Last financial year, two Melbourne consultants each earned $220,000. Same industry. Similar clients. Comparable overheads.
One operated as a sole trader. The other used a company.
The sole trader paid close to $75,000 in income tax and Medicare levy. The company paid $55,000 in company tax, retained the balance, and the owner had flexibility around when and how to extract the rest.
That difference was not luck. It was structure.
Now, before anyone jumps to conclusions, let’s be clear. The company owner still pays personal tax on any profits taken out as salary or dividends. The dividend imputation system prevents double taxation, but the timing and method of extracting profits changes the overall outcome. That is where strategy lives.
If you are reading this wondering whether you are paying more tax than you should, whether your current structure actually protects you, or whether it is time to review things before EOFY, this guide is for you.
We are going to walk through the real differences between sole trader, company, and trust structures for 2025 to 2026. Not theory. Not generic commentary. Practical numbers, realistic scenarios, and the sort of conversations we have with Melbourne business owners every week.
Understanding the differences is crucial when considering your options: Sole trader vs company vs trust Australia.
Quick Comparison: Sole Trader, Company, and Trust
Understanding Sole Trader vs Company vs Trust Australia
| Feature | Sole Trader | Company | Discretionary Trust |
| Tax Rate | Up to 47% (inc. Medicare) | 25% for base rate entities | Distributed at member rates |
| Asset Protection | None | Limited liability | Moderate (structure dependent) |
| Set-up cost with Angkor CA | Free to minimal | From $2,200 incl. GST, all-in | From $3,300 incl. GST, all-in (with a company trustee) |
| Annual Compliance | Low | Medium (ASIC + tax) | Medium to High |
| Super Obligations | Optional for self | 11.5% to 12.5% for employees | Varies by arrangement |
| Complexity | Low | Medium | Medium to High |
| Ideal Use Case | Early stage, low risk | Growing, profit retention | Family income splitting |
That table gives you the headlines. What it cannot show is how those features interact with your income, your household, and your plans for the next five years. That is where advice becomes personal.
Tax Breakdown for 2025 to 2026
Individual Marginal Rates
Following the Stage 3 changes, individuals generally pay:
- 0% up to $18,200
- 16% from $18,201 to $45,000
- 30% from $45,001 to $135,000
- 37% from $135,001 to $190,000
- 45% above $190,000
The 2% Medicare levy usually applies on top.
What that means in practice is simple. Once your taxable income pushes past $190,000, every additional dollar is taxed at 45% plus Medicare. When profits start climbing, that marginal rate bites quickly.
Company Tax Rate
Base rate entities, broadly companies with turnover under $50 million and limited passive income, pay tax at 25%.
That 25% applies to profits retained in the company. It does not mean profits are forever taxed at 25% if you later distribute them. The total outcome depends on how profits are drawn and your personal tax profile.
Dividends may carry franking credits, representing tax already paid by the company. When a company paying 25% tax distributes a fully franked dividend, the shareholder includes the grossed up amount in their income and uses the franking credit to offset personal tax.
For example, a $75,000 cash dividend comes with a $25,000 franking credit. The shareholder is assessed on $100,000 and applies the $25,000 credit against their tax bill.
Timing matters. Planning matters.
Trust Taxation
Trusts generally do not pay tax themselves. Instead, they distribute income to beneficiaries, who then pay tax at their own marginal rates.
If income is not distributed and no beneficiary is presently entitled, the trustee is typically taxed at the highest marginal rate, currently 45% plus Medicare, from the first dollar. That is a strong incentive to get distribution resolutions right each year.
The ATO’s draft ruling TR 2025/D1 confirms that trust distributions remain firmly on the compliance radar. Section 100A of the Income Tax Assessment Act 1936 can apply where arrangements are viewed as reimbursement agreements. In simple terms, if income is distributed to someone on paper but they do not genuinely benefit from it, there can be consequences.
The ATO’s Practical Compliance Guideline PCG 2022/2 sets out its current approach. Anyone operating a trust should at least be aware of it.
Worked Examples
These are simplified illustrations. Real life outcomes depend on deductions, other income, and how profits are extracted.
