Choosing the wrong business structure is one of the most expensive mistakes an Australian business owner can make. And right now, with last night's 2026–27 Federal Budget introducing the most significant overhaul of trust and capital gains tax in decades, the stakes have never been higher. Here's what you need to know — and what you should be doing about it.
Why Business Structure Is the Most Consequential Tax Decision You'll Make
Your business structure determines almost everything about your financial life as a business owner: how much income tax you pay, whether your personal assets are protected if something goes wrong, how you can pay yourself, your annual compliance costs, and whether you can bring in investors or sell the business one day.
Most business owners choose a structure at the start — often based on cost or simplicity — and then never revisit it. For some, that's fine. For many, it means paying far more tax than necessary for years, or carrying liability risk they don't realise exists.
In Australia, approximately 3.6 million businesses operate across four main structures: roughly 2.4 million (67%) as sole traders, 800,000 (22%) as companies, and 400,000 (11%) as partnerships or trusts. Each has fundamentally different tax treatment, compliance obligations, and risk profiles.
And as of 12 May 2026 — last night — the Federal Budget announced changes that will materially alter the tax equation for around 350,000 Australian businesses operating under discretionary trusts. If that's you, or if you've been considering a trust structure, this is essential reading.
The 2025–26 Tax Rate Landscape: What You're Working With
Before comparing structures, you need to understand the current tax rates that apply.
Individual Tax Rates (2025–26)
Australian resident individuals pay tax on a progressive scale:
Taxable IncomeMarginal Rate$0 – $18,2000% (tax-free threshold)$18,201 – $45,00016%$45,001 – $135,00030%$135,001 – $190,00037%$190,001 and above45%
The 2% Medicare Levy applies on top of these rates for most taxpayers. The Low Income Tax Offset (LITO) reduces tax by up to $700 for incomes up to $37,500, phasing out at $66,667.
Combined with the tax-free threshold, LITO effectively means most Australian residents pay no income tax on the first approximately $22,575 of income.
From 1 July 2026, the second marginal rate drops from 16% to 15% — the second phase of the legislated Stage 3+ tax cuts. Every taxpayer earning above $18,200 benefits by up to $268 per year.
Company Tax Rate (2025–26)
Companies pay a flat rate — no tax-free threshold, no progressive brackets:
- Base rate entities (aggregated turnover under $50 million, with no more than 80% of assessable income from passive sources): 25%
- General rate (all other companies): 30%
The vast majority of Australian small businesses incorporated as Pty Ltd companies pay the 25% base rate. This is a fixed, predictable rate regardless of profit level — a key advantage once business income grows beyond the point where the individual's marginal rate exceeds 25%.
The Break-Even Point
This is the practical question every sole trader should understand: at what income level does incorporating become tax-advantageous?
A sole trader paying 30% marginal tax on income above $45,000 is already paying more than the 25% company rate on that slice of income. In practice, the real break-even depends on how profits are extracted from the company (salary vs dividends, and the associated franking credit treatment), but as a rule of thumb, many professionals find company structure becomes worth considering at around $100,000 in annual business profit.
Structure 1: Sole Trader
How It Works
A sole trader is the simplest Australian business structure. You and your business are legally the same entity. All business income is declared in your personal income tax return and taxed at individual marginal rates. There is no separate business tax return.
The Advantages
Simplicity and low cost. ABN registration is free. There are no ASIC fees, no company tax return, no statutory records to maintain. Tax compliance is a single individual return.
Tax-free threshold and LITO. Unlike a company, you benefit from the $18,200 tax-free threshold and up to $700 LITO — meaning the first ~$22,575 of business income is effectively tax-free.
Small business income tax offset. Sole traders can access a 16% tax offset on the tax attributable to business income, capped at $1,000 per year. This is exclusive to unincorporated small businesses and is not available to companies.
Simplicity in getting started. You can be operating legally within minutes of registering your ABN.
The Disadvantages
Unlimited personal liability. This is the critical risk. Your home, savings, vehicle, and every other personal asset is legally exposed to business debts and claims. If the business is sued or fails to pay a creditor, there is no legal separation between you and your business.
Escalating tax as income grows. At $135,000 in profit, a sole trader pays 37% on every additional dollar. A company pays 25% on everything. The gap compounds significantly at higher income levels.
Limited structuring options. You can't split income with a spouse or family members (unless they genuinely work in the business and are employed). You can't retain profits in the business at a lower tax rate.
