Sell a business, an investment property, or a parcel of shares for more than you paid, and the profit is not simply yours to keep. A slice belongs to the Australian Taxation Office as capital gains tax (CGT), and for a lot of business owners, it is the single largest tax bill they will ever face.

The good news is that CGT is one of the most manageable taxes there is, provided you understand how it works before you sell. The difference between planning ahead and reacting after the sale can be tens, sometimes hundreds, of thousands of dollars.

This guide explains, in plain English, what capital gains tax is, how it is calculated, and the legitimate ways Australian business owners reduce it.

What is capital gains tax?

Capital gains tax is the tax you pay on the profit made when you dispose of an asset. It is not a separate tax with its own rate; your net capital gain is added to your assessable income for the year and taxed at your marginal rate.

A “disposal” is broader than a sale. It includes selling, gifting, or transferring an asset, and it usually happens on the date of the contract, not the date settlement money lands in your account. That timing point alone catches people out every June.

CGT applies to assets acquired after 20 September 1985, which covers almost everything relevant today: investment properties, shares, business goodwill, cryptocurrency, and units in trusts. Your main residence and personal-use assets such as your car are generally exempt.

How is capital gains tax calculated?

At its simplest, your capital gain is the difference between what you received for the asset and what it cost you:

• Capital proceeds: what you sold the asset for (or its market value if you gave it away).
• Cost base: what you paid, plus buying and selling costs such as stamp duty, legal fees, agent commission, and certain holding costs.

Capital proceeds minus cost base equals your capital gain. If the cost base is higher than the proceeds, you have a capital loss instead, which can’t reduce your ordinary income, but can be offset against other capital gains now or carried forward to future years.

Here is a simple example. Say you bought an investment property for $600,000, spent $40,000 on stamp duty and purchase costs, and later sold it for $900,000 after $20,000 in selling costs. Your cost base is $660,000 and your capital proceeds are $880,000, giving a capital gain of $220,000. That $220,000 is what CGT is applied to, before any discount or concession.

The 50% CGT discount

This is the most valuable CGT rule most people know about, and the one that rewards patience. If you are an individual or a trust and you have owned the asset for at least 12 months before selling, you generally only pay tax on half of the capital gain.

In the example above, holding the property for more than a year reduces the taxable gain from $220,000 to $110,000. That $110,000 is then added to your income and taxed at your marginal rate.

One important catch: companies do not get the 50% discount. A company selling the same asset would be taxed on the full $220,000. This is one of many reasons the structure that owns an asset matters enormously, and why the right structure needs to be in place well before you sell, not scrambled together afterwards. Our guide on company versus trust structures explains the trade-offs in detail.

The small business CGT concessions

For business owners, this is where the real money is. On top of the 50% discount, the tax law provides four small business CGT concessions that can reduce, and in some cases completely eliminate, the tax on the sale of an active business asset:

• The 15-year exemption: sell an asset you have owned for 15 years and, if you are over 55 and retiring, the entire gain can be tax-free. We cover this in our 15-year exemption guide.
• The 50% active asset reduction: a further 50% reduction on an active business asset, on top of the general discount.
• The retirement exemption: up to $500,000 of gains exempt over your lifetime; see our retirement exemption explainer.
• The rollover: defer the gain by rolling it into a replacement active asset.

These concessions have strict eligibility tests: the maximum net asset value test, the active asset test, and the significant individual test among them. Get the conditions right and the saving is life-changing. Get them wrong and you can lose access to all of it. Our full breakdown of the four small business CGT concessions walks through each test.

Capital gains tax on property and shares

The same framework applies to investment properties and share portfolios. Two points are worth flagging for property investors in particular.

First, the main residence exemption can make the home you live in fully CGT-free, but it can be partial if you have rented the property out or used part of it to run a business. Second, any capital works and depreciation you have claimed over the years generally reduces your cost base, which increases the gain on sale. Investors are often surprised by this, so it pays to model the numbers before listing.

For a broader look at how property is taxed, see our guide on negative gearing in Australia, and our perspective on whether a property capital gain is real wealth or just inflation.

How to legally reduce your capital gains tax

There is no single trick: reducing CGT is about stacking legitimate rules in the right order. The levers we most often use with clients include:

• Timing the sale. Holding an asset past the 12-month mark unlocks the 50% discount. Choosing the financial year of sale can also matter if your income differs year to year.
• Owning the asset in the right structure. Individuals and trusts access the discount; companies do not. The ownership decision is made at purchase, not sale.
• Using capital losses. Crystallising an unrelated loss in the same year can offset the gain.
• Making super contributions. Concessional contributions can reduce assessable income in a high-gain year, within the caps.
• Applying the small business concessions. For active business assets, these are the heaviest lever of all.

Every one of these depends on your circumstances and, critically, on decisions made before you sell. This is exactly the kind of planning a proactive advisor should be raising with you well ahead of a sale, not explaining after the return is lodged. You can read the official rules on the ATO’s capital gains tax pages.

Frequently Asked Questions

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A holding company is a company that owns assets or shares in other companies (its operating subsidiaries) rather than trading itself. In Australia it is used to separate valuable assets from trading risk, access the inter-company dividend rules, and build a tax-effective structure for asset protection and long-term wealth.

This guide is part of our complete guide to business structures in Australia.

If your business is growing and accumulating assets — intellectual property, equipment, investment funds, or even property — operating everything through a single trading company is a risk you can’t afford to ignore. A holding company structure is one of the most effective ways Australian business owners separate their valuable assets from their trading risks, and yet many don’t implement it until after something goes wrong. In this post, I’ll explain what a holding company is, how it works, and whether you need one.

What Is a Holding Company?

A holding company (also called a “holdco”) is a company whose primary purpose is to own assets or shares rather than to operate a business directly. It sits above the trading entity in the corporate structure, owning shares in the operating company (the entity that employs people, contracts with clients, and carries on the day-to-day business).

