Commercial lawyers are among Australia’s highest-earning professionals — and among the most likely to be operating under a structure that doesn’t reflect the complexity of their financial position. The tax landscape for law firm principals is genuinely unique: a combination of personal services income considerations, professional liability management, variable fee income, and the specific rules governing incorporated legal practices in each state.
The Tax Position of Law Firm Partners and Principals
Most commercial lawyers in private practice receive income through:
- Partnership distributions: Share of partnership profits, taxed at personal marginal rates
- Director’s salary plus dividends: In an incorporated practice, salary (deductible to the company) plus dividends from retained profits
- Trust distributions: Where a service trust arrangement is in place, income flows through the trust to beneficiaries
- Contracting income: Some lawyers operate as consultants billing directly under their own ABN
The key tax challenge for high-earning solicitors is that income is concentrated — typically in one person — and the personal services income (PSI) rules may limit the ability to split that income through a company or trust. Whether PSI applies is a fact-specific analysis that must be done properly before any structuring decision.
Practice Structure: Incorporated Legal Practices
In most Australian states, solicitors can operate through an incorporated legal practice (ILP) — a company structure approved by the relevant legal services regulator. Operating through an ILP allows you to retain profits at the 25–30% corporate rate rather than the 47% personal rate, and provides limited liability for shareholders — though professional indemnity insurance requirements remain regardless of structure.
Trust Distributions for Legal Professionals
Where PSI does not apply, a service trust arrangement can be powerful. The trust provides administrative services to the ILP or partnership, charges a commercially reasonable service fee, and distributes the fee income to beneficiaries in lower tax brackets — a spouse, adult children, or a bucket company.
The ATO applies the same PSI and Section 100A tests to professional service trust arrangements. The service fee must be genuinely commercial and reflect actual services provided. Learn more about tax planning strategies here.
Professional Liability and Asset Protection
Solicitors face meaningful professional liability exposure — negligence claims, conflicts of interest, trust account issues. Key principles:
- Personal assets held in a family trust or corporate structure are better protected from professional negligence claims
- Assets accumulated in superannuation are generally protected from creditors in bankruptcy
- A holding company structure — separating your accumulated wealth from any operating company — provides additional protection
Superannuation for High-Earning Solicitors
- The concessional contributions cap is $30,000 per year for 2026–27 — maximise this every year
- Division 293 tax applies at income above $250,000 — contributions taxed at 30% rather than 15%, still far below 47%
- Catch-up contributions may be available if your super balance was under $500,000 at 30 June of the prior year
- Super is particularly valuable for legal professionals because assets inside super are generally beyond the reach of creditors in bankruptcy
Income Variability and Planning Ahead
Fee income can fluctuate significantly year to year — a particularly good year may be followed by a slower one. In high-income years, maximise concessional contributions (including catch-up amounts) and prepay deductible expenses. If you have a bucket company, its accumulated funds can smooth your personal income — take dividends in years when your personal income is lower.
How Pinnacle Approaches This With Legal Professionals
When a commercial lawyer or law firm principal comes to Pinnacle, the first conversation is about the full picture: income streams, current structure, family situation, professional obligations, asset position, and goals. We understand the regulatory environment for legal professionals and work within it — we don’t recommend structures that conflict with Law Society requirements.
If you’re a solicitor or law firm principal who isn’t confident your current structure is optimal, contact Pinnacle today for a confidential review.
Frequently Asked Questions
Do PSI rules prevent me from using a trust as a commercial lawyer?
It depends. PSI applies if more than 50% of your income comes from your personal services — typically the case for lawyers. However, PSI does not prevent using a service trust for genuine services (administration, facilities, support). Whether PSI applies to your situation requires a specific PSI analysis.
Can I operate through a company as a solicitor?
Yes — most Australian states permit incorporated legal practices (ILPs). You must comply with your state’s regulatory requirements, including professional indemnity insurance and having a qualified legal practitioner director.
What are the tax benefits of an incorporated legal practice?
The primary benefit is the corporate tax rate of 25–30% on retained profits, compared to the personal rate of up to 47%. Additionally, the corporate structure provides limited liability and a cleaner foundation for any future sale of the practice.
Can I claim my continuing legal education (CLE) as a tax deduction?
Yes. CLE expenses — courses, conferences, Law Society memberships, and legal publications — are deductible to the extent they are directly related to your current practice, not to qualifying for a new area of practice.
Ready to do Business with Us?
Join the Melbourne business owners who work with a CPA and Chartered Tax Advisor, so you can focus on growing your business while we take care of the numbers.