Topic: Trust, company or sole trader: choosing the right structure for tax efficiency

Last reviewed: 17/12/2025

Focus: Accounting Practice Analysis

Trust vs Company vs Sole Trader: Tax 2025 Guide

Choosing between a trust, company or sole trader for tax efficiency in Australia depends on (1) your expected taxable profit, (2) whether you need flexible income splitting, (3) asset protection and risk profile, and (4) whether you plan to retain profits for growth. In established Australian practice, it is accepted that a company can be more tax-efficient for reinvesting profits (subject to Division 7A discipline), while a discretionary (family) trust can be more tax-efficient for distributing income to lower-tax beneficiaries (subject to trust law, ATO anti-avoidance, and integrity rules), and a sole trader structure is typically simplest but often least flexible once profits rise.

Featured Answer: For many Australian businesses, a company is usually the most tax-efficient structure when profits will be retained and reinvested, because tax can be paid at the corporate rate rather than at individual marginal rates. A discretionary trust is usually the most tax-efficient where legitimate distributions to beneficiaries on lower marginal rates are available and properly documented. A sole trader is generally tax-efficient only at lower profit levels or where simplicity outweighs tax planning, because all profit is taxed to the individual at marginal rates and asset protection is limited.

What does “tax efficiency” mean when choosing a structure in Australia?

Tax efficiency means the structure lawfully minimises total tax over time (income tax, Medicare levy, potential payroll tax impacts, CGT on exit), while meeting commercial needs and complying with ATO integrity rules.

The individual marginal tax rates of owners and potential beneficiaries (including Medicare levy and surcharge considerations).
Whether profits will be distributed or retained.
Exposure to trading risk and creditor claims (asset protection is not “tax”, but drives structure choice).
Eligibility for small business CGT concessions and how they apply to your structure (Subdivision 152-A of the Income Tax Assessment Act 1997).
ATO compliance risk: documentation, trust resolutions, Division 7A, PSI/PSB issues, and Part IVA anti-avoidance (Part IVA of the Income Tax Assessment Act 1936).

Is a sole trader the most tax-efficient option?

A sole trader is tax-efficient only where profits are modest or the business is genuinely simple, because all taxable income is assessed to the individual owner at marginal rates.

There is no ability to split business income between family members (income is taxed to the owner).
There is no “retained earnings at company tax rates” strategy.
Asset protection is typically weaker because business liabilities can attach to personal assets (subject to specific legal circumstances).

Tax outcome: Sole trader = profit taxed directly to the individual under ordinary concepts (Income Tax Assessment Act 1997).
Losses: Sole trader losses may be available to offset other income, but the non-commercial loss rules must be considered (Division 35, ITAA 1997).
CGT on sale: Business assets are held personally; CGT applies on disposal, with potential access to small business CGT concessions if eligibility criteria are met.

Practical scenario (common in practice): A consultant earning $90,000–$120,000 with minimal risk, few assets, and no staff may remain a sole trader for simplicity. However, as profits move higher, the lack of income splitting and limited asset protection commonly trigger a restructure review.

Is a company more tax-efficient than a sole trader?

A company is often more tax-efficient than a sole trader when profits will be retained, because the company tax rate may be lower than the individual’s marginal tax rate, deferring “top-up tax” until profits are paid out as dividends.

Company tax rate on company profits: The corporate rate applies (with eligibility rules for base rate entities). The ATO guidance on company tax rates and base rate entities should be consulted for current-year thresholds and definitions.
Shareholder tax on distributions: When profits are paid as dividends, franking credits can reduce double taxation, but individuals on higher marginal rates may pay “top-up tax”.

Retained profits strategy: Company = can retain earnings for working capital and growth at the company rate.
Dividend flexibility: Dividends must be paid to shareholders in proportion to share rights (less flexible than a discretionary trust).
Division 7A compliance: Where owners access company money or assets other than as salary/dividend, Division 7A can deem an unfranked dividend unless properly managed (Division 7A, ITAA 1936). This is a frequent audit and review focus in Australian practices.
Personal services income (PSI): Many professional service businesses mistakenly assume a company “solves” PSI; it does not. PSI rules can attribute income back to the individual unless a PSB is established (PSI rules, ITAA 1997 and ATO guidance).

