Understanding the business structure tax implications in Australia can be daunting for many entrepreneurs and small business owners. Even so, choosing the right structure is crucial because it directly impacts how your business income is taxed, your legal obligations, and your financial risks.
This Australian business structure tax guide will clarify how tax operates across the four main business structures in Australia: sole trader, partnership, company, and trust. The guide aims to help you make informed decisions that align with your business goals and compliance requirements.
Table of Contents
Understanding business structures in Australia
Australia recognises four primary business structures: sole trader, partnership, company, and trust. Each differs in legal ownership, control, and obligations:
- Sole trader: An individual operating a business under their own name or a registered business name. The owner is personally liable for all business debts and obligations.
- Partnership: Two or more people share ownership, control, profits, and losses. Partners are jointly responsible for liabilities.
- Company: A separate legal entity owned by shareholders and managed by directors. It provides limited liability protection to owners.
- Trust: A fiduciary arrangement where a trustee holds assets for beneficiaries. Trusts offer flexibility in income distribution but involve complex compliance.
These structures influence how income is taxed, who is liable for debts, and the complexity of regulatory compliance.
Why your business structure affects how you’re taxed
Your business structure determines whether income is taxed at the individual or entity level. For example, sole traders and partners are taxed on their share of business income through their personal tax returns, while companies pay the company tax rate in Australia at a flat rate. Trusts generally do not pay tax if income is distributed to beneficiaries, who then pay tax individually.
The most tax-efficient business structure depends on your asset protection needs, compliance burdens, and how profits are shared among owners. Choosing the right structure can optimise tax outcomes and minimise risks.
Sole trader — Simple setup, straightforward tax
If you are a sole trader, then you run a business with its own Australian Business Number (ABN) as an individual. You maintain sole ownership and control of the business. While it is the most simple and cost-effective business structure, you are also held personally responsible for the business.
In terms of tax obligations, a sole trader uses their own individual Tax File Number (TFN). Sole traders must lodge their income tax return each year and include, for example, business income and business expenses.
The sole trader tax rate is the same as individual taxpayers, meaning there is a tax-free threshold. You may also need to pay the Goods and Services Tax (GST) if your GST turnover meets or exceeds $75,000. Additionally, you may need to set money aside for income tax by paying pay-as-you-go (PAYG) instalments quarterly.
Taxation details
- Your report income on your individual tax return under business income.
- Current individual tax rates (2024–25) range from 0% for income up to $18,200 to 47% (including the Medicare Levy) for income above $190,000.
- You may need to register for GST if turnover exceeds $75,000.
- You may need to use PAYG instalments to prepay expected tax liabilities.
- You must lodge Business Activity Statements (BAS) if registered for GST or if there are PAYG obligations.
Pros and cons of a sole trader structure (tax perspective)
There are several advantages and disadvantages to maintaining a simple sole trader setup. Here are some things you should consider.
Advantages:
- Simple and low-cost to set up and maintain.
- Income tax is straightforward as it flows through to your individual tax return.
- You may be eligible for a 50% Capital Gains Tax discount on assets held for more than one year.
Disadvantages:
- You may potentially pay high marginal tax rates.
- There is no separation between personal and business assets, exposing personal assets to business risks.
- There are limited opportunities for tax planning compared to companies or trusts.
Partnership — Shared control, shared tax obligations
Usually, a business run as a partnership is controlled and managed by two or more people (‘partners’). Partners share any income or losses. Like a sole trader, setting up a business as a partnership is simple and cost-effective. However, partners are also personally responsible for the business, such as its debts.
In terms of tax obligations, the partnership must have a unique TFN. The partnership is required to lodge a tax return annually, and each partner must pay their respective share of their income for the year.
The tax rate applied to each partner is the same as their individual taxpayer rate. The partnership may also need to pay GST if their GST turnover meets or exceeds $75,000. Like a sole trader, partners may also need to set money aside for income tax by paying PAYG instalments quarterly.
Taxation details
- The partnership lodges an annual partnership tax return reporting total income, expenses, and distribution of income to partners.
- Income is split according to the partnership agreement; if none exists, income is shared equally.
- Partners pay tax on their share of profits at their individual marginal rates.
- Partnerships must register for GST if turnover exceeds $75,000 and lodge BAS as required.
Record-keeping and tax returns
Partnerships must maintain detailed records of income, expenses, and distributions to partners. Each partner receives a distribution statement to include their share of income or losses in their tax return.
Additionally, BAS lodgements are required if the partnership is registered for GST or if PAYG withholding applies.
Company — A separate legal entity with a flat tax rate
A company is considered to be a separate legal entity managed by directors and owned by shareholders. Due to the administrative and compliance costs involved, it can be quite an expensive business structure to set up. There are also specific reporting requirements, including legal and financial reporting.