Best For
Sole trader is most cost-effective for new businesses, freelancers, contractors, and side hustles with a single owner earning under approximately $100,000 per year in a low-liability environment. As income grows or liability risk increases, the calculus changes.
Structure 2: Company (Pty Ltd)
How It Works
A company is a separate legal entity from its owners (shareholders) and the people who manage it (directors). This separation is what provides limited liability protection. The company earns income, pays its 25% tax, and can then distribute after-tax profits to shareholders as dividends — which come with franking credits representing the tax already paid, preventing double taxation.
The Advantages
Limited liability. Shareholders' liability is generally limited to the amount unpaid on their shares. If the company incurs debts it cannot pay, creditors pursue the company — not shareholders personally. This protection is genuine for most business debts, though it doesn't apply to personal guarantees (which banks typically require) or director liability for PAYG withholding and superannuation.
Fixed 25% tax rate. Once business income exceeds the point where individual marginal rates exceed 25%, a company structure is tax-advantageous for retained earnings. Profits kept in the company for reinvestment are taxed at 25% — significantly less than the 37% or 45% an individual might pay.
Scalability and credibility. Companies are significantly easier to bring investors or partners into. They have recognised governance structures, share registers, and the ability to raise capital. Many larger clients and corporate counterparties also prefer dealing with companies.
Loss carry-back (from 2026–27). The 2026–27 Federal Budget introduces loss carry-back for companies with turnover up to $1 billion: if a company makes a loss in the current year, it can claim a refund against tax paid in the prior two income years. Around 85,000 companies are expected to benefit — the majority small businesses.
Permanent $20,000 instant asset write-off (from 1 July 2026). Last night's Budget made the $20,000 instant asset write-off permanent for small businesses with turnover under $10 million. No more annual cliffhangers about whether the concession will be extended — it's now a permanent feature of the tax landscape.
The Disadvantages
Higher setup and compliance costs. ASIC company registration costs $597. Annual reviews add ongoing fees. The company must lodge a separate company tax return, maintain statutory records, and directors have legal duties under the Corporations Act 2001.
Complexity in getting money out. A company is not a personal piggy bank. Extracting profits requires either paying yourself a salary (with PAYG obligations) or declaring dividends. Both have tax implications. Simply transferring money from the company account to your personal account is a loan to a shareholder — which has specific tax treatment under Division 7A.
Director liability exposure. Directors can be personally liable for unpaid PAYG withholding and superannuation obligations through Director Penalty Notices (DPNs). The ATO's use of DPNs has surged — up 136% in a single year. This is a serious risk for directors of any company with tax or super arrears.
Best For
Company structure suits businesses with meaningful liability risk, expected profits above approximately $100,000, ambitions to scale, plans to bring in partners or investors, or owners seeking to retain profits in the business at the lower corporate rate.
Structure 3: Discretionary Trust (Family Trust)
How It Works
A discretionary (or family) trust is a legal arrangement where a trustee holds and manages assets for the benefit of beneficiaries. The trustee — usually either an individual or a corporate trustee — has discretion each year over how income and capital are distributed among the beneficiaries.
This discretion is what has historically made trusts attractive for tax planning: by distributing income to beneficiaries on lower marginal rates (a non-working spouse, adult children, a self-managed super fund), a family business could reduce its overall tax bill significantly compared to all income flowing to a single high-income individual.
The Historical Advantages
Income splitting. Distributing business profits across multiple beneficiaries in lower tax brackets reduces the effective tax rate on the total income.
Asset protection. Assets held in a trust are generally not personal assets of the trustee or beneficiaries, providing a degree of protection from creditor claims.
Flexibility. Annual discretion over distribution amounts and recipients allows tax planning to respond to changing circumstances — a spouse returns to work and moves into a higher bracket; a child starts earning income.
CGT discount. Trusts (like individuals) have historically been eligible for the 50% CGT discount on assets held for more than 12 months — a significant advantage for capital-intensive businesses.
The 2026 Federal Budget: A Fundamental Change
This is where last night's announcements become critical.
1. Minimum 30% tax on discretionary trusts — from 1 July 2028
The Government confirmed in the 2026–27 Budget that from 1 July 2028, trustees will pay a minimum tax of 30% on the taxable income of discretionary trusts. Around 350,000 active small businesses currently operate under discretionary trust structures.
How it works: the trustee pays a 30% minimum tax on taxable trust income as a separate liability. Non-corporate beneficiaries receive non-refundable tax credits for the tax paid at the trustee level, preventing double taxation for individuals. However, corporate beneficiaries (so-called "bucket companies") do not receive these credits — a deliberate measure to prevent the use of corporate beneficiaries to warehouse distributions at the 25% company rate and then access refundable franking credits.
