Sole trader vs company: the tax truth for WA businesses
One of the most common questions I hear from WA business owners is: “Should I operate as a sole trader or set up a company?” It sounds like a simple question. In practice, it is one of the most consequential financial decisions you will make — and the answer is rarely straightforward.
The structure you choose affects how much tax you pay, what you can claim, how you plan for the future, and how the ATO sees you. Getting it right from the start can save you tens of thousands of dollars over time. Getting it wrong costs real money to fix.
Chaos is optional.
The sole trader vs company decision doesn't have to be complicated, if you're looking at the right information.
We've cut through it for you.
Why structure matters more than most people realise
Your business structure is not just an administrative formality. It determines your marginal tax rate, your personal liability exposure, your access to concessions, and your options when the time comes to sell, transition, or wind down.
Many business owners choose a structure because a friend recommended it, or because it seemed like the right thing to do at the time. Neither is a sound basis for a decision that follows you for years.
How sole traders are taxed in 2025–26
As a sole trader, your business income is treated as your personal income. It is added to any other income you earn and taxed at your individual marginal rate — which in 2025–26 can be as high as 47% (including the Medicare levy) once your combined income exceeds $190,000.
The advantages are simplicity and low setup cost. There is no separate tax return for the business, no company administration, and no ASIC fees. You also retain access to the 50% capital gains tax (CGT) discount on assets held for more than 12 months — a meaningful benefit if your business holds appreciating assets.
The disadvantages become apparent as income grows. Once your taxable income climbs past $120,000, the gap between your personal tax rate and the company tax rate starts to widen considerably.
How companies are taxed and the
25% rate
A private company that qualifies as a base rate entity pays corporate tax at 25% on its taxable income. For many profitable businesses, this is significantly lower than the owner's personal marginal rate.
The key here is the word 'retained'. A company pays 25% on profits it retains in the business. When those profits are paid to shareholders as dividends, the shareholders pay additional tax — but they receive a franking credit for the tax the company has already paid. In most cases, the overall tax outcome is equivalent to having paid at your personal rate, but the timing differs. This creates genuine planning opportunities around deferring personal tax and reinvesting at the lower corporate rate.
For a business generating $300,000 in net profit, the difference between being taxed at 47% as a sole trader and 25% as a company is $66,000 in the same year. That gap funds reinvestment, debt reduction, or simply builds the balance sheet.
The 25% rate, what it actually means for your business
The 25% rate isn't a loophole — it's the legislated rate for base rate entities.
The hidden costs of a company structure
A company is not right for everyone, and it does carry real costs that sole traders avoid:
• ASIC annual review fee and compliance obligations
• Separate company tax return and financial statements each year
• Director duties and statutory responsibilities
• More complex bookkeeping and payroll setup
• Loss of the 50% CGT discount at the company level (individuals retain this; companies do not)
• Cost of establishing and maintaining the structure — typically $1,500 to $3,000 upfront
These are real ongoing costs. For a business generating under $100,000 per year, the compliance overhead often outweighs the tax benefit. Above that threshold, the calculation starts to shift.
When to restructure and when not to
There is no universal income threshold that triggers a company restructure, but a few indicators suggest it is worth modelling:
• Your annual net profit consistently exceeds $120,000
• You are retaining profits in the business rather than drawing them all as income
• You want to separate personal and business assets for liability protection
• You are planning to bring in investors, partners, or employees with equity
• You are building towards a future sale of the business
Conversely, restructuring too early — before the business has sustainable income — often creates compliance costs and complexity with no meaningful tax benefit.
There is also the question of timing. Restructuring from a sole trader to a company mid-stream is not as simple as changing a registration. It requires transferring assets, potentially triggering CGT events, updating contracts, and notifying the ATO. Done carefully with professional advice, it can be achieved with minimal cost. Done poorly, it creates tax liabilities that are entirely avoidable.
The ATO's view on trust structures
A family discretionary trust is often raised as a third option, particularly for business owners with family members on lower incomes. While trusts can offer genuine flexibility in income distribution, the ATO has been increasingly focused on trust distributions — particularly those to adult children or low-income beneficiaries — since the publication of TA 2022/1 and the subsequent court activity.
Trust distributions are not the 'set and forget' planning tool they once were. If you are considering a trust structure, this warrants careful advice that takes into account your specific circumstances and the current regulatory environment.
What about trusts and the 2026–27 Budget changes
The 2026–27 Federal Budget did not introduce new trust legislation, but it did confirm the government's continued investment in ATO compliance programs targeting high-wealth individuals and associated structures. In practical terms, that means more data matching, more review activity, and less tolerance for distributions that lack commercial substance.
Trust distributions are not the "set and forget" planning tool they once were. If you are considering a trust structure, three things matter right now:
The distribution resolution must be documented before 30 June each year — no exceptions
Distributions to beneficiaries on low incomes will attract scrutiny unless there is a genuine economic basis
The ATO's guidelines on section 100A remain in force — arrangements where a beneficiary receives a distribution but someone else enjoys the economic benefit are firmly in the crosshairs
The landscape is changing; the fundamentals aren't.
Each layer serves a purpose. Business structures, tax planning, compliance; built carefully, they hold.
Key questions to ask your accountant
Before deciding on or changing your structure, make sure you have clear answers to the following:
• What is my current and projected annual net profit?
• Am I retaining profits in the business, or drawing most of it as income?
• What assets does the business hold — and what are the CGT implications of transferring them?
• What does the modelling look like over a 3-year horizon, accounting for compliance costs?
• Are there asset protection considerations I need to address?
Modelling this properly takes time and knowledge of your full financial picture. It is not something to shortcut.
Talk to Atramentum about your structure
At Atramentum, we work with sole traders and business owners across Perth and WA to model their options, make sense of the trade-offs, and implement the right structure for their circumstances. Whether you are just starting out or considering a restructure, we can help you make the decision with confidence.
Book a structure review consultation through our website, or get in touch directly.
atramentum.com.au · (08) 6118 5054 · 136 Stirling Hwy, Nedlands WA 6009
This article is general in nature and does not constitute financial or taxation advice. Your individual circumstances will affect which structure is appropriate for you. Please seek advice from Atramentum (a registered tax agent) before making structural decisions.