For example, a simple holding company structure might look like this:

• You and your spouse own shares in ABC Holdings Pty Ltd
• ABC Holdings Pty Ltd owns 100% of the shares in ABC Operations Pty Ltd
• ABC Operations Pty Ltd runs the actual business — employing staff, signing contracts, and generating profit

The holding company may also own other assets directly — investment property, a share portfolio, or intellectual property licensed to the operating company.

Why Business Owners Set Up a Holding Company

There are several compelling reasons:

• Asset protection: The operating company carries all the risk — employment disputes, contract claims, professional liability, product liability. If something goes wrong in the operating company, the assets held in the holding company are generally protected from the operating company’s creditors.
• Profit retention: Profits from the operating company can be paid as unfranked or franked dividends up to the holding company, where they accumulate and can be reinvested. This allows profits to leave the operating company (reducing exposure there) while remaining within the family group at the corporate tax rate.
• Staged asset protection: As the operating company makes profits, those profits can be regularly “swept” to the holding company rather than left sitting in the operating company where they’re at risk.
• IP ownership: Intellectual property — brands, software, customer databases, proprietary processes — is valuable. Placing it in a holding company (licensed to the operating company) means that if the operating company fails, the IP survives and can be used in a new entity.

Asset Protection: Separating IP and Assets

This is the core function of a holding company for many business owners. Imagine you run a successful business with $500,000 of accumulated cash in your operating company, plus $300,000 of proprietary software you’ve developed. If the operating company is sued and loses, both the cash and the software could be at risk.

Under a holding company structure:

• The software is owned by the holding company and licensed to the operating company for a commercial royalty — royalties paid to the holdco are deductible for the operating company and taxed in the holding company
• Accumulated cash is paid as dividends from the operating company to the holding company, removing it from the reach of the operating company’s creditors
• A creditor of the operating company cannot access holding company assets

For businesses in professional services, construction, retail, or any field with litigation or insolvency risk, this separation is genuinely valuable.

Dividend Flow to a Holding Company

When a company pays a dividend to another Australian company that owns at least 10% of its shares, that dividend is generally received tax-free by the holding company under the intercorporate dividend rebate. The holding company doesn’t pay additional tax on the dividend income — avoiding double taxation at the corporate level.

This means profits can move from the operating company to the holding company without triggering additional tax — an enormous advantage for asset protection. The funds sit in the holding company, taxed once (at 25–30% in the operating company), and can be reinvested in shares, property, or other assets.

Eventually, when you want to extract the cash personally, you take dividends from the holding company — which come with franking credits reflecting the company tax already paid. If you’re on a marginal rate lower than the corporate tax rate, you’ll receive a refund of excess franking credits.

CGT and the 50% Discount Issue

One significant downside of a holding company structure is that companies do not get the 50% CGT discount. If the holding company sells an asset held for more than 12 months, it pays CGT on the full gain at 30% (or 25% for base rate entities). By contrast, an individual or trust would pay CGT on only 50% of the gain.

This is why the holding company structure is usually combined with a family trust for business owners who hold appreciating assets they plan to sell. The trust can access the 50% CGT discount; the company cannot. For assets intended to be held long-term and generating income rather than growth (like investment property), the holding company can work well. For assets expected to appreciate significantly and be sold, a trust structure is generally preferable.

The small business CGT concessions may also apply to shares in an operating company sold by the holding company, subject to meeting the active asset test and other conditions. This is a complex area requiring specific advice.

When Does a Holding Company Make Sense?

A holding company structure tends to make sense when:

• Your business is generating significant profits ($200,000+) that you want to retain and reinvest
• You have valuable assets — IP, equipment, property — that you want to protect from trading risk
• You’re operating in an industry with meaningful liability exposure
• You want a clean corporate structure for future investor discussions or a business sale
• You’re building a multi-entity group and need a clean governance structure

It may not make sense when your business is small and the complexity and cost of maintaining multiple entities isn’t justified by the protection or tax benefits. Speak to Mina about whether the numbers stack up for your situation.

Cost vs Benefit Analysis

Running a holding company adds complexity and cost:

• ASIC annual review fee for the additional company
• Preparation of a separate company tax return each year
• Maintaining separate financial records for the holding company
• Legal advice on structuring the dividend flows and any IP licences

Against these costs, weigh: the value of the assets at risk, the probability of a claim or failure in the operating company, the tax efficiency of accumulating profits at the corporate rate, and the long-term benefit of a clean, scalable corporate structure.

For many business owners generating strong profits, the cost is modest relative to the protection and tax benefits. For smaller operators, a simpler structure (company or trust without a holdco) may be more appropriate until the business grows.

How Pinnacle Approaches This With Business Owners

When clients come to us with growing businesses — typically $1 million or more in revenue, or $200,000+ in accumulated assets — we always discuss whether a holding company structure is appropriate. We model the numbers, explain the asset protection implications, and help you decide whether the structure is right for your stage of business. Getting the structure right before you need it is exactly what our business advisory in Melbourne is built to do.

If we recommend implementing a holding company, we manage the entire process — company incorporation, advice on the share structure, dividend payment strategy, and integration with any existing trust structures. We also advise on the Division 7A implications of any loans between entities in the group. Read our guide to Division 7A here.

Structure is not permanent — as your business evolves, we review it with you and recommend updates. Contact Pinnacle today to discuss whether a holding company is the right next step for your business. You can also explore our tax planning services here.

Frequently Asked Questions

What is the difference between a holding company and an operating company?

An operating company (opco) runs the actual business — it employs staff, contracts with clients, and generates revenue. A holding company (holdco) owns assets — typically shares in the operating company, plus other valuable assets like IP or investments. The operating company carries the day-to-day risk; the holding company holds the value.