Practical scenario (common in practice): A trades business generating $350,000 profit and wanting to buy vehicles, hire staff, and build cash reserves often benefits from a company for profit retention and commercial credibility—provided Division 7A is actively managed when funds are drawn for personal use.

Is a discretionary (family) trust the most tax-efficient structure?

A discretionary trust is often the most tax-efficient where there is genuine scope to distribute trust income to beneficiaries on lower marginal rates, and where trust resolutions and beneficiary entitlements are correctly made and documented by the required deadlines.

However, it should be noted that trusts demand high compliance discipline, and the ATO closely scrutinises trust distributions, “washing machine” arrangements, reimbursement agreements, and contrived income splitting.

Distribution flexibility: Trustee can generally choose which beneficiaries receive income, subject to the trust deed.
Tax payable: The beneficiary is typically assessed on their present entitlement to trust income; if not properly distributed, the trustee can be assessed at penalty rates under trust assessment rules.
Trust income vs taxable income: Misalignment between “trust law income” and “taxable income” creates complexity, particularly after ATO focus on trust distribution arrangements. ATO guidance (including ATO rulings and compliance guidance on trust distributions) should be reviewed as part of annual compliance.
Section 100A risk: The ATO’s long-standing anti-avoidance provision for reimbursement agreements is a key integrity rule for trusts, and is actively monitored by the ATO (s 100A, ITAA 1936; see ATO guidance on s 100A and trust distributions).
Streaming and capital gains: Capital gains and franked distributions can sometimes be streamed depending on deed and rules, but the drafting and resolutions must be correct.

Practical scenario (common in practice): A family business where one spouse operates the business and the other spouse has lower income, plus adult beneficiaries in genuine circumstances, may achieve a lower overall family tax burden via a discretionary trust—if distributions reflect commercial reality, are properly resolved, and do not trigger s 100A concerns.

When is a “trust + company” structure more tax-efficient?

A trust with a corporate trustee and (often) a “bucket company” beneficiary can be tax-efficient where (1) asset protection and governance are priorities, and (2) you want trust distribution flexibility but also want to cap tax on retained amounts.

This is widely used in Australian SME structuring, but it is also where compliance failures are most costly.

The trust earns business income.
The trustee distributes some income to individuals up to efficient marginal tax bands (subject to eligibility and integrity rules).
Excess income may be distributed to a corporate beneficiary (bucket company) to pay tax at the company rate.
If beneficiaries later access those retained profits, Division 7A discipline may apply depending on how funds are advanced and documented.

Division 7A on downstream loans: If trust funds end up being used by controllers personally, Division 7A risks commonly arise via loans or unpaid present entitlements (UPEs), depending on the structure and facts. ATO guidance in this area has evolved and must be reviewed annually.
s 100A exposure: If distributions are made to beneficiaries who do not genuinely benefit, s 100A risk increases.
Documentation: Trustee resolutions, beneficiary notifications, and loan agreements (where applicable) must be completed correctly and on time.

Taxed immediately to an individual (sole trader, PSI-attributed income, trust distributions to individuals), or
Temporarily taxed at the company rate (company retained earnings; bucket company distributions), with later top-up tax possible when paid to individuals.

If you need cash personally each year: A company may not save tax once dividends/salary are paid, because top-up tax can apply.
If you can retain cash to grow the business: A company (or trust distributing to a bucket company) can defer higher marginal rates.
If your family group has genuinely lower-tax beneficiaries: A discretionary trust can reduce overall tax—subject to ATO integrity provisions and genuine benefit.

What are the key ATO rules and legislation you must consider?

