Sole trader or company: what are the tax differences?

If you’re starting a business or reviewing your current structure, choosing between operating as a sole trader or setting up a company is a critical decision. Tax treatment plays a major role in determining which structure best suits your circumstances.

How Tax Returns Differ

As a sole trader, you report your business income and expenses in your individual tax return each year. You include these details in the Business and Professional Items schedule, and the tax office assesses your business income as part of your personal income.

A company, however, lodges its own separate annual tax return and pays tax on its taxable income. Company directors and any employees must also lodge their own individual tax returns.

Record‑Keeping and Compliance Obligations

Operating through a company comes with additional legal and administrative responsibilities. Companies must comply with annual review requirements and maintain accurate financial records that clearly show transactions and the company’s financial position. These records must allow the preparation of proper financial statements and support audits if required.

Sole traders generally face fewer compliance obligations, although they must still keep accurate records to support their tax return.

Tax Rates and the Tax‑Free Threshold

One key tax difference lies in the tax‑free threshold.

Companies do not receive a tax‑free threshold. They pay tax on every dollar of taxable income. Companies that do not qualify for the lower company tax rate pay tax at the standard company rate of 30%.

Sole traders benefit from the individual tax‑free threshold of $18,200, as their business income forms part of their personal taxable income.

Lower Company Tax Rate

Some companies may qualify for the lower company tax rate of 25%. To access this rate, the company must meet the requirements to be classified as a base rate entity.

One key condition is that the company’s aggregated turnover for the income year must be less than $50 million. Aggregated turnover includes the company’s income plus that of any connected or affiliated entities.

GST and Payroll Tax Obligations

Both sole traders and companies may need to register for goods and services tax (GST). Registration is required if:

• Your GST turnover reaches $75,000 or more, or
• You provide taxi, limousine or ride‑sourcing services, regardless of turnover

Both structures can also employ staff. If your business’s gross wages exceed the threshold set by your state or territory, you must pay payroll tax, regardless of whether you operate as a sole trader or a company.

Capital Gains Tax Considerations

Both sole traders and companies may need to pay capital gains tax (CGT) when they dispose of assets and make a capital gain.

Sole traders may be able to reduce a capital gain using the CGT discount or indexation methods, where eligible. Some companies may also apply indexation in limited circumstances.

Fringe Benefits Tax

If your business provides fringe benefits to employees, you may need to pay fringe benefits tax (FBT). This obligation applies to both sole traders and companies.

Choosing the Right Structure

The tax differences between a sole trader and a company can significantly affect cash flow, compliance costs and long‑term planning. Understanding how each structure is taxed helps you make informed decisions as your business grows or changes.