Does a holding company pay tax?

Yes. A holding company is a regular private company and pays tax on its taxable income at 25% (base rate entity) or 30%. Dividends received from other Australian companies (where the holding company owns 10%+) are generally tax-free under the intercorporate dividend rebate, but other income (rent, interest, royalties) is taxed normally.

Can a family trust be used instead of a holding company?

Yes, and often a family trust is used instead of or alongside a holding company. Trusts offer the 50% CGT discount that companies don’t, plus income splitting flexibility. However, trusts are more complex to administer and don’t offer the same clean corporate structure for investor or buyer discussions. Many business owners use both — a trust at the top (for asset protection and income splitting) feeding into a company structure at the operating level.

Is a holding company the same as a parent company?

In practice, yes. “Parent company” and “holding company” are often used interchangeably in Australia for private business structures. In a legal and accounting context, a parent company is any company that controls another (subsidiary) company, typically through majority shareholding.

Can I transfer assets into a holding company without paying CGT?

Not generally without specific relief. Transferring assets between entities typically triggers CGT (and potentially stamp duty). There are some corporate restructure relief provisions under Subdivision 122-A of the ITAA 1997 that can defer CGT in certain circumstances, but these are complex and require professional advice. This is why getting the structure right from the start is so much better than restructuring later.

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Frequently Asked Questions

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For the last few years the ATO played the patient creditor. During and after the pandemic it paused a lot of active debt collection, let interest quietly accrue, and gave businesses room to recover. That period is over. The ATO has been clear that it is returning to firmer, faster action, and with collectable tax debt now past $50 billion, small business is squarely in its sights.

If your business is behind on GST, PAYG withholding, or super, the risk in 2026 is not a polite reminder letter. It is a Director Penalty Notice that makes you personally liable, your debt disclosed to credit reporting bureaus, or a garnishee that pulls money straight out of your bank account. I am Mina Baselyous, CPA and Chartered Tax Adviser at Pinnacle Accounting & Advisory, and this is what every Melbourne business owner needs to understand right now.

Why the leniency is ending

The numbers tell the story. Collectable tax debt has climbed past $50 billion, and the ATO has openly said it can no longer treat unpaid tax as an interest-free loan. It has also flagged that the days of passive collection are done: businesses that do not engage, particularly on unpaid GST, PAYG withholding, or employee super, should expect it to move more quickly to firmer action.

This is not a threat aimed only at businesses that ignore the ATO entirely. The support is still there for those who ask for it: as at the end of June 2025 the ATO had more than 655,000 payment plans in place covering roughly $11.7 billion of debt. The dividing line is engagement. Engage and there are options. Go quiet and the tools below come out.

What firmer action actually looks like now

Director Penalty Notices

A Director Penalty Notice (DPN) makes a company director personally liable for the company’s unpaid PAYG withholding, GST, and super guarantee charge. It cuts straight through the corporate veil, and the ATO has ramped up how often it issues them. If you receive one, you generally have just 21 days from the date on the notice to act, and whether you have any escape route at all depends on whether the company lodged its BAS and statements on time. For the full mechanics, including the critical difference between a lockdown and a non-lockdown DPN, read our detailed guide on the ATO Director Penalty Notice and what every director must know.

Disclosure of business tax debts to credit bureaus

This is the tool many owners have not heard of, and it can be the most damaging. The ATO can report your business tax debt to credit reporting bureaus where you have an ABN, you owe $100,000 or more that is overdue by more than 90 days, and you are not engaging with the ATO to manage it. Before it reports, the ATO issues an intent-to-disclose notice, and you have 28 days to pay or enter an appropriate payment arrangement to stop it. See the ATO’s guidance on the disclosure of business tax debts.

Once a debt lands on your credit file, the consequences are commercial and immediate. Your ability to obtain finance can dry up, and suppliers who credit-check you may tighten terms or walk away. For many businesses, losing access to finance is more dangerous than the tax debt itself.

Garnishee notices

A garnishee notice lets the ATO recover a debt by directing a third party who holds money for you, most often your bank, to pay it straight to the ATO. It can also be issued to customers who owe you money or to a merchant facility. The ATO generally uses garnishees when other attempts to resolve the debt have failed, but for a business already tight on cash, having funds redirected without warning can be the tipping point.

The interest sting: carrying an ATO debt just got more expensive

Even if the ATO takes no direct action, the cost of sitting on a debt has jumped. The general interest charge (GIC) is set each quarter, currently sits above 11 per cent a year, and compounds daily. That alone makes an unpaid tax debt one of the most expensive forms of finance a business can carry.

The bigger change is that the deduction is gone. From 1 July 2025, GIC and shortfall interest charge (SIC) are no longer tax deductible, regardless of which income year the underlying debt relates to. Previously you could at least claim the interest as a deduction, softening the blow. Now you pay the full, compounding cost with no tax offset, which makes leaving an ATO debt to accrue a far worse decision than it was even a year ago.

Payment plans and why engaging early matters

The single most important thing you can do is engage before the ATO escalates. A payment plan is still available to most businesses that cannot pay in full, and entering one is often enough to stop a debt being disclosed to credit bureaus and to keep firmer action off the table. The catch is that engagement has to happen before, not after, the ATO acts. A director who negotiates a plan the week a debt falls due is in a completely different position to one who waits for a Director Penalty Notice to arrive.

Proactive cash flow management is what keeps you out of this territory in the first place. Our Virtual CFO service monitors your ATO position and cash flow through the year, so tax obligations are planned for rather than discovered when the money is not there.

