For most Australian small business owners in 2026, a company structure offers the best long-term tax savings thanks to the 25% base rate tax for small businesses, while trusts provide powerful income-splitting flexibility for families. The right choice depends on your income level, growth plans, and personal circumstances — and a qualified accountant can model the exact numbers for your situation.
Sole Trader vs Company vs Trust: Which Structure Saves the Most Tax — 2026 AU Guide
Choosing the wrong business structure can cost you thousands of dollars every year in unnecessary tax. Whether you're just starting out or reconsidering your current setup, understanding how sole traders, companies, and trusts are taxed differently is one of the most important financial decisions you'll make as an Australian business owner.
This guide breaks down each structure, compares real tax outcomes, and helps you work out which option is most likely to save you money in 2026.
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What Each Structure Actually Means
Before comparing the tax outcomes, it's worth understanding what each structure is — and isn't.
Sole trader is the simplest structure. You and your business are the same legal entity. There's no separation between personal and business assets, and all business income is reported on your individual tax return. A company (typically a Pty Ltd) is a separate legal entity. It has its own ABN, its own tax obligations, and its own liability. Profits are taxed at the company tax rate, not your personal rate. A trust is a legal arrangement where a trustee holds assets for the benefit of beneficiaries. Discretionary (family) trusts are the most common structure used by Australian small businesses, and they allow the trustee to distribute income flexibly among beneficiaries each financial year.Each has advantages and trade-offs across tax, liability, administration, and cost. Let's look at each in detail.
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How Sole Traders Are Taxed in 2026
As a sole trader, every dollar your business earns is personal income. That means it's subject to Australia's progressive marginal tax rates, which in 2026 top out at 45% for income above $190,000 (plus the 2% Medicare levy).
According to the Australian Bureau of Statistics, there were approximately 1.5 million actively trading sole traders in Australia as of 2024, making it by far the most common business structure — largely because of its simplicity, not its tax efficiency.
The main advantage of the sole trader structure is low cost and easy compliance. There's no separate tax return, no ASIC fees, and minimal accounting overhead. However, once your business income exceeds around $45,000–$60,000 per year, you'll likely be paying more tax than you would under a company structure.
For example, a sole trader earning $120,000 in net business profit will pay approximately $33,500 in income tax (before offsets). The same profit inside a company would be taxed at just 25%, equating to $30,000 — a $3,500 annual saving, before considering the tax-deferral benefits of retaining profits inside the company.
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How Companies Are Taxed in 2026
The company tax rate for base rate entities (businesses with an aggregated annual turnover under $50 million that derive at least 80% of their income as base rate entity passive income) is 25% in 2026, as confirmed by the ATO. Larger companies pay the full 30% rate.
This flat rate is what makes companies appealing once your income grows. Unlike individual rates, it doesn't increase as your profit grows. A business generating $200,000 in profit is still taxed at 25%, whereas a sole trader would face a marginal rate of 45% on the top portion of that income.
Companies also allow for tax deferral: if profits are retained in the company rather than paid out as a dividend, you only pay the 25% company rate — and you don't trigger personal tax until you draw those funds. This can be a significant advantage if you're reinvesting in the business.
There are downsides to consider. Companies come with ongoing ASIC annual review fees (currently $310 per year for most small companies), more complex accounting requirements, and no access to the 50% CGT discount when selling assets (unless structured carefully with individual shareholders).
If you're looking for professional help navigating company setup and tax planning, best accountants in Sydney can help you model the most tax-effective approach for your specific income level.
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How Trusts Are Taxed in 2026
Discretionary family trusts don't pay tax directly. Instead, income is distributed to beneficiaries each year, who then pay tax at their own marginal rates. This is where the real tax-saving opportunity lies for families.
If you have a spouse or adult children with low income, you can distribute business profits across multiple people, keeping everyone below the higher tax thresholds. For example, distributing $80,000 each to two people earning nothing else results in a much lower combined tax bill than one person paying tax on $160,000.
The ATO has strengthened trust integrity rules in recent years, particularly through its guidance on Sections 100A and Division 7A, so it's critical to have proper documentation and genuine commercial arrangements in place. Trusts should not be used purely as a tax-minimisation vehicle without substance.
