Choosing between a company and a trust depends on your goals: a company offers limited liability and a flat tax rate of 25% or 30%, ideal for retaining profits, while a discretionary trust offers flexible income distribution and strong asset protection. Many established businesses use both, a company owned by a trust.

Choosing between a company and a trust is one of the most consequential decisions an Australian business owner will make — and it’s one that most people get wrong, either by choosing based on cost alone or by defaulting to whatever their first accountant set up years ago without thinking about whether it still fits. The right structure can save you tens of thousands of dollars in tax each year and protect everything you’ve built. The wrong structure can cost you far more. Let me break down the real differences between a company and a trust so you can make an informed decision.

Key Differences at a Glance

Both companies and trusts are used to operate businesses and hold assets in Australia. They are both separate from you personally in important ways, but they work very differently:

• A company is a separate legal entity incorporated under the Corporations Act 2001. It has its own legal identity, can enter contracts, owns its own assets, and pays its own tax.
• A trust is a legal relationship — not a separate legal entity — in which a trustee holds and manages assets for the benefit of beneficiaries. A discretionary (family) trust gives the trustee flexibility to decide who receives income each year.

The ATO provides guidance on business structures, but the nuances of which is right for you requires professional advice specific to your situation.

Tax Treatment: Company vs Trust

Tax is where the differences become most significant:

Company tax rates:

• Base rate entity (small company with passive income less than 80% of total income and aggregated turnover under $50 million): 25%
• All other companies: 30%

Trust taxation:

• A trust itself does not pay income tax — instead, income is distributed to beneficiaries who each pay tax at their own marginal rate
• Undistributed trust income is taxed at 47% in the hands of the trustee — a strong incentive to distribute every year
• Individual beneficiaries can receive trust income at their personal marginal rates: 0% for those under the tax-free threshold, 19% for income $18,201–$45,000, 32.5% for $45,001–$135,000, 37% for $135,001–$190,000, and 45% (+2% Medicare levy) above $190,000

The key advantage of a trust is income splitting: the trustee can direct income to beneficiaries in lower tax brackets each year, minimising the overall family tax bill. A company cannot do this — profits stay in the company at 25–30% until paid out as dividends, at which point individual tax rates apply.

However, companies have a flat rate that is often lower than the top marginal rate, making them attractive for retaining profits in the business without distributing them.

Asset Protection: Company vs Trust

Both structures provide asset protection, but in different ways:

Company: A company provides limited liability to its shareholders — your personal assets are not at risk for the company’s debts (with exceptions, such as personal guarantees and director liability under insolvent trading laws). However, assets inside the company are exposed to creditors of the company.

Trust: Assets held by the trustee on behalf of the trust’s beneficiaries are generally protected from the personal creditors of those beneficiaries (since beneficiaries don’t own the assets). A discretionary beneficiary has no guaranteed entitlement, so creditors have very limited rights over trust assets.

In practice, trusts often provide superior asset protection when properly structured — particularly because the discretionary nature means no beneficiary can be said to “own” a specific share of the trust. This makes it harder for creditors to get their hands on trust assets compared to company assets.

Flexibility and Distributions

This is where trusts have a clear edge:

• A trust can distribute different amounts to different beneficiaries each year based on what makes sense from a tax perspective. Got a spouse who’s had a low-income year? Distribute more to them. Adult child studying with no income? Consider distributing to them (subject to the ATO’s rules on distributions to under-18s and the Section 100A integrity rules).
• A company can only pay dividends in proportion to shareholding. If you own 70% and your spouse owns 30%, dividends must be paid in that ratio. You cannot pay your spouse more just because it’s tax-effective this year.

The flexibility of a trust is genuinely powerful — but it must be exercised carefully and with proper documentation. Missing the 30 June resolution deadline, for instance, results in all trust income being taxed at 47%.