Watch: the ATO is coming after directors in 2026

Prefer to watch rather than read? Mina explains how Director Penalty Notices work and what directors must do to protect themselves in this BusiHealth episode:

What business owners must do now

• Lodge everything on time, even if you cannot pay. Lodging on time is what keeps a DPN in the non-lockdown category where you still have options.
• Never treat PAYG withholding or super as working capital. These are the obligations the ATO pursues hardest, because the money was never yours.
• If a debt is building, engage first. Contact the ATO or your adviser and get a payment plan in place before the debt is disclosed or a notice is issued.
• Watch the $100,000 line. If your business tax debt is heading toward $100,000 and ageing past 90 days, act before the disclosure rules bite.
• Get advice the moment cash flow tightens, not when the notice arrives. Early intervention gives you the most options and the lowest cost.

Frequently Asked Questions

Is the ATO really chasing tax debts harder in 2026?

Yes. After pausing much of its active debt collection during the pandemic, the ATO has returned to firmer, faster action as collectable tax debt passed $50 billion. It has said businesses that do not engage, especially on GST, PAYG withholding, and super, can expect quicker use of Director Penalty Notices, garnishees, and debt disclosure.

When can the ATO report my business tax debt to credit bureaus?

The ATO can disclose a business tax debt to credit reporting bureaus if you have an ABN, you owe $100,000 or more overdue by more than 90 days, and you are not engaging to manage the debt. It first issues an intent-to-disclose notice, and you have 28 days to pay or enter a payment arrangement to prevent the disclosure.

Is interest on ATO debt still tax deductible?

No. From 1 July 2025, the general interest charge and shortfall interest charge are no longer tax deductible, regardless of which income year the debt relates to. The GIC also compounds daily and is currently above 11 per cent a year, so carrying an ATO debt is now significantly more expensive than it used to be.

Can I still get a payment plan with the ATO?

Yes. Payment plans remain available to most businesses that cannot pay in full, and the ATO had more than 655,000 in place as at June 2025. Entering an appropriate payment arrangement is often enough to stop a debt being disclosed to credit bureaus and to keep firmer action off the table, provided you act before the ATO escalates.

What should I do if I have already received a notice from the ATO?

Act immediately and get advice the same day. Deadlines are strict: a Director Penalty Notice generally gives you only 21 days from the date on the notice, and an intent-to-disclose notice gives you 28 days. Do not ignore it, and do not assume a second reminder is coming. The earlier you engage, the more options you have.

Frequently Asked Questions

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The profit and loss report in Xero shows your business income, expenses and profit over a chosen period. You can run it from the Reports menu, compare periods, drill into any figure, and customise the layout. It is one of the most useful reports for understanding whether your business is actually making money.

You open your Xero profit and loss report, look at the numbers, and feel… roughly nothing. Revenue looks okay. Expenses look higher than you’d like. Net profit is there at the bottom. But what does any of it actually mean — and what should you be doing differently because of it?

This is the situation for most small business owners. They have access to a Xero profit and loss report but no real framework for interpreting it. The numbers exist. The insight doesn’t. This guide changes that.

We’re going to walk through what a P&L report actually contains, how to read each section, which numbers matter most, and how to turn your P&L from a passive record into an active decision-making tool.

What Is a Profit and Loss Report?

A profit and loss report — also called an income statement — shows how much money your business earned and spent over a specific period, and whether you ended up with a profit or a loss. It covers a period of time (a month, a quarter, a financial year) rather than a point in time, which is what distinguishes it from a balance sheet.

The P&L answers one fundamental question: is your business making money? But read properly, it answers a much more useful set of questions: where is the money coming from, where is it going, what are your margins, and are your costs under control?

For Australian business owners, your P&L is also the source document for your income tax return. The net profit figure flows through to your tax return — which means errors in your P&L create errors in your tax obligations. The ATO’s guidance on business income and deductions makes clear that your financial records need to support every figure reported. A P&L that’s coded correctly gives you the evidence trail the ATO expects.

How to Run Your P&L Report in Xero

Running a profit and loss report in Xero takes less than a minute. In the top navigation, go to Accounting, then Reports, and select Profit and Loss. From there, you can set your date range, choose your comparison period (prior month, prior year, or budget), and decide whether to show figures including or excluding GST.

A few settings worth knowing:

• Date range — always check which period you’re looking at. It’s easy to accidentally run a report for the current month when you mean to look at the full financial year.
• Cash vs accrual — Xero lets you toggle between cash basis (transactions recorded when money moves) and accrual basis (transactions recorded when they’re earned or incurred). Accrual gives a more accurate picture of business performance. Cash basis shows your actual cash position. Know which you’re looking at.
• Comparison columns — adding a prior year or prior period column transforms a single P&L into a trend analysis tool. This is where real insights start to emerge.
• Budget variance — if you’ve loaded a budget into Xero, you can compare actuals against budget. This is one of the most powerful things you can do with your P&L.

If you’re working with a bookkeeper, they should be running and reviewing your P&L regularly — typically monthly — and flagging anything that looks unusual before you see it.

Understanding Each Section of Your Xero P&L

Your profit and loss report has a consistent structure. Here’s what each section means and what you should be looking for.

Revenue

Revenue (sometimes called Income or Trading Income) shows everything your business earned during the period. If your Xero chart of accounts has multiple revenue accounts, each will show as a separate line — which lets you see which income streams are growing, which are flat, and which are declining.

Questions to ask here: Is total revenue up or down on the prior period? Which income streams are driving growth? Is the revenue mix shifting in a way that affects your overall margins?

Cost of Sales

Cost of Sales (also called Cost of Goods Sold or COGS) captures the direct costs of producing your product or delivering your service. For a trade business, this might be materials and subcontractor costs. For a product business, it’s the cost of the goods you sell. For some service businesses, it might include direct labour.

Not all businesses have a Cost of Sales section — pure service businesses with no direct variable costs may not use it. But if your business does have direct costs, separating them from operating expenses here is important. It’s what allows you to calculate gross profit.