At $120,000 Profit
A sole trader might pay somewhere between $30,000 and $35,000 in income tax and Medicare.
A company would pay $30,000 at 25%, leaving $90,000 retained.
A trust distributing between two adult beneficiaries may reduce overall family tax, but only if distributions are genuine and properly dealt with.
At $250,000 Profit
A sole trader can easily face a tax bill in the mid $80,000 range.
A company pays $62,500 in tax and retains $187,500.
A trust may allow income to be shared between beneficiaries, which can reduce overall family tax where appropriate. It needs to be structured and administered carefully.
At $500,000 with Retained Earnings
This is where structure often becomes decisive.
A company retaining profits after tax creates serious reinvestment capacity. Equipment, expansion, cash reserves, debt reduction. All possible without immediately triggering top marginal personal tax.
A sole trader at $500,000 taxable income can face tax well into six figures. It is not just about tax saved. It is about flexibility created.
Sole Trader: Simple, Until It Isn’t
Starting as a sole trader makes sense. It is fast, cheap, and straightforward.
But simplicity can quietly become risk.
Picture a Melbourne electrician who began at $80,000 turnover and now bills $320,000. There are staff, larger contracts, commercial clients. As a sole trader, there is no separation between business obligations and personal assets.
If something goes wrong, the exposure is personal.
The personal services income rules can also apply where income is largely derived from personal effort and certain tests are not met. These rules are technical and highly fact dependent, but the ATO monitors them closely.
Many sole traders restructure within a few years of strong growth. Often the trigger is not tax planning. It is a wake up call.
If your profits are consistently over $100,000 and rising, that conversation is worth having.
Company Structure: Control, Retention, and Responsibility
A company is a separate legal entity. It contracts in its own name. It owns assets. It employs staff.
Shareholders generally have limited liability. That said, limited liability is not immunity. Directors can be personally liable in certain circumstances, including insolvent trading under the Corporations Act 2001 and certain unpaid company tax debts through the Director Penalty Notice regime.
The 25% tax rate is attractive. But the real strength of a company lies in retained profits.
If your business earns $300,000 and you only need $120,000 personally, the remaining profit can stay inside the company. That capital can fund growth or build resilience.
Division 7A, contained in Division 7A of the Income Tax Assessment Act 1936, prevents shareholders from informally extracting funds without tax consequences. If company money is taken without a proper dividend or compliant loan agreement, it may be treated as a deemed dividend.
This is not rare. We see it regularly.
ASIC also charges an annual review fee every year, and the amount changes over time. There are governance obligations. Records must be maintained.
The compliance burden is real. It is also manageable with the right support.
Discretionary Trust: Flexibility with Discipline
A discretionary trust allows the trustee to determine how income is distributed each year.
For a Melbourne household where one spouse earns a high salary and the other earns little, this can create meaningful tax efficiency, provided the distributions are genuine and funds are dealt with properly.
But flexibility attracts scrutiny.
TR 2025/D1, although still a draft ruling, signals continued attention from the ATO. Section 100A can apply where trust distributions are structured in a way that does not reflect genuine economic benefit.
Trust deeds must be properly drafted. Beneficiaries clearly defined. Vesting dates understood. Distribution resolutions completed on time.
Trust losses cannot be distributed. They are quarantined and carried forward subject to trust loss rules.
And while trusts can assist with asset management and risk structuring, they are not a substitute for insurance or governance. A corporate trustee can strengthen protection, but personal guarantees and director obligations still matter.
Used properly, trusts are powerful. Used casually, they become complicated.
Hybrid Structures: Company as Trustee
A common structure in Melbourne professional services firms is a discretionary trust with a corporate trustee.
This combines income distribution flexibility with the governance framework of a company.
Often, the trustee company holds no significant assets of its own. The trust holds business assets and distributes income.
In some cases, a corporate beneficiary is included as part of a broader planning strategy.
This structure adds cost and complexity. It is rarely appropriate at early stages. But for established businesses with stable profits and family structures, it is worth modelling carefully.
How to Choose the Right Structure
There is no universal answer. There are, however, practical questions.
What is your projected profit this year?
