Key Structure Options and Drivers
When setting up an entity in Australia for business purposes, common options are:
- Company
- Trust (discretionary/family trust, fixed trust, unit trust)
- Partnership or Sole trader
Your choice will affect liability, tax rates, deductions, and compliance complexity.
Recent Changes Affecting Trusts
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From 1 July 2026, the mandatory beneficiary TFN reporting for closely held trusts will be embedded within trust return lodgments. New labels like “closely held trust indicator” and “No TFN Provided” will be introduced in the annual statement of distribution. (softwaredevelopers.ato.gov.au)
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Under the Modernisation of Tax Administration Systems (MTAS Phase 2) reforms, trustee reporting becomes more robust, and non-individuals get expanded prefill and digital reporting capabilities. (pwc.com.au)
Comparative Overview: Trust vs Company vs Sole Trader
| Key Feature | Company | Trust | Sole Trader |
|---|---|---|---|
| Tax Rate | 25-30% | Individual rates for beneficiaries, up to 47%+ | Individual rates |
| Compliance | Directors, ASIC, corporate tax return | Trust return + beneficiary distributions, TFN reporting from July 2026 | Simplest structure, direct reporting |
| Flexibility in profit allocation | Dividend based | Discretionary allocation among beneficiaries | All profits to individual |
| Asset protection / liability | Limited liability | Trustees hold liability | Personal liability |
Picking the Right Structure: Scenarios
- Family business seeking flexibility: a discretionary trust offers distribution flexibility, but prepare for increased TFN and reporting obligations from mid-2026.
- Investor holding property assets: fixed trust or company may work better to manage capital gains and CGT discounts. Consider non-resident exposure too.
- Consultant or freelancer working internationally: sole trader may suffice early on; consider incorporation if facing liability or wanting cleaner separation.
Action Steps Before & After Setup
- Prior to July 2026, ensure trust structures are ready to accommodate new TFN reporting and new labels in distribution statements.
- Implement robust record-keeping: beneficiary details, TFNs, share of distributions.
- Engage a tax practitioner to draft trust deed to allow flexibility while remaining compliant with Part IVA and anti-avoidance rules.
- Review company rules under Thin Capitalisation, Pillar Two if group entity. Companies tend to be subject to stricter international compliance obligations.
Example
Sarah and Max want to start a boutique design business with Max’s overseas income component. They form a discretionary trust: Sarah is the trustee; beneficiaries are Sarah, Max, and their dependent children. They ensure the trust deed allows for allocation flexibility. By July 2026, they incorporate beneficiary TFNs into distributions, prepare for prefill reporting, and limit administrative burden. They avoid potential pitfalls such as missing TFNs resulting in higher withholding rates.
Understanding these updated compliance rules can help you build the right structure without unexpected headaches down the road.