Salary drawn as director. Remaining profit taxed at company rate, then distributed as franked dividend.
Sole Trader
Net Income
$107,112.00
Effective Rate
26.1%
Company
Net Income
$108,412.00
Effective Rate
25.2%
Company Breakdown
| Item | Sole Trader | Company |
|---|---|---|
| Business Profit | $150,000.00 | $150,000.00 |
| Deductions | $5,000.00 | $5,000.00 |
| Director Salary | — | $80,000.00 |
| Income Tax | $34,988.00 | $16,388.00 |
| Medicare Levy | $2,900.00 | — |
| Company Tax (25%) | — | $16,250.00 |
| Dividend Received | — | $48,750.00 |
| Tax on Dividend | — | $3,950.00 |
| Total Tax | $37,888.00 | $36,588.00 |
| Net Income | $107,112.00 | $108,412.00 |
| Effective Tax Rate | 26.1% | 25.2% |
Sole Trader
As a sole trader, all business profit flows directly to you and is taxed at personal rates (16% to 45% plus Medicare levy). You report business income in your personal tax return. It is simple but can result in higher tax at higher income levels.
Company Structure
With a company, you draw a salary (taxed at personal rates) and the remaining profit is taxed at the company rate (25% for base rate entities). When you distribute profits as dividends, franking credits reduce or eliminate double taxation.
Tax is Not the Only Factor
While tax savings are important, companies involve additional costs: ASIC fees, separate tax returns, accounting fees, and compliance obligations. Companies also provide asset protection and can retain profits for future investment.
Profit Retention
A key advantage of a company is the ability to retain profits at the 25% rate rather than distributing them at your marginal rate. This is beneficial if you plan to reinvest in the business.
Disclaimer: This is a simplified comparison. Actual outcomes depend on many factors including GST, super obligations, and specific deductions. Consult a registered tax agent before changing your business structure.
Comparing the two most common business structures for tax, liability, and administration
What is the main tax difference?
A sole trader pays personal income tax on business profits at marginal rates from 0% to 45% (plus 2% Medicare Levy). A company pays a flat 25% tax rate (for base rate entities with turnover under A$50 million) or 30%. For profits up to about A$120,000, a sole trader usually pays less tax. Above that, a company structure can save tax because the flat rate is lower than the top marginal rate of 45%.
How does limited liability work?
A sole trader has unlimited personal liability — if the business owes money or gets sued, your personal assets (home, savings, car) are at risk. A company is a separate legal entity, so your liability is limited to what you invested in the company. However, directors can still be personally liable for unpaid employee super, PAYG withholding, and if they trade while insolvent. Many banks also require personal guarantees for company loans.
What does each structure cost to set up and run?
A sole trader costs nothing to set up — just apply for a free ABN. A company costs about A$550 to register with ASIC, plus an annual review fee of about A$310. Companies need more complex accounting and tax returns, costing A$2,000 to A$5,000 per year in accounting fees compared to A$500 to A$2,000 for a sole trader. Companies must also maintain minutes, registers, and lodge annual reports with ASIC.
When should you switch from sole trader to company?
Consider switching when your business profit consistently exceeds A$120,000 to A$150,000 per year, when you need asset protection, or when you want to bring in partners or investors. A company makes it easier to split income (through dividends), retain profits in the business at a lower tax rate, and sell the business in the future. If your profits are under A$80,000, a sole trader structure is usually simpler and cheaper.
How do you take money out of a company?
You can pay yourself a salary (taxed at personal rates with PAYG withholding), pay dividends (which carry franking credits to avoid double tax), or a combination. You cannot simply withdraw company money for personal use — that creates a Division 7A loan that must be repaid on formal terms or it is treated as a taxable dividend. Getting the salary-dividend mix right is one of the main advantages of a company structure.
What are the reporting requirements for each?
A sole trader lodges a personal tax return with a business schedule and quarterly BAS if registered for GST. A company lodges a separate company tax return, an ASIC annual review, and may need to lodge financial reports. Companies with employees must manage PAYG withholding, super, and possibly payroll tax. A sole trader's bookkeeping is much simpler — many use basic accounting software or even spreadsheets.
Can you have employees in either structure?
Yes. Both sole traders and companies can hire employees. In both cases, you must pay at least the minimum wage, withhold PAYG tax, pay the 11.5% Superannuation Guarantee, take out WorkCover insurance, and comply with Fair Work obligations. The process is the same. However, a company may appear more professional to potential employees and can offer share-based incentives.
What about CGT when selling the business?
Sole traders selling business assets may qualify for the small business CGT concessions, including a 50% active asset reduction and a 15-year exemption. These can dramatically reduce or eliminate CGT. Companies can also access these concessions, but the rules are more complex, especially regarding the distribution of proceeds to shareholders. Both structures benefit from the general 50% CGT discount for assets held over 12 months.
ATO-Aligned: Based on 2024-25 ATO rates and thresholds. For personal advice, speak to a qualified tax agent.
Disclaimer: This calculator provides estimates based on current ATO rates and thresholds for the 2024–25 financial year. It does not constitute professional tax, financial, or legal advice. Your actual liability may differ depending on your individual circumstances. Always consult a qualified tax agent before making financial decisions. Read our terms
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