In terms of tax obligations, each company is required to have a unique TFN. Companies need to lodge a company tax return each year, which includes the following:
- The company’s income
- Any deductions
- Any income tax payable
Company profits are taxed at the company tax rate, which is generally lower than personal income tax rates. For a large company, this is 30%, but you may be eligible for the 25% tax on small businesses in Australia.
Unlike individuals or, for example, a sole trader business, there is also no tax-free threshold. This means that each company is required to pay tax on every dollar of profit earned. A company may need to pay GST if its GST turnover meets or exceeds $75,000. Usually, companies also pay income tax through PAYG instalments.
Taxation details
- Companies lodge a separate company tax return.
- Losses can be carried forward to offset future profits.
- Eligibility for the lower company tax rate depends on turnover and passive income thresholds.
- Companies must register for GST if turnover exceeds $75,000 and lodge BAS accordingly.
Franking credits and dividend distribution
After paying company tax, a company can distribute profits to shareholders as dividends. To avoid double taxation, companies issue franking credits, which shareholders use to offset their personal tax on dividends received. This system ensures profits are taxed only once at the shareholder’s marginal rate.
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Trust — Flexible distribution, complex tax compliance
A trust is set up as a formal deed involving a trustee and beneficiaries. The trustee, who can either be an individual or a company, is responsible for the trust and how profits are distributed from the business to the beneficiaries. The trust must also have its own ABN if it conducts business. This is a costly business structure to set up.
In terms of tax obligations, the trust must have a unique TFN. The trustee is required to lodge a tax return each year. The trust does not have a specific trust tax rate as it does not directly pay taxes. Instead, the beneficiaries who receive income are assessed for tax as individual taxpayers. That said, the trust may also need to pay GST if its annual GST turnover meets or exceeds $75,000.
Taxation details
- Trustees lodge a trust tax return reporting income, deductions, and distributions.
- Income distributed to beneficiaries is taxed in their hands.
- Undistributed income may be taxed at the highest marginal rate.
- Trustees have legal responsibilities to manage the trust and make timely distributions.
Tax planning opportunities and risks
Discretionary trusts provide flexibility to allocate income among beneficiaries, enabling tax planning to minimise overall tax liability. However, misuse can trigger anti-avoidance rules and compliance risks, so careful management and advice are essential.
Tax comparison across business structures
Now, let’s look at the business structure tax comparison in Australia. Which is the optimal choice for you?
| Feature | Sole Trader | Partnership | Company | Trust |
| Who pays tax | Individual owner | Individual partners | Company entity | Beneficiaries (usually) |
| Tax rate | Individual marginal rates | Individual marginal rates | 25% flat (base rate entity) or 30% (full company) | Individual marginal rates |
| Reporting requirements | Individual tax return + BAS if GST registered | Partnership tax return + BAS if GST registered | Company tax return + BAS if GST registered | Trust tax return + distributions reported |
| Profit distribution method | The owner keeps all profits | Shared per agreement | Dividends to shareholders | Distributed to beneficiaries |
| Asset protection | None (personal liability) | Joint liability | Limited liability | Limited liability (trustee) |
| Tax planning flexibility | Low | Moderate | High | High |
Choosing the most tax-effective structure for your business
Now that you know the differences, advantages, and disadvantages of each business structure for tax purposes, how do you decide the right one for your business? Here are some factors to consider.
- Income level: Higher incomes may benefit from company structures with flat tax rates.
- Growth plans: Companies and trusts offer better scalability.
- Risk appetite: Companies and trusts provide asset protection.
- Number of owners: Partnerships and companies suit multiple owners; sole trader suits one person.
- Compliance willingness: Sole trader is the most straightforward set-up, while companies and trusts require more compliance.
When to restructure your business
Businesses often start as sole traders and restructure into companies or trusts as they grow. To determine whether your business is ready, evaluate your growth and changes regularly.
Remember that restructuring involves registering new entities, transferring assets, and cancelling old registrations. You should also consider tax implications, including potential capital gains or stamp duty, before changing structures.
FAQ
Do trusts pay tax in Australia?
Trusts generally do not pay tax if all income is distributed to beneficiaries, who then pay tax on their share at their individual rates.
Can I change my business structure later?
Yes, you can change your business structure as your business grows or your needs change, but it requires careful planning and may have tax consequences.
What is the most tax-efficient business structure in Australia?
The most tax-efficient structure depends on your business size, income, and goals. Companies and discretionary trusts often offer greater tax planning opportunities than sole traders or partnerships.
Effective business tax planning
Choosing the right business structure is fundamental to managing tax obligations effectively in Australia. Each structure offers distinct tax treatments, compliance requirements, and protections. By understanding these differences, you can select a structure that supports your business growth, minimises tax liabilities, and safeguards your personal assets.
For tailored advice and assistance with setting up or restructuring your business, consider consulting with professionals or services like Lawpath to ensure compliance and optimise your tax position.