Gross Profit

Gross profit is Revenue minus Cost of Sales. It represents how much money your business makes from its core activity before you account for the overhead costs of running the business. This is one of the most important numbers on your P&L, and we’ll come back to it when we look at margins.

Operating Expenses

Operating expenses are the costs of running the business that aren’t directly tied to production or delivery. Rent, wages (if not already in Cost of Sales), marketing, insurance, software subscriptions, accounting fees, utilities — these all appear here.

This is where most of the detail lives on a typical P&L, and where you’ll spend most of your analysis time. Look for line items that are unusually high compared to prior periods, expenses that are growing faster than revenue, and costs that you’ve lost track of.

Net Profit

Net profit is what’s left after you subtract all expenses (both cost of sales and operating expenses) from revenue. This is the bottom line — but it’s not the only number that matters. Net profit can be positive while your business is in trouble (if, for example, it’s declining rapidly), and it can look deceptively healthy if it includes one-off gains.

Always look at net profit in context: compared to the prior period, compared to budget, and as a percentage of revenue.

The Two Numbers That Matter Most: Gross Margin and Net Profit Margin

Most business owners focus on absolute figures — “we made $80,000 profit this quarter.” But the most useful way to read a P&L is through margins — profit expressed as a percentage of revenue. Margins let you compare performance across periods, across businesses of different sizes, and against industry benchmarks.

Gross Margin

Gross margin = (Gross Profit ÷ Revenue) × 100

If your revenue is $500,000 and your cost of sales is $300,000, your gross profit is $200,000 and your gross margin is 40%.

Your gross margin tells you how efficiently you’re generating profit from your core activity. A declining gross margin is a serious signal — it means either your costs are rising faster than your prices, your pricing is too low, or the mix of your sales is shifting toward lower-margin products or services.

Gross margin also varies significantly by industry, which is why comparing your margin to industry benchmarks matters. A 30% gross margin is exceptional for a food business but concerning for a professional services firm.

Net Profit Margin

Net profit margin = (Net Profit ÷ Revenue) × 100

Net profit margin tells you what percentage of every dollar of revenue you’re actually keeping as profit after all costs. A 10% net profit margin means for every $100 of revenue, you’re keeping $10.

Low net profit margins leave no room for error — an unexpected cost, a slow month, or a client who doesn’t pay can move you from profit to loss quickly. Understanding your net margin helps you determine how much pricing flexibility you have and how resilient your business is to shocks.

If you want to go deeper on what your margins mean for your business strategy, management accounting is the discipline that turns these numbers into actionable decisions.

Common P&L Mistakes in Xero That Distort Your Numbers

A P&L is only as accurate as the data behind it. These are the most common mistakes that cause Xero P&L reports to produce misleading figures.

Incorrect tax coding

If GST tax codes are applied incorrectly in Xero, your revenue and expense figures on the P&L may be distorted. For example, if a GST-exclusive transaction is coded as GST-inclusive, the revenue figure Xero reports will be understated. Correct tax coding is fundamental — it affects your P&L, your BAS, and your tax return simultaneously.

Personal expenses coded to business accounts

Any personal expense that ends up in your Xero file inflates your operating expenses and reduces your net profit. Worse, it may be claimed as a business deduction when it shouldn’t be. This is a common ATO audit trigger. Keep personal and business expenses completely separate.

Transactions sitting in suspense or unreconciled

Unreconciled bank transactions or transactions sitting in a clearing account distort every section of your P&L. Your revenue may be understated because income hasn’t been allocated, or your expenses may be double-counted. Regular bank reconciliation — ideally weekly — prevents this from building up.

Owner wages coded incorrectly

How you pay yourself matters for your P&L. Sole trader drawings are not an expense and shouldn’t appear in your P&L as one. Director fees for a company are an expense. Getting this wrong distorts your net profit figure and can cause tax errors. If you’re unsure how your drawings or salary should be structured in Xero, your Xero accountant in Melbourne can advise you.

Accrual vs cash confusion

Running your P&L on cash basis when your business operates on accrual (or vice versa) can make your results look very different from reality. If you invoice clients on 30-day terms, a cash basis P&L in a slow collection month will significantly understate your actual revenue. Understand which basis you’re using and be consistent.

How to Use Your P&L to Make Better Decisions

A P&L read passively is wasted. Here’s how to turn it into a decision-making tool.

• Run it monthly, not just annually — annual P&Ls show you what happened. Monthly P&Ls help you respond in time to do something about it.
• Compare to the prior period and prior year — trends matter more than single-period snapshots. Is revenue growing? Are margins holding? Are any expense categories blowing out?
• Set a budget and track variance — without a budget, your P&L tells you what happened but not whether it was good or bad. With a budget loaded into Xero, you can see exactly where you’re over or under — and investigate why.
• Interrogate any line that moves significantly — a cost that was $2,000 last month and $8,000 this month needs an explanation. Drill into that account in Xero to see the transactions behind it.
• Use gross margin to test pricing decisions — if you’re considering a price increase, you can model the gross margin impact before you implement it. If you’re taking on a new type of work, estimate what it would do to your margin.

How Your Accountant Reads Your P&L Differently

When Mina Baselyous and the Pinnacle team review a client’s P&L, we’re not just checking the bottom line. Here’s what a trained eye looks for that most business owners miss.

Ratio analysis. We look at every major expense category as a percentage of revenue — not just in dollars. Wages as a percentage of revenue. Rent as a percentage of revenue. Cost of goods as a percentage of revenue. When these ratios drift, something has changed in the business — and we want to understand what and why.

Comparison to industry benchmarks. We have reference points for typical margins and expense ratios across different industries. When a client’s figures are significantly outside those benchmarks — high or low — it prompts investigation. Sometimes it means the business is performing exceptionally. Sometimes it means something’s being coded incorrectly.

