Company vs trust for tax: how the choice affects what you pay
Think about where profits will end up and when. A company pays company tax first (25% for most small and medium trading companies that meet base rate entity tests, or 30% otherwise). You can retain profits inside the company to fund growth and pay franked dividends in a later year—useful when your personal marginal rate is high now but may be lower later.
A discretionary (family) trust generally distributes its net income by 30 June. Adult beneficiaries are then taxed at their marginal rates. This flexibility can lower the overall tax bill when multiple adult beneficiaries have spare tax brackets. Trusts can also stream capital gains and franked dividends to specific beneficiaries if the deed and resolutions allow.
CGT matters: companies do not get the 50% CGT discount; individuals and trusts typically do (if eligible and the asset was held for more than 12 months). That can be decisive for asset-heavy or exit-focused businesses. On the other hand, companies can warehouse profits at a predictable rate for reinvestment.
Practical tip: model one to three realistic years of profit, including expected distributions and any capital events, before you lock in a structure. If you already operate, a structure review can test whether a change is beneficial under the small business restructure roll-over rules.
Key Australian tax points to keep in view
- Company tax rate: 25% for base rate entities (aggregated turnover under $50m and ≤80% passive income); otherwise 30%. Dividends carry franking credits to shareholders who then may pay top-up tax or receive a refund.
- Trust distributions: beneficiaries are taxed on their share of trust net income. Minors are generally taxed at penalty rates on unearned income. Trustees must make valid distribution resolutions by 30 June.
- Retaining income: undistributed trust income can be taxed to the trustee at the top marginal rate. Using a “bucket company” requires careful Division 7A and unpaid present entitlement (UPE) management.
- CGT: companies do not get the 50% discount; individuals and trusts may. Trusts can stream capital gains and franked dividends if the deed allows. Small business CGT concessions can apply to both structures where strict tests are met.
- Losses: companies must satisfy continuity of ownership or similar business tests. Trust loss rules are stricter; family trust elections and interposed entity elections may be relevant.
- Personal services income (PSI): if income is mainly from your personal effort, anti-avoidance rules can limit income splitting via trusts or companies.
- Compliance and costs: companies have ASIC fees, financials and company returns; trusts need a quality trust deed, trustee minutes and trust tax returns. Both may need ABNs, GST registration and BAS if required.
What to compare before you commit
Tax profile
Do you want to retain profits (company) or distribute income each year (trust)? Consider current vs future tax brackets, dividend timing and franking credit use.
Capital gains and exits
Will you hold appreciating assets or sell the business? Trusts and individuals may access the 50% CGT discount; companies do not. Check small business CGT concessions for both.
Control, risk and asset protection
Companies provide limited liability for shareholders but directors still have duties. Trusts can separate control and benefit and may improve asset protection when well-managed.
Complexity and cost
Compare setup, annual compliance, Division 7A/UPE risks (for trusts using companies as beneficiaries), and documentation quality (deeds, resolutions, minutes).
Best next steps
Outline your objectives first: lower overall tax, reinvestment capacity, asset protection, an eventual sale, or succession. Then model tax under each structure across a few realistic scenarios.
Already trading? A structure review can confirm if moving to a trust or company (or introducing a corporate beneficiary) improves outcomes without creating avoidable risk. New venture? Get the deed, constitution and registrations right on day one to avoid costly rework.
Use these paths to move forward with confidence:
- Tax accountant for structure modelling, distributions and franking strategy.
- New business accountant for company or trust setup, registrations and software.
- Help centre to explore tax, BAS and payroll topics in plain English.
Frequently asked questions
Is a company or a trust better for paying less tax?
Neither structure always wins. A company offers a capped tax rate and profit retention with franking credits on dividends. A trust can split income to adult beneficiaries and may reduce the family’s overall bill in high-income years. The right answer depends on profit level, beneficiary mix and timing. Model both options before deciding.
Can a trust keep profits?
Not without consequences. Undistributed trust income can be taxed to the trustee at the top marginal rate. Many families use a “bucket company” beneficiary to cap tax, but unpaid present entitlements to that company can trigger Division 7A if not paid or placed on a complying loan. This area needs careful advice.
How are capital gains taxed in a company vs a trust?
Companies don’t get the 50% CGT discount; trusts and individuals may if the asset was held for more than 12 months and other conditions are met. Trusts can often stream capital gains and franking credits to specific beneficiaries if allowed by the deed. Small business CGT concessions can apply to both structures, subject to strict tests.
Can I change structures later?
Sometimes. The small business restructure roll-over may allow moving active assets to a different entity without immediate tax when conditions are met. However, commercial, stamp duty and finance issues still apply. Get a structure review before you change anything.