Sole Trader vs Company in Australia: When Restructuring Actually Saves You Tax (2026)

“You should set up a company — you'll pay 25% instead of 47%.” It is the most common piece of bad advice given to Australian sole traders, usually at a barbecue, occasionally by someone who should know better. Australia's dividend imputation system means a company does not reduce the tax you pay on money you actually take home. What it can do is defer tax on profits you leave in the business, protect personal assets, and open up structures that a sole trader can't access. This guide works through the real numbers at every profit level, the ongoing costs, the rules that stop the strategy working (PSI and Division 7A), and a decision framework for whether restructuring is worth it for you.

The Two Structures in Plain English

As a sole trader, you and the business are the same legal entity. Your business profit is simply added to your personal taxable income and taxed at your marginal rate. You have one tax file number, one tax return, and unlimited personal liability for business debts.

As a company (a Pty Ltd), the business is a separate legal entity with its own TFN, its own ABN, and its own tax return. It pays a flat rate of tax on its profit. You are typically the director and the shareholder, but the company's money is not your money — you can only extract it as salary, dividends, or a complying loan.

That last sentence is where most of the confusion starts. A company tax rate of 25% sounds like a bargain next to a 47% top marginal rate, but the 25% is only the first layer of tax. The moment you move that money into your own pocket, the second layer applies.

The 2025–26 Rates You Need

Everything in this guide comes back to these numbers. Individual rates below exclude the 2% Medicare levy, which applies on top.

On the company side, a base rate entity pays 25%. To qualify, the company needs aggregated turnover under $50 million and no more than 80% of its assessable income from passive sources (interest, rent, dividends, royalties, net capital gains). Almost every owner-operated trading company qualifies. A company that fails either test pays 30%. Importantly, the rate a company pays also sets the rate it can frank dividends at — a 25% company franks at 25%.

One more number matters for sole traders specifically: the small business income tax offset. If your unincorporated business has aggregated turnover under $5 million, you get an offset of 16% of the income tax attributable to your net small business income, capped at $1,000 per year. Companies do not get it. It's small, but it's a permanent, guaranteed advantage on the sole trader side of the ledger.

Why a Company Doesn't Cut Your Tax Bill

Australia has a dividend imputation system. When a company pays tax on its profit and then distributes that profit as a franked dividend, the shareholder is credited with the tax the company already paid. The shareholder grosses the dividend back up to the pre-tax profit, works out tax at their own marginal rate, and subtracts the franking credit.

The result is that the total tax paid on distributed profit is exactly the shareholder's marginal rate — no more, no less. The company tax is a prepayment, not a final tax.

Here is that arithmetic on $100,000 of company profit, distributed in full to a single shareholder:

The bottom row is identical to what a sole trader would have paid on the same $100,000. The 25% never disappeared — it was simply paid earlier, by a different entity, and credited back to you.

So the honest framing is this: a company is a tax deferral tool, not a tax reduction tool. The benefit exists only for profit you genuinely leave inside the company, and it only becomes a permanent saving if that profit is eventually released in a year when your marginal rate is lower than it is now.

Worked Comparison at Three Profit Levels

The comparison below assumes a single owner with no other income, a base rate entity company, and a company that pays the owner a salary equal to what they actually need to live on, retaining the rest. Figures include the 2% Medicare levy and, on the sole trader side, the $1,000 small business income tax offset.

Scenario 1: $90,000 profit, and you need all of it

The company is roughly $2,600 a year worse off, for more paperwork. At this profit level, with no retained earnings, a company is simply a cost.

Scenario 2: $180,000 profit, you live on $90,000

The company defers $8,450 of tax this year. That is real money — it stays in the business earning a return, funding equipment, or covering a lean quarter. But note the last row: the $67,500 of retained profit still carries a future tax liability. If you eventually pay it out in a year where you're on 39%, you hand back $12,600. The deferral was worth having; the “saving” was never permanent.