Tax planning signals. A P&L reviewed in May or June is a tax planning tool, not just a historical record. If net profit is coming in significantly higher than expected, there may be legitimate strategies to consider before 30 June. If it’s lower, we need to understand whether that’s a real business performance issue or a timing issue that will resolve itself.

Audit risk flags. Certain patterns in a P&L attract ATO attention — large deductions in specific categories, significant year-on-year fluctuations, or expense-to-revenue ratios that are unusual for the industry. Our management accounting service gives Melbourne business owners this level of ongoing insight.

Frequently Asked Questions

How often should I review my Xero profit and loss report?

At a minimum, monthly. Reviewing your P&L monthly gives you enough frequency to catch problems while there’s still time to act. For businesses in a growth phase, or businesses with tight margins, a fortnightly review is even better. Annual-only reviews are too infrequent to be useful as a management tool — by the time you see an annual P&L, you’ve lost 12 months of decision-making opportunity.

Why does my profit and loss look different on cash basis vs accrual basis?

Cash basis records revenue when payment is received and expenses when payment is made. Accrual basis records revenue when it’s earned (even if unpaid) and expenses when they’re incurred (even if not yet paid). If you have significant outstanding invoices or unpaid bills at the end of a period, the two methods will produce very different results. For most businesses, accrual basis gives a more accurate picture of economic performance, but cash basis can be useful for understanding your actual cash position.

My Xero P&L shows a profit, but I have no cash. What’s going on?

This is one of the most common — and most confusing — situations in small business finance. Profit and cash are not the same thing. You can show a profit on your P&L while having no cash if: your clients haven’t paid their invoices yet, you’ve paid for inventory or equipment that will be used over a longer period, you’ve made loan repayments (which reduce cash but aren’t always shown as an expense), or you’ve paid owner drawings (which don’t appear as an expense on your P&L). Understanding the difference between profit and cash flow is fundamental. Book a call with us if this is a challenge you’re facing — it’s something we can work through quickly.

Start Reading Your P&L Like It Matters — Because It Does

Your Xero profit and loss report contains more useful information about your business than almost any other document you have access to. But only if you read it correctly, regularly, and in context.

The businesses that grow consistently and weather difficult periods are the ones whose owners understand their numbers — not at a surface level, but deeply enough to make decisions based on them. That’s not a finance skill. It’s a business skill. And it’s one we help our clients develop.

If you want to start getting more from your Xero reports — or if you suspect your P&L isn’t as accurate as it should be — book a no-obligation consultation with Pinnacle Accounting & Advisory. Mina Baselyous and the team will review your Xero file and help you understand exactly what your numbers are telling you.

Frequently Asked Questions

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The ATO is no longer waiting until the end of the year to check your deductions. It is matching data in real time, comparing your claims against hundreds of external sources, and flagging anything that looks out of step before your return is even processed. For Melbourne business owners, the risk is not that your deductions are illegal. It is that the line between personal and business use is blurry, your records are thin, and the ATO now has the tools to notice.

This is the enforcement side of the story. Plenty of guides explain how to claim a car or a home office. This one explains what the ATO is actually targeting in 2026, which claims are most likely to trigger a review, and how to claim safely so a legitimate deduction does not turn into an adjustment, interest, and penalties. I am Mina Baselyous, CPA and Chartered Tax Adviser at Pinnacle Accounting & Advisory, and this is the area where I see good businesses caught out most often.

Why the ATO is escalating now

Two things have changed. First, collectable tax debt has climbed past $50 billion, with small business the largest contributor, so the ATO has every incentive to protect revenue. Second, its data-matching capability has expanded dramatically. The ATO now receives information from banks, share registries, state revenue offices, motor vehicle registries, insurers, payment platforms, and hundreds of other sources, then compares your return against businesses like yours.

The ATO has also become unusually public about what it is watching. Through its small business focus areas, it now shares specific risks each quarter, including making sure business income is not treated as personal, non-commercial business losses, and deductions where private use has not been properly excluded. When the regulator tells you where it is looking, ignoring it is a choice.

The three claims most likely to trigger scrutiny

Mixed personal and business use is the common thread running through almost every deduction the ATO adjusts. These three are where it happens most.

1. Motor vehicle and car claims

Cars are the single most adjusted category for sole traders and small businesses, because private use is almost always understated. The persistent myth is that signage or business ownership makes a vehicle fully deductible. It does not. You can only claim the business-use proportion, full stop.

For 2025-26 you have two methods. The cents per kilometre method is 88 cents per kilometre, capped at 5,000 work-related kilometres, and you must be able to explain how you worked out those kilometres. The logbook method lets you claim the actual business-use percentage of all running costs, but only if you keep a valid logbook for a continuous 12-week period plus odometer readings. Where a company or trust owns the car and a director uses it privately, fringe benefits tax is almost always in play. For the detail on both methods, see our guides on claiming motor vehicle expenses and the most common car deduction questions.

What triggers a review: a high business-use percentage with no logbook, a claim that mirrors the 5,000 kilometre cap suspiciously closely year after year, or vehicle costs that look large relative to reported income.

2. Working from home

Working from home claims exploded during the pandemic and the ATO has tightened the rules in response. For 2025-26 the fixed rate method is 70 cents per hour, and it covers energy, internet, phone, and stationery. The catch that catches people is the record. You must keep a record of the actual hours you worked from home across the entire year, such as a timesheet, roster, or diary. A reasonable estimate is no longer accepted, and if you cannot produce a contemporaneous record in a review, the claim is disallowed.

The second trap is double dipping: claiming phone and internet separately on top of the 70 cent rate, when those costs are already included in it. Both are exactly the kind of pattern the ATO’s data-matching is built to surface.

3. Mixed-use assets, money, and expenses

The broadest risk is any asset or expense that serves both the business and the owner. Phones, laptops, subscriptions, tools, and equipment used partly at home all have to be apportioned, and you can only deduct the taxable-purpose portion. The ATO is equally focused on the reverse problem: business income, or business assets and money, being used privately without being properly accounted for. Its stated focus includes ensuring business income is not misreported as personal, and that non-commercial or hobby-style losses are not offset against other income.

