Key takeaways
- Sole traders pay tax at individual rates; base rate entity companies pay 25%.
- A lower company rate doesn't mean lower total tax once profits reach the owners.
- Companies add costs, paperwork and Division 7A rules.
- Companies can't access the 50% CGT discount.
One of the most common questions business owners ask is whether they'd pay less tax as a company. The answer depends on how much profit you make, whether you need it to live on, and what you want the business to become.
Side-by-side comparison
| Sole trader | Company | |
|---|---|---|
| Tax rate | Individual marginal rates (0%–45%) plus Medicare levy | 25% for base rate entities, otherwise 30% |
| Legal liability | Unlimited — personal assets at risk | Generally limited to the company's assets |
| Tax return | Business schedule in your individual return | Separate company tax return |
| Set-up and running costs | Low | Higher — ASIC registration, annual review fee, more accounting |
| Getting money out | Profits are yours | Wages, dividends or a complying loan |
| CGT discount | 50% after 12 months | Not available |
| Losses | Can offset other income, subject to the non-commercial loss rules | Stay in the company |
| Small business income tax offset | Up to $1,000 | Not available |
The tax rate isn't the whole story
A company pays 25% or 30% on its profit, but that profit still belongs to the company. When it's paid to you as a dividend, it's taxed at your marginal rate, with a credit for the company tax already paid (franking). Retaining profits in the company can defer tax — but money taken out improperly can trigger Division 7A and be treated as an unfranked dividend.
When a company may make sense
- Profits are consistently higher than you need to live on
- You want to limit personal liability
- You're taking on employees, investors or significant contracts
- You plan to grow and reinvest profits in the business
Personal services income applies to both
If your income is mainly from your personal skills or effort, the PSI rules can attribute it back to you personally — even if it's earned through a company.
Official sources
General information only. This article doesn't take into account your personal circumstances and isn't a substitute for professional advice. Tax rules and thresholds change — check current details with the ATO or contact us for advice specific to you.
Published by
ANS Taxation & Accounting
Melbourne accounting and tax practice