Scenario 3: $250,000 profit, you live on $120,000

This is where incorporating starts to genuinely pay. A consistent $20,000+ per year of deferred tax, retained and reinvested, compounds meaningfully. Over five years that's $100,000 of working capital you never had to send to the ATO in the first place.

The catch remains: that money is inside the company, and getting it out later costs the difference between 25% and your marginal rate at that time. The strategy works best when there is a plausible future window — a sabbatical, parental leave, a lean year, semi-retirement — where you can release dividends at a lower rate.

The Rule That Stops Most Contractors: Personal Services Income

Before you calculate anything, check whether the personal services income (PSI) rules apply to you. They are the single most common reason an incorporation delivers nothing.

Income is PSI when more than 50% of what a client pays you for a contract is a reward for your personal skills, effort or expertise — rather than for the use of assets, the sale of goods, or the work of other people. Consultants, IT contractors, engineers, designers, bookkeepers, medical locums and most one-person professional services businesses generate PSI.

If your income is PSI and you do not qualify as a personal services business (PSB), the income is attributed straight back to you personally and taxed at your marginal rate, no matter what entity earned it. The company becomes an expensive empty shell. You also lose access to deductions the company would otherwise claim.

You qualify as a PSB if you pass any one of these tests:

• Results test — you're paid to produce a specific result, you supply your own tools and equipment, and you're liable for rectifying defects at your own cost. Pass this and the other tests don't matter.
• Unrelated clients test — you have two or more unrelated clients, obtained through public offers or advertising (word of mouth and recruitment agency placements generally don't count).
• Employment test — you engage others (employees or contractors, not associates) who perform at least 20% of the principal work by market value.
• Business premises test — you maintain business premises that are physically separate from your home and your clients' premises, used exclusively for the business.

There is also the 80% rule gate: if 80% or more of your PSI in a year comes from one client and their associates, you can only be a PSB by passing the results test, and you can't self-assess — you need a personal services business determination from the ATO.

The practical takeaway: if you're a solo contractor with one main client, a company will not reduce your tax. It may still be worth having for liability or client-requirement reasons, but the tax argument doesn't apply.

Division 7A: You Can't Just Take the Money

Every year, thousands of new company directors discover Division 7A the hard way. Company money is not your money. If you transfer funds out of the company to yourself as a shareholder or associate — for a personal expense, a house deposit, a holiday — and it isn't a properly declared salary or dividend, the ATO treats it as an unfranked deemed dividend and taxes it in your hands with no franking credit at all.

That is genuinely the worst outcome available: 25% company tax already paid, plus your full marginal rate on the amount withdrawn, with no credit for the company tax.

There are only three clean ways to get money out of your company:

• Salary or director's fees — deductible to the company, taxed to you at marginal rates, requires PAYG withholding, Single Touch Payroll reporting, and 12% super guarantee on top.
• Franked dividends — paid out of after-tax profits, require a directors' resolution and sufficient franking credits in the franking account.
• A complying Division 7A loan — a written agreement before the company's lodgement day, minimum yearly repayments, a maximum seven-year term (25 years if secured by real property), and interest at the ATO's benchmark rate.

The administrative weight of all this is a real cost. As a sole trader, moving money from the business account to your personal account is a non-event — it's called a drawing, and it has no tax consequence whatsoever.

The Real Cost of Running a Company

Every comparison should include what the structure actually costs to operate. Ranges below are typical for a small owner-operated business; ASIC fees are indexed each 1 July, so check the current schedule.

These costs are deductible, so at a 39% marginal rate the after-tax impact of $2,500 in extra fees is about $1,525. Still, the tax deferral needs to clear that hurdle before incorporating makes sense on numbers alone.

Asset Protection: Real, but Oversold

Limited liability is the headline benefit of a company. If the business fails, creditors generally can pursue company assets, not your house. For a business with inventory, premises, staff, or genuine product/service liability exposure, that separation matters a great deal.

