Can a Company structure lower your tax obligations?

The company tax rate: Often lower than your personal rate

One of the biggest advantages of a company structure is its fixed tax rate.

Most small-to-medium businesses in Australia operating through a company fall under the base rate entity rules. This means:

• Company tax rate: 25% (for base rate entities)
• Top individual marginal rate: 47% (including Medicare Levy)

If your business profits are high enough that you’re personally pushed into the upper tax brackets, a company structure can create meaningful savings by taxing those profits at a lower corporate rate.

But there’s a catch…

You’re taxed again when profits are paid out.

When owners take money out of the company as dividends, franking credits help reduce “double taxation”. However, you may still pay additional tax depending on your personal income level.

So yes, a company can reduce tax — but only when managed intentionally.

Companies allow you to “cap” profit tax

Unlike sole traders or partnerships, where all business income is taxed at personal rates, a company gives you the ability to retain profits at the lower 25% rate.

Why does this matter?

Because many business owners don’t need all their profit as personal income each year. Retaining earnings can help you:

• Smooth cash flow
• Fund expansion
• Build buffers
• Invest back into the business

This ability to cap tax on retained profit is one of the biggest strategic advantages of using a company.

Companies open the door to more strategic tax planning

A company structure can support:

• Splitting income through dividends
• Bringing in new shareholders (family members, partners, investors)
• Accessing limited liability, which can protect personal assets
• Better alignment with trust structures for flexibility

Many successful business groups combine companies and trusts to achieve both tax efficiency and strong asset protection.

For example: a discretionary trust operating a business may distribute income to a company (“bucket company”) to cap tax at 25% rather than pushing individuals into high personal tax brackets.

This is legal, widely used, and extremely effective when managed correctly.

But… a company isn’t always cheaper

This is the part often glossed over in online advice.

Switching to a company can increase admin and compliance costs, such as:

• ASIC annual fees
• Additional accounting requirements
• Stricter record-keeping obligations
• Division 7A rules if you take money out incorrectly
• More complex tax returns

A company structure should always pay for itself in financial benefit or strategic value.

If you’re earning relatively modest profits or need all your income personally each year, the tax savings may be minimal.

Restructuring can trigger tax — so plan first

Moving from a sole trader or partnership into a company can create Capital Gains Tax (CGT) and stamp duty implications.

The good news? Under NSW and federal legislation, Small Business Restructure Rollovers may allow a restructure without immediate tax consequences, when certain conditions are met.

This is a complex area (and one we recommend getting advice on), but it’s a powerful tool that many business owners don’t even realise exists.

Company structures don’t work in isolation

The most important point:

A company structure won’t reduce tax on its own. It needs to be paired with the right:

• Shareholder setup
• Trust structure
• Profit distribution plan
• Director strategy
• Long-term business goals
• Funding approach
• Asset protection framework

That’s why cookie-cutter advice rarely works. Two businesses with the same profit can have opposite outcomes depending on how the structure is implemented.

So, should you operate through a company?

A company structure can lower your tax obligations, but only when it matches:

• The size of your business
• The profit levels you’re generating
• Your long-term plans
• Your cashflow needs
• Your family circumstances
• Your risk exposure

If you’re earning significant profits, reinvesting regularly, or building long-term enterprise value, a company (often as part of a wider structure) can be a huge advantage.

If you’re unsure, or you feel like your current setup no longer fits the stage of business you’re in, that’s a strong signal to review your structure.

Need a second opinion on your structure?

At Luma Advisors, we help business owners make clear, confident decisions about the right structure — not just for tax, but for long-term success.

Whether you’re a sole trader looking to scale, a family business navigating multiple income streams, or an established company wanting to optimise your tax outcomes, we can help you map the right path forward.