For a full picture of what is genuinely claimable versus what is not, our complete guide to small business tax deductions works through every major category.

How the ATO actually catches you

The old assumption was that unless you were unlucky enough to be randomly audited, aggressive claims would slip through. That assumption is dead. The ATO’s modern approach is data-first: your return is scored against benchmarks for your industry and turnover, and outliers are flagged automatically. If your deductions sit well above comparable businesses, or your reported income does not reconcile with the bank, platform, and third-party data the ATO already holds, you become a candidate for a review or a benchmark audit.

Real-time matching also means the timing has shifted. The ATO increasingly identifies discrepancies as returns are lodged rather than years later, which is why a clean, defensible position at lodgement now matters more than ever.

The substantiation the ATO expects

Every work-related deduction has to meet three golden rules: you must have spent the money yourself and not been reimbursed, the expense must directly relate to earning your income, and you must have a record to prove it. The record is where most claims fall down. In practice, the ATO expects you to hold:

• Receipts or invoices for each expense, generally kept for five years;
• A valid 12-week logbook plus odometer readings for the logbook car method;
• A contemporaneous record of hours worked from home for the whole year;
• A reasonable, documented basis for every apportionment between business and private use.

If you cannot show how you arrived at a percentage, the ATO’s position is that you have not substantiated it, and the deduction is at risk regardless of how genuine the underlying expense was.

How to claim safely in 2026

The goal is not to claim less. It is to claim everything you are entitled to in a way that survives scrutiny. Four habits get you there. Apportion honestly, so the private slice is genuinely carved out rather than rounded down to zero. Keep records as you go using a tool like a diary or the ATO app, not reconstructed in July. Match your claims to your reality, so a home office claim lines up with actual work-from-home days and a car claim lines up with a real logbook. And get a second set of eyes on the grey areas before you lodge, not after a review letter arrives.

This is exactly where proactive advice pays for itself. Our tax planning service reviews your position throughout the year, so legitimate deductions are captured and documented, and the risky ones are fixed before they become a problem.

Frequently Asked Questions

What deductions is the ATO targeting in 2026?

The ATO is focused on claims where personal and business use overlap: motor vehicle and car expenses, working from home, and mixed-use assets and expenses such as phones, laptops, and subscriptions. It is also watching for business income treated as personal and non-commercial losses. These are surfaced through expanded data-matching rather than random audits.

Can the ATO really see my claims in real time?

Increasingly, yes. The ATO receives data from banks, registries, insurers, state revenue offices, and payment platforms and matches it against your return, often as it is lodged. Returns are also scored against industry benchmarks, so claims that sit well outside the norm for your business type and turnover are automatically flagged for review.

What records do I need to claim a car for business?

For the cents per kilometre method (88 cents per kilometre for 2025-26, capped at 5,000 kilometres), you need a reasonable basis for your work kilometres. For the logbook method, you need a logbook covering a continuous 12-week period, odometer readings, and receipts for running costs. Without a logbook you cannot claim a business-use percentage above the cents per kilometre cap.

Is a working from home estimate still acceptable?

No. To use the 70 cent fixed rate method for 2025-26 you must keep a record of the actual hours you worked from home across the entire year, such as a timesheet, roster, or diary. A reasonable estimate is no longer accepted, and an unsupported claim will be disallowed in a review.

What happens if I get a deduction wrong?

If the ATO disallows a deduction, you repay the tax shortfall plus interest, and penalties can apply where it considers you failed to take reasonable care. Correcting a position proactively, before the ATO contacts you, generally leads to a far better outcome than waiting for a review. If you are unsure about a claim, it is worth getting advice before you lodge.

Frequently Asked Questions

Food and drink sits right on the personal versus business boundary. If you buy groceries that partly feed the office and partly feed your household, the split matters. See our guide to staff amenities versus entertainment for what is claimable and what is not.

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You lodged your income tax return expecting a refund. The number looked healthy, you had already earmarked what it would go towards, and then the money never arrived. Or a much smaller amount landed than you were told to expect. If that has happened to you, you have almost certainly run into ATO offsetting.

Offsetting is one of the least understood parts of how the ATO handles your money, and it catches business owners out constantly, especially those carrying a debt on another account or running a payment plan. As a Chartered Tax Advisor and CPA, I see it play out most often when a client assumes a refund is theirs to spend, only to discover the ATO has quietly applied it against a debt sitting somewhere else in their file.

Here is exactly how offsetting works, what it does when you are on a payment plan, and the decision I walk clients through whenever a credit lands on their account.

The ATO does not run one account, it runs several

The first thing to understand is that the ATO does not keep a single tally of what you owe or what you are owed. It keeps several separate running balance accounts, each with its own balance, and each dealing with a different type of obligation.

For most business owners, two accounts do the heavy lifting:

• The Income Tax Account. This is where your income tax sits, the tax on your business and personal income after your return is lodged and assessed.
• The Integrated Client Account (ICA). Sometimes called your activity statement account, this is where your GST, PAYG withholding, PAYG instalments and other business activity statement obligations are recorded.

Each account can be in credit (the ATO owes you) or in debit (you owe the ATO) at any given time. It is entirely possible to have a refund owing on one account while carrying a debt on the other, and that is precisely the situation where offsetting comes into play. If you want to understand the obligations that flow through the ICA, our guides on how PAYG instalments work and lodging your BAS are a good place to start.

What offsetting actually means

Offsetting is where the ATO uses a credit or refund sitting on one account to pay down a debt on another account. As the ATO explains it, offsetting is generally automatic, and it applies credits against your tax debts before any debts you might have with other government agencies.

