Business structures and your key tax obligations

- October 9, 2023 6 MIN READ


So, you’re setting up a new business and you need to know the tax implications.  The first question you’ll need to consider is what structure to use. Do you form a company, do you operate through a trust or do you simply set yourself up as a sole trader? asks Mark Chapman, Director of Tax Communications at H&R Block.

Firstly it helps to know the difference between each business structure, so I’ve outlined the options below:

Sole Trader

The main advantage of this structure is its simplicity; there’s less red tape to negotiate to start your business and the associated legal and professional costs are minimal. When you run a business as a sole trader, you simply record the business’s income and expenses in your personal tax return.

From a tax point of view, the main advantage is that if it takes time to get your business going, any tax losses can usually be applied at the individual level against all your other forms of assessable income, including salary and wages and income from other business activities.

On the downside, once you start trading at a profit, you’ll pay income tax at your applicable marginal tax rate (which could be up to 45% for those earning more than $180,000). The potential to split income between family members, which is often available where a trust is used as the business vehicle, does not exist.

In addition, setting up as a sole trader does not provide you with any form of asset protection from creditors or protection in the event of family break-ups.

Discretionary Trust

A trust is a business structure where a trustee (an individual or company) carries out the business on behalf of the members (or beneficiaries) of the trust.

Family businesses are often set up as a trust so that each family member can be made a beneficiary without having any involvement in how the business is run.

The major advantage of using a discretionary trust to run your business is that you are able to decide who benefits from the income of the trust. So, when you start trading profitably, the trust will be able to distribute its income in the most tax effective way permitted by the trust deed, typically to the beneficiaries with the lowest marginal tax rates.

Each beneficiary records their share of the income of the trust in their personal tax return and pays the tax themselves. The trust usually only pays tax if it doesn’t distribute all the profits which arise in the business.

There are also asset protection advantages in holding assets through a discretionary trust. Because the beneficiaries of the trust are not the legal owners of the business, creditors cannot easily access the assets of the business if a particular beneficiary encounters financial problems.


The other possible scenario is to set up your business through a company.

Shareholders own the company while directors run it. With many small businesses, the company directors are also the shareholders. To become a company, an entity must:

  • be incorporated under the Corporations Act 2001 (Commonwealth Act); and
  • be registered with the Australian Securities and Investment Commission

The company is a separate legal entity to the people who run it. That means that the company lodges its own tax return and pays tax on its profits at the company tax rate – currently 25% (provided the company’s aggregate turnover is less than $50m and it derives no more than 80% of its income from passive activities, such as interest, dividends, rent and capital gains). The company can then distribute profits to shareholders in the form of franked dividends. These dividends are taxable to the shareholders less a credit for the tax already paid by the company.

In some cases, companies don’t pay out profits to shareholders; they retain them, possibly for future investment in the business. In that sense, companies can be regarded as tax shelters since the rate of tax payable by the company (25%) is significantly lower than the higher rates of personal taxation. That is only part of the story of course; ultimately the cash in the company needs to be extracted and at that point tax will need to be paid, so the tax is deferred rather than avoided.

The most common reason why people choose a corporate structure is that it provides limited liability to the shareholders. In other words, the extent to which shareholders are liable for the debts of the company is limited to the amount they’ve invested as share capital. There are also asset protection benefits because creditors of the company cannot access the assets of the shareholders.

On the downside, companies cannot access the 50% capital gains tax discount. Setting up and maintaining a company is also more expensive than the alternatives, with greater compliance obligations imposed by regulators like ASIC.

A Hybrid?

Many people opt for a mixed structure, often running their trade through a company, which is then owned by a discretionary trust. This provides both the asset protection and lower tax rate advantages of a company combined with the ability to stream income (in the form of dividends) to beneficiaries of the trust.

Alternatively, they run the business through a trust, which has a company as either sole trustee or one of a number of trustees. The trust can then stream profits to the corporate trustee, which is taxed at the corporate rate, rather than the higher personal rates.

What registrations do I need?

Tax file number

If the business is being operated as a sole trader, there is no requirement to obtain a tax file number (TFN). The business will simply use the individual’s own TFN.

If instead, the business is run through another entity, such as a trust, partnership or company, that entity will need its own TFN. The procedure for applying for a business TFN is different to applying for an individual one. A TFN can be obtained via the Australian Business Register (ABR) website (Apply for a TFN for business | ABR).

The ABR is the central registry of Australian business information so, as well as obtaining a TFN, it is possible to obtain an Australian business number (ABN), register for GST, apply for pay-as-you-go (PAYG) withholding and register the business name.

Australian business number

An ABN is essential for any Australian business since it is used in numerous business interactions, with customers, suppliers and other government agencies. An ABN will be required, for instance, before the business can register for GST. If the business does not have an ABN, other businesses must withhold 49% tax on any payments they make to the business for goods or services.

An ABN can be obtained through the ABR website (Applying for an ABN | ABR).

Australian company number (ACN)

This will only be required if the intention is to run the business through a company. If so, this will be required before applying for an ABN. An ACN can be obtained through the ASIC website (Steps to register a company | ASIC – Australian Securities and Investments Commission).

Director ID

If a company is involved, it is necessary for all directors of that company to apply for a director ID. A director ID is a unique identifier that is attached to a director forever, and helps to prevent the use of false or fraudulent director identities. There is no need to apply for another director ID where the individual becomes a director of other companies. For individuals who first became a director from 5 April 2022, it is necessary to apply for a director ID before commencement of the appointment. A director ID can be obtained at Apply for your director ID online | Australian Business Registry Services (ABRS)

Pay-as-you-go withholding

Registration for PAYG withholding is required where there is an intention to employ people who will be paid wages or salary. Tax must be deducted from each wage or salary payment and paid to the ATO through the PAYG system.

Registration is completed through the ABR website (see above). Where a business already has an ABN, registration is through online services for business, accessed through the ATO website.

Goods and services tax

A business generally needs to register for GST once its annual turnover is $75,000 or more.

Once the annual turnover threshold is passed, registration is necessary within 21 days so it is worthwhile monitoring turnover each month to see if this point is being reached. Registration is voluntary before that point.

Where a new business has been started and there is an expectation that it will reach the GST turnover threshold or more in its first year of operation, it is sensible to register for GST even if the $75,000 threshold has not yet been reached.

Registration is via the ABR website (see above) or online services for business, via the ATO website.

Note that registration is only required once for GST, even where the registrant operates more than one business. So, where an individual runs, for example, a pastry shop and a clothing shop, only one GST registration is needed unless one of the businesses is operated through a different entity, such as a company.

What do I do now?

Always take tax and legal advice before starting a business. You’ll get expert advice on which structure is best,  both in terms of immediate tax liabilities and also looking over the long term, e.g. considering your ultimate exit from the business or the introduction of new funding or employees.

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