Why Entity Selection Matters
Your chosen structure determines:
- The tax rate you pay;
- Your liability exposure;
- The complexity of compliance and reporting;
- Access to capital and investment vehicles.
In Australia, common forms are sole trader, company, trust and partnership.
Comparing Major Entity Types
| Entity | Tax Rate / Distribution | Liability | Reporting & Compliance |
|---|---|---|---|
| Sole Trader | Individual’s marginal rate; no division of profits | Full personal liability | Minimal compliance; simpler BAS / tax return |
| Company | 25-30%; profits taxed at company rate; dividends franked | Limited liability | Must lodge company tax returns, possibly GST, payroll obligations |
| Trust (Family & Discretionary) | Income taxed in hands of beneficiaries | Limited liability for trustee only | More record keeping; beneficiary distributions; trust tax return |
| Partnership | Partners taxed personally on share of profits | Shared liability | Must lodge partnership return; individual partner returns |
Tax Planning Strategies Using Entities
- Asset protection: Family trusts can shield assets from certain liabilities if structured properly.
- Income splitting: Distribute income to beneficiaries on lower tax rates.
- Franked dividends: Companies pay tax at corporate rate; distributions may carry credits to avoid double taxation.
- Small business concessions: Entities with turnover under certain thresholds can access simplified depreciation, GST lodgement options.
Case Study: Setting up a Discretionary Trust vs Company
Scenario: A couple wants to run a consulting business. They expect profits of ~$200,000/yr, occasional contracting to overseas clients.
- As a sole trader, they’d pay individual tax rates up to 37-45%. Risk: unlimited liability.
- As a company: taxed at ~25-30% and profits can be paid as franked dividends to shareholders—with franking credits. However, more compliance costs.
- As a trust: trust distributes income to beneficiaries (often family members) taxed at their individual rates—if done thoughtfully, this can minimise tax. But must watch Division 7A if distributing to private companies, and comply with trust deed.
Recent Changes & What to Watch Out For
- The 2025-26 Federal Budget introduced further cuts to the tax rate on the bracket $18,201-45,000, reducing rate from 16% to 15% from 1 July 2026, then further to 14% from 1 July 2027. This impacts sole traders and beneficiaries taxed under that bracket. (budget.gov.au)
- Legislation known as the Treasury Laws Amendment (Cost of Living Tax Cuts) Act 2024 has been enacted; it included these marginal rate reductions. (ato.gov.au)
Steps to Choose & Establish Your Entity Wisely
- Estimate income & its volatility – will you stay in low/mid bracket or push into higher rates?
- Consider growth & capital needs – companies are better for equity investors or scaling.
- Liability considerations – if risk of lawsuits or credit obligations, avoid sole trader structure.
- Seek professional advice, particularly for trusts with multiple beneficiaries or cross-border operations.
- Anticipate future policy changes – e.g. changes to CGT discount, Division 7A, superannuation caps.
Author: NomadicTax Research Team