But the protection has substantial holes:

• Personal guarantees. Banks, landlords and major suppliers routinely require directors to personally guarantee company obligations. Every guarantee you sign puts your personal assets back on the line.
• Director penalty notices. Directors are personally liable for the company's unpaid PAYG withholding, super guarantee charge, and GST. Lodging late can make that liability non-remittable.
• Insolvent trading. Directors who let a company incur debts while insolvent can be held personally liable.
• Negligence. A professional who gives bad advice can be sued personally regardless of the entity they traded through.

For most solo service businesses, adequate professional indemnity and public liability insurance delivers more practical protection per dollar than incorporating does. A company is a complement to insurance, not a substitute for it.

Where Sole Traders Have the Clear Advantage

1. Business losses offset your other income

If your sole trader business makes a $30,000 loss and you also earned $80,000 in salary, that loss can reduce your taxable income to $50,000 — a refund of roughly $9,600. Company losses are trapped inside the company and can only be carried forward against future company profits, subject to continuity of ownership or the similar business test.

The sole trader deduction isn't automatic. The non-commercial loss rules mean you can only offset the loss if your adjusted taxable income is under $250,000 and you pass one of four tests: at least $20,000 assessable income from the business, a profit in three of the past five years, real property worth $500,000+ used in the business, or other business assets worth $100,000+.

For a business in its first two or three years — the exact period when losses are most likely — this makes sole trader status materially better.

2. The 50% CGT discount on sale

Individuals who hold an asset for more than 12 months get a 50% discount on the capital gain. Companies do not get the CGT discount at all. If you build a business you intend to sell, selling it as a sole trader (or through a trust) can be dramatically cheaper than selling assets held inside a company.

On a $1,000,000 gain, an individual on the top rate is assessed on $500,000 after the discount. A company is assessed on the full $1,000,000 at 25%, and you then face top-up tax when the proceeds are distributed. Add the small business CGT concessions — the 15-year exemption, the 50% active asset reduction, the $500,000 retirement exemption, and the replacement asset rollover — and a well-structured individual or trust sale can end up close to tax-free.

This one factor reverses the decision for a lot of businesses being built for an exit.

3. Simplicity and flexibility

No ASIC filings, no directors' resolutions, no franking account, no Division 7A, no minutes, no separate tax return. You take money out when you want. If you close the business, you stop trading and cancel your ABN — no deregistration process, no liquidator.

What About a Trust?

A discretionary (family) trust is the structure most people actually want when they think they want a company. A trust running a business, with a company as corporate trustee, gives you:

• The liability separation of a company, via the corporate trustee.
• Access to the 50% CGT discount, which a company can't get.
• The ability to distribute income between adult beneficiaries each year, subject to Section 100A and Part IVA — distributions have to be genuine, with the beneficiary actually receiving and controlling the money.
• The option to distribute to a corporate beneficiary (a “bucket company”) and cap the tax rate on retained profits at 25%–30%.

The costs are higher again — expect $2,500–$5,000 per year all-in — and trusts can't distribute losses, so they suffer the same early-year problem as companies. The PSI rules also apply to trusts, so a solo contractor gains nothing there either. But for a profitable family business with an eventual sale in mind, a trust often beats both alternatives.

Side-by-Side Summary

A Decision Framework

Work through these in order. The first “no” usually settles it.

1. Is your income PSI without passing a PSB test? If yes, stop. A company gives you no tax benefit. Stay a sole trader unless a client contractually requires a company.
2. Is your profit consistently above roughly $130,000? Below that, your marginal rate is 32% and the gap to 25% rarely justifies $2,500 in extra costs. Above $135,000 the gap widens to 14 points, and above $190,000 to 22 points.
3. Do you genuinely retain profit in the business? If you draw out everything you earn, the deferral benefit is zero and you're paying fees for nothing. The benefit is proportional to what you leave behind.
4. Do you expect to sell the business? If yes, weigh the loss of the 50% CGT discount heavily, and look at a trust instead.
5. Is your liability exposure real? Staff, premises, inventory, physical product, or significant contract risk all favour a company. A laptop-based consultant with good PI insurance has less to gain.
6. Are you still in the loss-making phase? If so, remain a sole trader until you're reliably profitable so the losses can shelter your other income.