When a Company Wins

A company structure tends to be the better choice when:

• You need to retain profits in the business long-term — paying 25–30% company tax while reinvesting is far better than paying 47% personally
• You’re operating in an industry where a trust is not appropriate or creates complications (some professional services like law require specific structures)
• You want certainty of ownership — shares are clearly defined and easily transferred, making companies cleaner for equity arrangements with co-founders, investors, or key employees
• You’re planning to bring on outside investors, who expect a corporate structure
• You want to take advantage of the small business CGT concessions on sale of a business — these can be accessed through a company structure as well as a trust

When a Trust Wins

A trust tends to be the better choice when:

• You have a family group with varying income levels and want to split income tax-effectively each year
• You want maximum asset protection and don’t need outside investors
• You’re holding investment assets (property, shares) that you expect to sell eventually — the 50% CGT discount flows through to individual beneficiaries from a trust, not from a company
• You want flexibility to adapt distributions year to year
• You’re in the startup or growth phase of a business and not yet retaining significant profits

Using Both Together: The Trust + Bucket Company Structure

The most tax-effective structure for many successful Australian business owners is actually a family trust combined with a bucket company. Here’s how it works:

Larger groups often add a third layer, a holding company sitting between the trading company and the trust, so accumulated profits are held outside the entity that carries the trading risk.

• The business operates through (or under) a family trust
• The trustee distributes income to beneficiaries in lower tax brackets first
• Any excess income (that would otherwise be taxed at 47% in the hands of a high-income beneficiary) is instead distributed to the bucket company
• The bucket company pays company tax at 25–30% on that income
• Profits accumulate in the bucket company, ready to be invested or eventually paid out as dividends

This structure can dramatically reduce the overall tax paid on business profits. For example, a $100,000 distribution to a high-income beneficiary at 47% costs $47,000 in tax. The same $100,000 distributed to a bucket company at 25%, which is the rate that applies where the company is a base rate entity, costs only $25,000 — a saving of $22,000 on a single year’s distribution. Explore comprehensive tax planning strategies here.

How Pinnacle Approaches This With New Business Owners

When a new business owner comes to Pinnacle — whether they’re just starting out or have been operating for years under a suboptimal structure — we take a holistic view of their situation before making any recommendations.

We look at: current income and projected growth, family situation (spouse income, adult children), the nature of the business (professional services, trading, investment), plans for eventual sale or exit, and risk profile. From there, we model the tax outcomes under different structure scenarios so you can see clearly what each option actually means in dollar terms.

Many business owners come to us having never had this conversation with their previous accountant. That’s a missed opportunity we’re committed to fixing. Structure is not set-and-forget — as your business grows and your personal circumstances change, your structure should evolve with you.

Ready to review your structure? Get in touch with Pinnacle today. For a broader look at all structure options available to Australian business owners — including sole trader and partnership — read our complete business structures guide, or explore our dedicated business structuring services. You can also read about the different classes of shares a company can issue.

Frequently Asked Questions

Can I change from a trust to a company later?

Yes, but restructuring has tax consequences — it can trigger CGT on assets transferred and, in some states, stamp duty. The ATO does provide some restructure concessions under Division 122 of the ITAA 1997, but these are complex. It’s much better to get the structure right from the start, which is why upfront structural advice is so valuable.

Is a trust better than a company for tax?

It depends entirely on your circumstances. A trust offers more flexibility for income splitting across a family group. A company is better for profit retention at lower rates. The best outcome often comes from using both — a family trust distributing to a bucket company. Speak to Mina to model the right approach for your situation.

Do trusts pay company tax?

No. A trust distributes its income to beneficiaries, who pay tax at their own rates. If income is not distributed, the trustee pays tax at 47% — which is why annual trustee resolutions are critical. A corporate beneficiary (bucket company) will pay company tax on its share of trust income.

What are the compliance costs of a trust vs a company?

Both have compliance obligations. A company must file an annual tax return, maintain proper financial records, and meet ASIC obligations. A trust must file an annual tax return and, critically, pass trustee resolutions by 30 June each year. If you use a corporate trustee, you have the ongoing ASIC obligations of that company as well. Your accountant can manage all of this for you.

Can a trust and company be used together?

Absolutely — and for many business owners, this is the optimal structure. A family trust distributes income to a corporate beneficiary (bucket company) to cap the tax rate at 25–30%, rather than letting excess income hit a high-income individual at 47%. This is a well-established and ATO-compliant strategy when properly implemented.

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This article contains general advice only and does not take into account your specific circumstances. Please speak with a qualified accountant or tax adviser before making financial decisions.

Frequently Asked Questions

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