For educational purposes only. Not tax, legal, or financial advice. Tax laws change frequently. Consult a registered tax agent or CPA for your specific situation.

    Skip to content
    TaxKiln Australia

    Sole trader vs company vs trust

    Compare the three main Australian small-business structures side-by-side. Model franking credits on a Pty Ltd dividend, distributions to family beneficiaries through a discretionary trust, and the bucket-company top-up. Surfaces the s.100A reimbursement-agreement warning when relevant.

    Your scenario

    Before any entity-level tax or owner remuneration.

    Owner + spouse

    Trust scenario

    Owner counts as 1, spouse as 2, then adult kids.

    Company assumptions

    25 for BRE, 30 for general.

    Sole trader / partnership

    Entity-level tax
    $0.00
    Personal / distribution tax
    $83,638.00
    Total tax
    $83,638.00
    Effective rate
    33.5%
    Net to household
    $166,362.00

    Recipients

    • Owner (all profit assessed personally)$250,000.00 → $83,638.00 tax

    Company (Pty Ltd) @ 25%

    Entity-level tax
    $62,500.00
    Personal / distribution tax
    $21,138.00
    Total tax
    $83,638.00
    Effective rate
    33.5%
    Net to household
    $166,362.00

    Recipients

    • Owner — fully franked dividend (FC 62,500)$187,500.00 → $21,138.00 tax

    Discretionary trust

    Best
    Entity-level tax
    $0.00
    Personal / distribution tax
    $61,576.00
    Total tax
    $61,576.00
    Effective rate
    24.6%
    Net to household
    $188,424.00

    Recipients

    • Owner ($0 other income)$125,000.00 → $30,788.00 tax
    • Spouse ($0 other income)$125,000.00 → $30,788.00 tax

    Best structure saves $22,062.00 vs the most expensive option for this scenario.

    Sole trader / partnership: All business profit is taxed in the owner's hands at marginal rates plus Medicare Levy.

    Sole trader / partnership: Super contributions are not compulsory but personal deductible contributions (ITAA 1997 s 290-150) can shift income into the concessional cap — modelled separately in the super optimizer.

    Company (Pty Ltd) @ 25%: Company pays 25% tax on profit, generating $62,500 of franking credits.

    Company (Pty Ltd) @ 25%: All retained profit assumed distributed as a fully franked dividend to the owner-shareholder in the same year.

    Company (Pty Ltd) @ 25%: Excess franking credits are refundable to resident individuals (ITAA 1997 Div 67) — shown here as a reduction in the owner's incremental tax.

    Company (Pty Ltd) @ 25%: Owner remuneration via wages (with SG and PAYG) is NOT modelled — change the company tax rate input or distribute as dividend only.

    Discretionary trust: Trust pays no tax itself (ITAA 1936 s 95). Net income is assessed in the beneficiaries' hands under ss 97–100 in the proportion of their present entitlement.

    Discretionary trust: Income split equally across 2 adult beneficiaryies.

    Should I set up a company or a trust?

    Sole trader is the default. No registration cost beyond an ABN, no separate tax return. All profit hits your personal return and is taxed at marginal rates. Best when profit is modest and substantially consumed by you each year.

    Pty Ltd company taxes profit at 25% (Base Rate Entity) or 30% (general). Because Australia uses imputation, when the company distributes a fully franked dividend the shareholder is grossed up and brought back to their marginal rate — the franking credit is refundable (ITAA 1997 Div 67). So the company adds deferral when profit is retained, not a permanent saving once distributed. Useful for asset protection, reinvestment, and selling a business.

    Discretionary (family) trust adds flexibility: the trustee decides each year which beneficiaries are made presently entitled. Income can be split across a spouse and adult children at their respective marginal rates. A corporate beneficiary (bucket company) can mop up the slice that would otherwise hit the top brackets, capping it at the company rate. The trade-off is compliance cost, losses are trapped in the trust, and ATO scrutiny under s.100A on non-arm's-length distributions.

    The common SME pattern is trust with corporate trustee + bucket company beneficiary — flexibility of a trust, deferral of a company, and a separate legal entity acting as trustee for limited liability. Get personal advice; the right answer depends on profit profile, family composition, asset-protection needs, and exit plans.

    Frequently asked questions

    What is a discretionary (family) trust?+
    A trust where the trustee has discretion each year to decide which beneficiaries (typically the controller's family) receive the trust's net income. The trust itself pays no tax (ITAA 1936 s 95); whichever beneficiary is made presently entitled is assessed on that share in their own hands at their marginal rate. The flexibility to vary distributions year-to-year is the main planning attraction — and the main ATO scrutiny point.
    Can I distribute trust income to my spouse?+
    Yes — provided your spouse is a beneficiary under the trust deed and they actually receive (or have a present entitlement to) the income. Income split between spouses with very different marginal rates can produce material tax savings. Distributions are valid even if the recipient never spends the money, but the trustee must be able to point to a genuine entitlement, not a paper allocation that flows back to someone else.
    What is the s.100A risk?+
    Section 100A of ITAA 1936 lets the Commissioner ignore a distribution if it is part of a 'reimbursement agreement' — broadly, a scheme where the named beneficiary's entitlement is paid or applied for someone else's benefit. The classic target is distributions to low-rate adult children that are then 'gifted back' to the controlling parents. If s.100A is invoked, the trustee is taxed at 47% under s.99A on that share, wiping out the saving and adding interest. Trust streaming to non-contributing family members is the highest-risk area; get professional advice before relying on it.
    What is a bucket company?+
    A corporate beneficiary of the trust whose only job is to receive the slice of trust income that would otherwise push individuals into the top tax brackets. The bucket company pays tax at the company rate (25% BRE or 30% general) and retains the funds. Future distributions back to the family come out as franked dividends — converting today's marginal-rate tax into tomorrow's company-rate tax. Note Division 7A: any 'loan' of those retained profits back to a shareholder must be on commercial terms or be deemed an unfranked dividend.
    Should I just incorporate a Pty Ltd?+
    Sometimes — when profit consistently exceeds personal needs and is being reinvested, the 25% company rate beats the top personal rate (47% incl. Medicare Levy). But Australia's imputation system means that ONCE the company distributes a fully franked dividend, the shareholder is brought back to their marginal rate via the gross-up. The company structure delays tax, it doesn't eliminate it. Trusts add flexibility; companies add deferral. Many SMEs use a trust with a corporate trustee plus a bucket company to get both benefits.

    Educational only — not tax, legal, or financial advice. Choice of business structure has lasting tax, succession, asset-protection, and family-law consequences. This calculator ignores payroll tax, WorkCover, FBT, Division 7A loans, family trust elections, TFN withholding for non-quoting beneficiaries, ASIC fees, accounting costs, GST registration thresholds, and CGT on restructure. Consult a registered tax agent and a lawyer before establishing or changing an entity.