The Government expects this measure to raise $4.5 billion over five years from 2025–26. Around 40% of affected small businesses may not pay additional tax as a result — those whose distributions were already going to beneficiaries in the 30%+ tax bracket. But for the remaining 60%, the economics of discretionary trust structures will materially change.
2. CGT discount replaced — from 1 July 2027
The 50% CGT discount for individuals, trusts, and partnerships will be replaced from 1 July 2027 with CPI cost base indexation and a 30% minimum tax on real capital gains. This means only real (inflation-adjusted) capital gains are taxed, but at a minimum rate of 30%.
The 50% CGT discount continues to apply to gains arising before 1 July 2027. Investors in new housing will be able to choose between the 50% discount or the new arrangements when they sell.
3. Rollover relief for restructuring — from 1 July 2027
To assist businesses that wish to move out of discretionary trust structures, the Government is providing expanded rollover relief for three years from 1 July 2027 to 30 June 2030. This means businesses can restructure from a discretionary trust into a company or fixed trust without triggering income tax or CGT consequences during that window.
The Australian Small Business and Family Enterprise Ombudsman will be empowered to assist small businesses considering their options from 1 January 2027.
The New Disadvantages (Post-2028)
With a 30% minimum tax at the trustee level, the primary tax planning advantage of discretionary trusts — distributing to low-income beneficiaries to reduce the effective tax rate — is largely eliminated for income flowing to beneficiaries in lower brackets.
Distributing to a beneficiary in the 16% or 30% bracket previously resulted in tax at that rate. Under the new rules, the trust pays 30% regardless (with non-refundable credits for the beneficiary), meaning the effective tax rate on distributions to lower-bracket beneficiaries is 30% — the same as a company, but without the dividend imputation advantages companies offer.
Additionally, bucket company strategies — distributing to a company to take advantage of the 25% corporate rate, then accessing imputation credits — are explicitly blocked by the anti-corporate-beneficiary rule.
What Should Trust Operators Do Now?
If you currently operate through a discretionary trust, this is the moment to have a serious conversation with your accountant or bookkeeper about what the changes mean for your specific situation. Key questions include:
- Who are your current beneficiaries and what are their marginal tax rates?
- Would the 30% minimum tax increase your overall tax bill, or are your beneficiaries already in the 30%+ bracket (making the reform largely neutral for you)?
- Does a company structure make more sense for your business going forward, particularly given the loss carry-back provisions and permanent instant asset write-off now available to companies?
- If restructuring makes sense, the rollover relief window opens 1 July 2027 — but preparation should start now
For around 40% of affected trusts, the reform will have little practical impact. For the remaining 60%, the tax savings that justified the additional complexity of a trust structure may no longer exist from 2028.
What the Minimum Tax Does NOT Apply To
The 30% minimum tax does not apply to: fixed trusts and widely held trusts, complying superannuation funds (including SMSFs), special disability trusts, charitable trusts, deceased estates, primary production income, or income from testamentary trusts that existed at the announcement date.
Structure Comparison at a Glance
FeatureSole TraderCompany (Pty Ltd)Discretionary TrustTax rateMarginal (0–45%)Flat 25% (base rate)Distributed at beneficiary rates (30% min from 2028)Personal liabilityUnlimitedLimited (with exceptions)Trust assets generally protectedSetup costFree (ABN only)$597 ASIC + legal$1,500–$3,000+ (deed + corporate trustee)Annual complianceSimple individual returnCompany return + ASIC reviewTrust return + possibly corporate trustee complianceIncome splittingNoNo (via salary/dividends)Yes (with distributions)Loss carry-backNoYes (from 2026–27)NoInstant asset write-offYes (under $10M turnover)Yes (under $10M turnover)Yes (under $10M turnover)CGT discount50% (until 1 July 2027)No (companies ineligible)50% (until 1 July 2027; then 30% min)ScalabilityLimitedHighModerate
Key Tax Numbers for 2025–26: Quick Reference
ItemRate / ThresholdIndividual tax-free threshold$18,200Individual rate: $18,201–$45,00016% (dropping to 15% from 1 July 2026)Individual rate: $45,001–$135,00030%Individual rate: $135,001–$190,00037%Individual rate: $190,001+45%Medicare Levy2% of taxable incomeCompany tax rate (base rate entities)25%Company tax rate (other)30%Super Guarantee rate12% of ordinary time earningsInstant asset write-off threshold$20,000 per asset (permanent from 1 July 2026)Concessional super contributions cap$30,000 per yearSmall business income tax offset16% of tax on business income, capped at $1,000Low Income Tax Offset (LITO)Up to $700, phases out at $66,667CGT 50% discountAvailable for assets held 12+ months (until 1 July 2027)
How Does Bookkeeping Fit Into This?