Trusts also carry the benefit of asset protection (assets held in trust are generally protected from personal creditors) and estate planning flexibility.
However, trusts cannot retain profits. If profits aren't distributed before 30 June, they're taxed at the top marginal rate of 47% (including Medicare levy) in the hands of the trustee. Good planning with your accountant is essential.
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Side-by-Side Tax Comparison: 2026 AUD
The table below illustrates the approximate annual tax position for a business generating $150,000 in net profit, with a single adult owner and no income splitting.
| Structure | Tax Paid on $150K Profit | Annual Admin Cost (est.) | CGT Discount Eligibility | Asset Protection | |---|---|---|---|---| | Sole Trader | ~$43,500 (incl. Medicare) | $800–$1,500 (BAS/tax return) | Yes (50% after 12 months) | No | | Pty Ltd Company | $37,500 (25% flat rate) | $2,000–$4,000 | No (unless via shareholders) | Yes | | Discretionary Trust (1 beneficiary) | ~$43,500 (flows to individual) | $2,500–$5,000 | Yes (via beneficiary) | Yes | | Discretionary Trust (income split 2 people) | ~$26,000–$30,000 combined | $2,500–$5,000 | Yes | Yes |*Tax estimates are approximate and exclude offsets, deductions, and surcharges. Consult a registered tax agent for personalised advice.*
For a detailed breakdown of what you'll pay for professional advice, see our cost guide.
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Which Structure Saves the Most? It Depends on These Factors
There's no universally "best" structure — but there are clear patterns:
- Income under $45,000: Sole trader is likely fine. The tax savings from a more complex structure don't justify the cost. - Income $60,000–$200,000, single person: A company often wins on pure tax savings. - Income above $60,000 with a spouse or adult children: A family trust with income splitting is frequently the most tax-effective option. - High-growth businesses reinvesting profits: Company structure allows tax deferral while capital accumulates. - Significant assets or liability risk: Trust or company provides essential protection that a sole trader cannot.
According to the ATO's 2023–24 Tax Statistics, over 900,000 companies lodged a tax return in Australia, with small businesses (under $10 million turnover) making up the vast majority — a figure that reflects the growing shift away from sole trader arrangements as businesses scale.
Our methodology explains how we evaluate and rank advisers who specialise in business structure advice.
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When to Review Your Business Structure
Many Australian business owners set up a structure when they first start and never revisit it. This is a costly mistake. You should review your structure when:
- Your net profit exceeds $60,000 annually - You're bringing a partner, spouse, or investor into the business - You're buying significant assets (property, equipment, IP) - You're planning to sell the business within the next 5–10 years - Your personal income has changed significantly
Restructuring mid-business can sometimes trigger capital gains tax or stamp duty, so timing matters. An experienced accountant can model the transition costs against the projected tax savings to determine whether switching structures makes financial sense.
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FAQ
Q: Can I switch from a sole trader to a company without paying tax? A: Not always. Transferring assets (stock, equipment, intellectual property) to a new company may trigger CGT or GST events. There are small business concessions available, but you'll need a registered tax agent or accountant to manage the transition correctly and minimise any tax liability. Q: Do I need a trust and a company? A: Some businesses use both — a discretionary trust as the operating or investment vehicle, with a corporate trustee (a Pty Ltd) acting as trustee. This structure combines income-splitting flexibility with limited liability. It does add administrative complexity and cost, so it's generally worthwhile only for businesses earning $150,000+ or those with significant assets. Q: Are trusts under more ATO scrutiny in 2026? A: Yes. The ATO has continued to issue guidance on Section 100A (reimbursement agreements) and Division 7A (loans from companies), and has flagged trusts as a key compliance focus. Trusts remain legitimate and tax-effective when structured and administered correctly, but poor documentation or artificial arrangements can attract significant penalties. Q: How much does it cost to set up a company vs a trust in Australia? A: In 2026, establishing a Pty Ltd company typically costs $1,200–$2,500 in accounting and ASIC fees. Setting up a discretionary trust (with a corporate trustee) generally costs $2,000–$4,500 including trust deed preparation and ABN registration. Ongoing annual accounting costs for both structures are typically $2,000–$5,000 depending on complexity and transaction volume.---
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