Sole trader or company — which saves more tax?

General advice only · AFSL 222640 · Global Mutual Funds Pty Ltd

The direct answer

It depends on how much profit you make and what you do with it. Base rate entity companies pay 25% tax, while sole traders pay individual marginal rates up to 45% plus the Medicare levy. But profits taken out of a company are taxed again in your hands (with franking credits), loans from the company are caught by Division 7A, and companies cost more to run. Low profits usually favour sole trader.

What it depends on

The full answer depends on your specific circumstances. Here’s what matters.

Profit you will leave in the business

The company rate advantage mostly applies to profits retained for growth. If you need all the profit to live on, the saving shrinks.

Personal services income rules

If your income is mainly from your personal skills or effort, PSI rules can attribute it back to you regardless of structure.

Running costs and asset protection

Companies have ASIC fees, separate tax returns and director duties. They can provide some liability protection, although guarantees reduce it.

The last 10%

What a qualified professional can add

The answer above covers the general position. Here’s where professional judgement — applied to YOUR specific situation — makes the difference.

Modelling your tax under each structure at your actual profit level
Considering trusts and other structures that may suit your family situation
Planning the timing and cost of restructuring, including CGT and stamp duty

Questions to ask before you engage one

If you decide to engage a professional, these questions help you evaluate whether they’re right for your situation.

At what profit level does a company start saving me tax?

Do the PSI rules apply to my income?

What will the new structure cost to set up and run each year?

How do I get money out of the company without triggering Division 7A?

Your next step

Estimate your expected profit for the next two years and how much you need to draw personally. Take those two numbers to your accountant for modelling.

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