Under $80,000 may not justify additional complexity. Above $120,000 and growing usually warrants analysis.
Do you need to extract all profits personally?
If yes, the retained earnings benefit of a company reduces. If not, deferral can be powerful.
What is your risk exposure?
If you employ staff, sign leases, or operate in higher risk industries, personal liability as a sole trader is a real concern.
Do you plan to bring in investors?
Companies are generally more suitable for equity participation.
What is your exit plan?
The small business CGT concessions, contained in Division 152 of the Income Tax Assessment Act 1997, can reduce or defer capital gains tax where eligibility conditions are met. To qualify, you must satisfy foundational tests, including either the $6 million maximum net asset value test or the small business entity turnover test under $2 million.
Structure influences eligibility. Early planning matters.
When Does Restructuring Make Sense
We often see serious restructuring discussions once net profit moves into the $100,000 to $150,000 range.
Other triggers include hiring staff, entering commercial leases, purchasing significant assets, or starting succession planning.
Restructuring must be planned carefully.
Company registration, contract transfers, asset movements, tax rollovers. These steps require coordination.
CGT rollover provisions may apply in certain circumstances, but they are not automatic. Professional advice is essential.
A Practical Roadmap for Switching
Step 1: Structure Review Meeting
Model the current position. Compare alternatives. Consider family and risk context.
Step 2: Financial Modelling
Run detailed projections. Include tax, compliance costs, and transition expenses.
Step 3: Legal and Registration Work
Register the company or establish the trust properly. Obtain relevant tax registrations.
Step 4: Asset and Contract Transfer
Carefully transfer business names, contracts, intellectual property, and equipment. Timing is important.
Step 5: Ongoing Compliance Setup
Implement payroll, BAS processes, director obligations, and trust distribution documentation.
With the right team, the process is methodical rather than overwhelming.
Frequently Asked Questions
What is the best business structure for small business in Melbourne?
It depends on income, risk, and growth plans. Sole trader works early on. Company suits growing profits and retention. Trust offers flexibility with discipline. A review becomes important as profits and risk increase.
Is a trust better than a company for tax in 2026?
Sometimes. Trusts can distribute income across beneficiaries at different tax rates where arrangements are genuine. Companies offer a flat 25% retained earnings rate. The right answer depends on your circumstances.
Can I change from sole trader to company easily?
Yes, if handled properly. Registration, contract updates, and accounting adjustments are required. Asset transfers must be planned to avoid unintended tax consequences.
What are the costs to switch in Victoria?
With us, a company set-up starts from $2,200 incl. GST, all-in, including the ASIC registration fee, the documents and the identity checks the law requires. A family trust with a company trustee starts from $3,300 incl. GST, all-in, and any stamp duty is extra. Restructures are quoted after a Setup Right session: 60 minutes and a written summary for $600 + GST ($660 incl. GST). The decision should be driven by modelling, not guesswork.
Does a trust protect my home?
Not automatically. Structure can reduce exposure, especially with a corporate trustee, but personal guarantees and legal realities still matter.
How does the super guarantee rate affect my business structure?
For 2025 to 2026, the super guarantee is 12% for employees. Any employing structure must account for this. Sole traders are not required to pay super for themselves, though planning for retirement remains important.
What happens to CGT when I sell my business?
Structure influences eligibility for small business CGT concessions under Division 152. To qualify, foundational tests such as the $6 million net asset test or the turnover test must be satisfied. Planning years ahead of a sale produces better outcomes.
Is Your Current Structure Still Right?
If this article raised more questions than it answered, that is not a bad outcome.
The business owners who review their structure proactively tend to manage risk better, plan tax more effectively, and grow with greater confidence.
If profits are rising, risk is increasing, or your structure has not been reviewed in years, it may be time.
Book a Business Structure Review. We will model your numbers, compare alternatives, and provide a clear recommendation based on your situation.
No jargon. No pressure. Just practical advice.
You can also download our Melbourne Business Structure Checklist to begin thinking through the key questions. Disclaimer: This article provides general information only and does not constitute financial, legal, or taxation advice. You should seek professional advice tailored to your individual circumstances before making decisions about your business structure.