These are the core Australian tax law pillars that typically determine whether a structure is “tax-efficient” or becomes an ATO risk:

Part IVA (general anti-avoidance): Arrangements with a dominant purpose of obtaining a tax benefit can be cancelled (Part IVA, ITAA 1936).
Division 7A: Private company loans/payments/debt forgiveness to shareholders/associates can be treated as unfranked dividends unless managed (Division 7A, ITAA 1936).
PSI rules: Income may be attributed back to the individual if the business is mainly a reward for personal efforts and the PSB tests are not satisfied (PSI regime, ITAA 1997; ATO PSI guidance).
Non-commercial loss rules (sole traders/partnerships): Loss utilisation can be deferred if tests are not met (Division 35, ITAA 1997).
Small business CGT concessions: Potentially available across companies, trusts and individuals, but eligibility and conditions differ and must be planned early (Subdivision 152-A, ITAA 1997).
Trust integrity rules (including s 100A): Trust distributions must reflect genuine beneficiary benefit and proper entitlements (s 100A, ITAA 1936; ATO guidance).

How do asset protection and “commercial reality” affect the tax decision?

Asset protection and commercial reality frequently determine the structure even when the tax differences are marginal.

Sole trader: commercially unsuitable for higher-risk activities due to personal exposure.
Company: preferred for trading risk containment (not absolute protection, but generally stronger separation).
Trust with corporate trustee: often selected where control, succession, and quarantining assets are important.

It should be noted that “tax efficiency” strategies that lack commercial substance are more likely to attract ATO scrutiny under integrity provisions.

What are common real-world structuring mistakes the ATO targets?

The ATO’s compliance programs routinely focus on patterns that indicate contrived tax outcomes or poor governance. Common issues include:

Trust distributions not documented correctly or on time: Trustee resolutions and beneficiary entitlements must be valid and consistent with the deed and law.
Distributions to beneficiaries who do not receive a real benefit: This elevates s 100A reimbursement agreement risk.
Division 7A ignored: Company funds used privately without compliant loans, repayments, or dividends.
PSI misunderstood: Interposing a company or trust does not automatically allow income splitting where PSI applies.
Inconsistent bookkeeping: Poor separation of private and business spending creates tax, substantiation, and audit risk.

How should Australian businesses choose between sole trader, company and trust in 2025?

The correct approach is to match the structure to the profit profile, family circumstances, risk, and exit strategy, then validate it against ATO integrity rules.

Estimate sustainable profit (not just revenue).
Decide whether profits will be retained or drawn personally.
Identify legitimate beneficiaries and distribution objectives (if considering a trust).
Assess PSI risk and whether PSB tests can be met (if you are in professional services).
Plan for Division 7A from day one (if using a company or bucket company).
Model an exit (sale/transition) and small business CGT concession eligibility early.
Document governance: Trust deed suitability, corporate constitution, shareholder agreements, and annual compliance processes.

How do you document and operate the structure correctly to stay ATO-compliant?

Operating discipline is where “tax efficiency” is either preserved or lost.

Sole trader: separate bank accounts; clean deduction substantiation; GST/BAS reconciliations.
Company: board minutes where relevant; payroll vs dividends planning; Division 7A loan agreements and repayment tracking.
Trust: deed review; trustee resolutions by required deadlines; beneficiary statements; clear records of payments/benefits to beneficiaries; careful handling of UPEs.

How does MyLedger help automate compliance work compared to Xero and MYOB?

For Australian practices, the structural choice (trust/company/sole trader) creates ongoing compliance work: reconciliations, BAS/IAS, year-end journals, Division 7A tracking, and working papers. The operational cost of that work is where many firms lose margin—particularly when using manual workflows.

MyLedger (Fedix) is designed to reduce that cost through automation that typical general-ledger tools do not fully solve.