Your business structure determines your compliance obligations — and every structure has bookkeeping needs that flow directly from the structure choice.
A sole trader's bookkeeping requirements are the simplest: correct income and expense coding, quarterly BAS (if GST-registered), and a clean set of records for the annual individual tax return.
A company adds a layer: separate company books, accurate recording of director salaries and shareholder loans (Division 7A compliance), franking account maintenance, and a company tax return.
A trust adds further complexity: trust distribution records, trustee resolutions signed before 30 June each year, and potentially corporate trustee compliance on top.
Regardless of structure, the principle is the same: your bookkeeping needs to be accurate, current, and correctly coded. If your books are a mess, your accountant can't tell you whether your structure is working for you — let alone whether the Budget changes affect you.
Girl Friday Australia helps small businesses across all structures keep their books clean, BAS lodged on time, and compliance obligations met — so you can have the strategic conversations that actually matter, based on real numbers.
Frequently Asked Questions
Can I change my business structure later? Yes — but there are costs and tax implications. Transitioning from sole trader to company or trust can trigger GST and stamp duty obligations. The Small Business Restructure Roll-over Relief (SBRR) can allow transfers between structures without immediate CGT consequences for eligible businesses, provided certain conditions are met. From 1 July 2027, expanded rollover relief will be available specifically for businesses restructuring out of discretionary trusts.
Do I need a separate bank account for each structure? For companies, yes — maintaining separate accounts is both a best practice and effectively required to avoid Division 7A issues. For sole traders, it's not legally required but is strongly recommended. For trusts, the trust should have its own account to clearly separate trust assets from personal assets.
What's a "corporate trustee" and do I need one? A corporate trustee is a company that acts as the trustee of a trust rather than an individual. Corporate trustees are generally recommended because they avoid the need to transfer trust assets when the individual trustee changes (due to death, retirement, etc.). They add a layer of cost and compliance but are standard practice for trusts intended to operate over the long term.
When should I talk to a professional about restructuring? Now — particularly given the Federal Budget announcements. The trust minimum tax doesn't apply until 1 July 2028, and rollover relief doesn't open until 1 July 2027 — but strategic restructuring decisions take time to plan, implement correctly, and execute without unintended tax consequences. The businesses that will navigate this smoothly are the ones that start the conversation in 2026, not 2027.
Can my bookkeeper help with this? A good bookkeeper is your first port of call. Clean books are the foundation of any structure review — you can't make informed decisions without accurate financials. Your bookkeeper can also coordinate with your accountant or tax agent to ensure the structure conversation is grounded in your real numbers.
The Bottom Line
The right business structure is one of the most impactful financial decisions you'll make — and it's not a set-and-forget choice. Tax law changes, your income grows, your circumstances shift, and what made sense in year one may not be optimal in year five.
The 2026–27 Federal Budget has changed the calculation for every Australian business operating under a discretionary trust, and to a lesser extent for anyone holding assets with embedded capital gains. The changes don't take effect immediately, but the time to understand them — and to start planning — is now.
Whether you're a sole trader questioning whether it's time to incorporate, a company director wanting to ensure your books are audit-ready, or a trust operator trying to understand what last night's Budget means for you — Girl Friday Australia can help you get your financial foundations right.
✅ Registered BAS Agent ✅ Xero Certified Advisor & Gold Partner ✅ 20+ years experience with Australian small businesses ✅ All structures: sole trader, company, trust ✅ 100% remote, Australia-wide ✅ No lock-in contracts
Get a free quote or book a discovery call — and make sure your structure, your books, and your compliance are working as hard as you are.
This article is general information only and does not constitute tax, legal, or financial advice. Business structure decisions depend on your individual circumstances, income level, risk profile, and goals. Budget announcements are subject to legislation passing Parliament. Always consult a registered tax agent or accountant for advice specific to your situation.
Girl Friday Australia provides bookkeeping, BAS lodgement, payroll management, EOFY preparation, and business admin support to small businesses, sole traders, and tradies across Australia.