A reasonable rule of thumb for a service business with no unusual liability exposure: consider incorporating once profit exceeds about $150,000 and you can leave at least $50,000 a year in the business. Below that, the sole trader structure almost always wins on a total-cost basis.

How to Restructure Without Creating a Mess

If the numbers say incorporate, the mechanics matter. This is not a change you want to make halfway through a quarter.

• Time it for 1 July. A mid-year change means two sets of books, apportioned income, and a much larger accounting bill.
• Check CGT on transferring assets. Moving business assets — goodwill, equipment, client lists — into a company is a CGT event at market value. The small business restructure rollover (Subdivision 328-G) can defer that gain if you meet the genuine restructure and ultimate economic ownership requirements. Get advice before transferring anything.
• Register properly. New company via ASIC, then a new TFN and new ABN, new GST registration, and a PAYG withholding registration if you'll pay yourself a salary.
• Set up the share structure thoughtfully. Share classes and ownership are cheap to get right at the start and expensive to change later. Discuss ordinary versus discretionary share classes with your accountant.
• Novate contracts and update clients. Existing client agreements are with you personally; they need to be assigned or re-signed with the company. Update every invoice template, quote and engagement letter with the new ABN and ACN.
• Move the banking, insurance and subscriptions. New business bank account in the company name, insurance policies reissued to the company, merchant facilities and software subscriptions transferred.
• Cancel or retain the old ABN deliberately. Don't cancel until all final invoices are paid and your final sole trader BAS and tax return are lodged.
• Set up payroll from day one. If you pay yourself a salary you need PAYG withholding, Single Touch Payroll reporting each pay run, and quarterly super guarantee at 12%.

Five Mistakes That Cost the Most

1. Incorporating for the “25% rate” without understanding imputation. You pay your marginal rate on everything you spend, either way. Only retained profit is deferred.
2. Ignoring PSI. Setting up a company for a single-client contracting arrangement produces an ATO amendment, back tax and penalties, plus years of fees for nothing.
3. Treating the company account as a personal account. Division 7A deemed dividends are unfranked. This is the most expensive form of tax in the Australian system and it's entirely self-inflicted.
4. Incorporating too early. Losing the ability to offset start-up losses against other income, while paying $3,000 a year in compliance on a business making $60,000.
5. Not planning the exit. Building a business inside a company for a decade, then discovering at sale that there's no 50% CGT discount available. Restructuring right before a sale rarely works and attracts scrutiny.

Key Takeaways

• Dividend imputation means a company does not reduce tax on money you take home — the total tax on distributed profit equals your marginal rate either way.
• The genuine company benefit is deferral on retained profits, worth around $8,000 a year at $180,000 profit and $21,000 a year at $250,000 profit — but that tax is owed later.
• If the PSI rules apply and you don't pass a personal services business test, incorporating achieves nothing at all.
• A company costs roughly $2,500–$5,000 a year more to run than a sole trader, which the deferral has to clear before it's worth doing.
• Sole traders keep three things companies lose: the $1,000 small business income tax offset, the ability to offset business losses against other income, and the 50% CGT discount on sale.
• A rough threshold for a service business: consider incorporating above about $150,000 profit with at least $50,000 a year retained.
• If you plan to sell the business, look hard at a discretionary trust with a corporate trustee before defaulting to a company.
• Restructure effective 1 July, get advice on the small business restructure rollover before transferring any assets, and never treat the company bank account as your own.