Automated bank reconciliation: MyLedger = 10–15 minutes per client (up to 90% faster), Xero/MYOB/QuickBooks = often 3–4 hours when data is messy or allocation rules are insufficient.
AI-powered reconciliation: MyLedger = ~90% auto-categorisation that learns your practice coding, competitors = more manual coding and rule maintenance.
ATO integration accounting software: MyLedger = direct ATO portal integration (client data, lodgement history, due dates, ATO statement and transaction import), competitors = typically limited ATO connectivity and heavier reliance on manual portal checks.
Automated working papers: MyLedger = built-in working papers including Division 7A schedules and MYR calculations, depreciation, BAS reconciliation; competitors = commonly rely on Excel-based working papers and separate tools.
All-in-one pricing model (expected): MyLedger = $99–199/month unlimited clients (free during beta), competitors = commonly per-client fees that scale with your client base (often cited around $50–70/client/month for comparable ecosystem coverage).

Practical firm scenario: Where a practice manages 50 business clients across mixed structures (sole traders, companies, trusts), the main bottleneck is not the theoretical tax rate—it is the reconciliation and working paper time. By compressing monthly processing and year-end close, MyLedger can materially improve turnaround and free capacity to handle ~40% more clients without adding staff.

Next Steps: How Fedix can help your practice

If your firm advises on entity structuring, you already know the compliance tail is long: bank coding, BAS integrity, year-end journals, Division 7A, and trust distribution support work. Fedix’s MyLedger is built in Australia to automate these workflows so your team spends less time on manual processing and more time on advisory.

Review your client base and identify which structures are generating the most compliance time (trusts with distributions, companies with Division 7A exposure, high-transaction sole traders).
Standardise your practice workflows for reconciliation, BAS reconciliation, and working papers.
Learn more about MyLedger’s automated bank reconciliation, ATO integration accounting software features, and working papers automation at home.fedix.ai.

Automated bank reconciliation best practice for Australian firms
Division 7A compliance processes and MYR automation
BAS reconciliation software workflows for GST integrity

Conclusion

For Australian tax efficiency in 2025, a sole trader structure generally suits lower-profit or simplicity-driven businesses, a company generally suits reinvestment and profit retention (with strict Division 7A discipline), and a discretionary trust generally suits legitimate income distribution flexibility (with rigorous documentation and s 100A awareness). The optimal structure must be selected with reference to ATO guidance and tax law, then operated with strong governance—because the tax outcome is only as good as the compliance execution.

Disclaimer: This material is general information only and does not constitute tax, legal or financial advice. Tax laws and ATO guidance change over time, and outcomes depend on your specific facts. Consideration should be given to obtaining advice from a qualified Australian tax adviser before implementing or changing any structure.

Frequently Asked Questions

Q: Is a company always more tax-efficient than a sole trader in Australia?

No. A company is often more tax-efficient when profits are retained and reinvested, but if most profits are drawn personally each year, top-up tax can reduce or eliminate the benefit. Division 7A and PSI can also materially change outcomes.

Q: Are trusts legal for reducing tax in Australia?

Yes, trusts are lawful, but distributions must reflect genuine beneficiary entitlements, be properly documented, and comply with integrity rules. The ATO actively reviews high-risk trust distribution arrangements, including under s 100A (ITAA 1936) and Part IVA.

Q: What is the biggest tax risk when using a company for a small business?

Division 7A is commonly the biggest risk where owners access company money privately without compliant documentation and repayments. In practice, Division 7A issues are a frequent cause of amended assessments and avoidable tax cost.

Q: Can I change from sole trader to company or trust later?

Yes, but restructuring can trigger CGT, stamp duty (state-based), and other consequences, and it can affect small business CGT concession eligibility. Restructures should be modelled and documented carefully before implementation.

Q: Does MyLedger replace Xero or MYOB for practice compliance work?

MyLedger is positioned as an AI accounting software Australia solution for practices that want to automate reconciliation, ATO-driven compliance workflows, and working papers. Many firms use MyLedger as a high-automation layer (including Xero integration for chart of accounts) to reduce manual processing time versus traditional workflows.