payment may avoid deemed-dividend treatment if repaid or converted to a complying loan by the required lodgment day, but minimum repayments and the annual benchmark interest rate then matter. Informal drawings create expensive surprises.
Third, losses stay in the company. They do not reduce a founder’s salary or investment income and can be used later only if the relevant continuity-of-ownership or business-continuity requirements are satisfied.
Discretionary trust: flexibility with strict administration
A discretionary trust can allow the trustee to distribute different categories or amounts of income among eligible family beneficiaries, subject to the deed and tax law. It can also provide succession flexibility because control may pass through the shares and directorship of a corporate trustee and the appointor provisions, rather than transferring each underlying business asset.
But flexibility is not permission to allocate income after the event. Resolutions must be valid, timely and supported by the deed. Section 100A reimbursement-agreement rules, the rules for distributions to minors, family trust elections, trust-loss provisions and the streaming requirements for capital gains and franked distributions may apply.
A “bucket company” beneficiary may cap the immediate tax on a distribution at the applicable company rate, but the arrangement must address whether the amount is actually paid or remains an unpaid present entitlement. Division 7A and ATO guidance concerning trust entitlements and shareholder benefits must be considered. If company funds later reach family members, further tax may arise.
Unit trust: fixed economics for unrelated owners
Unit trusts are commonly used where investors need defined rights rather than a trustee’s discretion. Units can reflect capital contributions, voting power and distributions; a unitholders agreement can govern funding, transfers, defaults, deadlock and exit.
The tax classification should not be assumed from the commercial label. Whether a trust is “fixed” for particular tax provisions is technical, and a public trading trust or corporate unit trust can be taxed like a company. Changes to units may trigger CGT, and interests in a land-rich trust may attract NSW landholder duty. In NSW, many trusts—particularly special or discretionary trusts—do not receive the ordinary land-tax threshold. A property structure therefore needs a state-tax model, not just an income-tax comparison.
Common combinations
Trading company with shares held by a discretionary trust
This is a frequent family-business structure. The company contains operating risk, retains profits and contracts with customers and staff. If the family trust owns the shares, it may provide flexibility when franked dividends are distributed and may improve succession planning. A future sale of shares by the trust may permit the general CGT discount and possibly small-business CGT concessions if every condition is met.
Holding company or separate asset/IP entity
A holding company may receive dividends and hold surplus capital away from day-to-day operations. A separate entity may own valuable intellectual property, property or equipment and license or lease it to the trading entity on properly documented commercial terms. This can reduce concentration of risk and simplify investment in a particular business line.
Cross-guarantees, all-assets security and non-commercial related-party arrangements can undo much of the benefit. Moving existing IP or property may itself trigger CGT, GST and NSW duty. Substance, valuation and Part IVA risk must be addressed.
Which structure commonly fits which business?
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Professional services: start with the personal services income rules. PSI is income produced mainly from an individual’s skills or efforts. If the rules apply, interposing a company or trust generally cannot divert that income or deductions. Professional firms should also consider the ATO’s risk framework for allocation of professional-firm profits and governing professional rules.
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Trades and operational SMEs: a company often becomes attractive as employees, vehicles, leases and contractual risks grow. Family-trust shareholding may add distribution and succession flexibility, but insurance and guarantees remain critical.
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Technology startup or investor-backed venture: investors usually prefer a company with a clean share register, constitution, shareholders agreement and employee-equity capacity. A complex discretionary-trust operating structure can obstruct due diligence and later funding. Founder share ownership and exit tax should be planned at incorporation, not on the eve of sale.
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Property investment: individuals and eligible trusts may obtain the CGT discount on capital gains, while companies do not. Against that, NSW land tax can be materially worse for special/discretionary trusts, and foreign-person provisions can apply through trust drafting. Financing, estate planning and asset protection also matter.
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Property development: sale profits may be ordinary income rather than capital gains, making the CGT discount irrelevant. GST—including registration, taxable supplies and possible margin-scheme issues—must be modelled. A separate company or unit trust is often used to ring-fence a project, but tax grouping, finance security and landholder duty require advice.
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Family business: a trading company owned through a discretionary trust can combine continuity with flexible family distributions. The succession plan must address company control, trustee and appointor succession, family law exposure and funding of exits.
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Unrelated co-investors: a company or unit trust generally provides clearer fixed rights than a discretionary trust. Governance and exit documents are as important as tax treatment.
Issues that apply across structures
Small-business CGT concessions. Subject to detailed conditions, the four concessions are the 15-year exemption, 50% active-asset reduction, retirement exemption (with a $500,000 lifetime limit) and small-business rollover. The basic conditions commonly involve either aggregated turnover below $2 million or maximum net assets not exceeding $6 million, plus the active-asset test. Extra conditions apply to shares and trust interests. These concessions are powerful but should never be assumed in an exit price model.
Payroll tax. For 2026–27, NSW payroll tax is 5.45% above the $1.2 million annual threshold, with registration determined by monthly thresholds. Grouping rules can combine related businesses so restructuring payroll across entities may not multiply thresholds. Contractor payments and payments to working owners can also need review.
GST. Registration is generally compulsory when current or projected GST turnover reaches $75,000 ($150,000 for non-profits), and special rules apply to taxi/limousine travel. Structure affects who registers, invoices, claims credits and reports. A restructure or going-concern sale requires specific GST analysis.
Compliance cost. Companies require ASIC annual review, registers, director compliance and tax returns. Trusts require a deed, annual resolutions and careful accounts; a corporate trustee adds company compliance. Complexity should earn its keep.
A decision framework
Before choosing, model at least these questions:
1. Who will own, control and work in the business now and in five years?
2. Is income generated by systems and assets, or mainly by one person’s labour?
3. How much profit will be consumed, distributed or reinvested?
4. What liabilities arise from staff, products, advice, premises, debt and regulation?
5. Will family members, key employees or external investors obtain equity?
6. Which assets are expected to appreciate, and will an exit be a sale of assets or ownership interests?
7. Can losses be used in the entity in which they arise?
8. What happens on death, incapacity, relationship breakdown, retirement or disagreement?
9. What are the NSW payroll-tax, land-tax and duty consequences?
10. Does the expected tax and risk benefit justify annual compliance and administration?
Restructuring later can be taxable
A structure that was sensible at launch can become unsuitable, but moving a business is not merely changing the ABN. Transfers may trigger CGT, GST, NSW transfer or landholder duty, lender consent, contract novation, employee transfer, licensing, privacy and valuation issues. The small-business restructure rollover in Subdivision 328-G of the Income Tax Assessment Act 1997 may provide CGT relief for eligible genuine restructures involving small-business entities and ultimate economic ownership, but it is not a general exemption and does not automatically remove state duty or other taxes.
The most reliable process is coordinated legal and accounting advice before implementation: compare projected cash tax, retained profits and exit tax; map liability and control; document commercial dealings; and confirm the structure can still be explained to a bank, investor, buyer and the ATO.
Sources
Disclaimer
This article provides general information only and is not legal, tax, accounting or financial advice. Tax outcomes depend on the facts, governing documents, elections, transactions and law in force at the relevant time. It does not create a solicitor-client relationship. Obtain coordinated advice from a lawyer and registered tax adviser before establishing or changing a structure.