In plain terms, if you are owed money on one account and you owe money on another, the ATO nets them off first and only pays you what is left. A couple of common examples:

• A GST refund sitting on your Integrated Client Account is applied against an income tax debt on your Income Tax Account.
• An income tax refund is applied against an outstanding GST or PAYG amount on your ICA.

Here is what that looks like in practice. Say your company is owed a $12,000 GST refund on its Integrated Client Account but still owes $8,000 in income tax. Rather than paying out the $12,000 and separately chasing the $8,000, the ATO applies the credit to the debt and refunds you the $4,000 difference.

This all happens before a cent reaches your bank account. The ATO can also offset a credit against a debt you have with another government department, such as Services Australia, and against debts it had previously placed on hold. You can read the full ATO explanation on its offsetting page.

The refund you were counting on may never hit your bank

This is the part that stings. You might be expecting a clean cash refund, only to receive a reduced amount or nothing at all, because the ATO has used it to reduce a debt elsewhere. The money was never wasted, it went towards a genuine liability, but if you had already mentally spent it on a purchase, a distribution or simply on cash flow, the surprise can be a real problem.

When the ATO does not have to offset

There is an important nuance here. The ATO is not always required to offset. It states that in certain circumstances it does not have to apply a credit against a debt, including where the amount owing is due but not yet payable, is subject to a payment arrangement you are complying with, is an amount recovery has been deferred on, or relates to director penalties.

Where one of those situations applies, the ATO may still choose to refund the full or partial amount if it considers it appropriate. It encourages you to contact it before or at the time of lodging if you think one of these applies to you. In practice this means the outcome is not always black and white, so it pays to know where you stand before you lodge rather than hoping for the best.

What offsetting looks like on your accounts

When an offset happens, it is not hidden. The amount moved from one account to another appears on the relevant statement of account, and the ATO will notify you about the offset. If your refund is used to pay an amount owed to another government department, that department will also let you know an amount has been paid on your behalf.

The catch is that most business owners only look at these statements after the money has already moved. By then the decision has been made for you. This is one of the many reasons accurate, up to date records matter: if you know your position across both accounts in advance, an offset is never a surprise.

How offsetting works when you are on a payment plan

This is where offsetting becomes genuinely costly if it is misunderstood, and it is the single point I most want business owners to take away from this article.

A credit does not replace your instalment

When you have a payment plan in place and a refund or credit is applied to reduce the debt, that is a good thing: the balance comes down faster. But the ATO is explicit that a credit applied through offsetting will not replace your required instalment payment. You must keep making the agreed payments, on schedule, until the balance reaches nil.

In other words, a credit landing on your account does not buy you a month off. The plan does not automatically shrink or pause because a credit has reduced the balance. If you assume it does and skip a payment, you are heading for trouble.

Income tax and activity statement accounts need separate plans

Because the ATO runs your income tax and activity statement obligations as separate accounts, they require separate payment plans. If you have overdue debts on more than one account, you either pay them in full or set up a separate arrangement for each. It is common for a business owner to believe one plan covers everything, then find a second account has fallen overdue and triggered firmer action.

Miss a payment and the plan can default

If you miss an agreed instalment, or you fail to keep your ongoing lodgements and new tax debts up to date, the payment plan can default. When a plan defaults, the full overdue balance becomes immediately payable and the ATO can move to firmer recovery action. For company directors, that can escalate to a director penalty notice, which makes you personally liable for certain company tax debts. A missed payment based on the false comfort that a credit had it covered is one of the more avoidable ways to end up there.

Should you change your payment plan when a credit lands?

This is the question clients ask me most, so let me share how I generally think about it. What follows is general guidance, not personal advice, but it is the framework I use.

Why I usually tell clients to keep paying

My default position is simple: do not vary or reduce your payment plan just because credits have been applied to the debt. If you can keep the payments going at the agreed level, do it. There are three good reasons.

• You clear the debt faster. The credit brings the balance down and your continued payments bring it down further, so you are debt free sooner.
• You pay less interest. Tax debts on a payment plan keep accruing the General Interest Charge, which compounds daily, so the quicker the balance falls, the less interest you hand over.
• You build goodwill and a buffer. A clean track record of meeting your arrangement matters if you ever need the ATO to work with you again, and clearing the debt early frees up cash flow for the things that actually grow your business.

If cash flow is genuinely tight

Sometimes keeping the payments going simply is not realistic. If cash flow is genuinely under pressure, you may be able to contact the ATO to cancel the existing plan and enter into a new arrangement with terms that suit your current position.

Be prepared, though: the ATO may ask for further information before agreeing to a new plan, such as financial statements and a budget or cash flow forecast showing what you can realistically afford. This is exactly the point where having your numbers in order pays off. A business with clean records and a credible forecast is in a far stronger position to negotiate than one scrambling to pull figures together. It is also where a Virtual CFO earns their keep, giving you the forward-looking numbers the ATO wants to see and the confidence to have the conversation.

Do not forget the General Interest Charge

One more reason to clear ATO debt quickly rather than let it sit: the General Interest Charge (GIC). GIC accrues on outstanding tax debts and compounds daily, so a debt that lingers costs you steadily more over time, even while you are on a payment plan.

There is also a significant change to be aware of. From 1 July 2025, the General Interest Charge is no longer tax deductible. Any GIC you incur on or after that date cannot be claimed as a deduction, even where the underlying debt relates to an earlier income year. That effectively makes carrying an ATO debt more expensive than it used to be, because you no longer get any tax benefit from the interest. You can read the detail on the ATO page covering denying deductions for ATO interest charges. For most business owners, this reinforces the same message: the sooner the debt is gone, the better.

The bottom line

Offsetting is not a penalty and it is not the ATO doing anything underhanded. It is simply how the system works: separate accounts, credits applied automatically against debts, and only the balance refunded to you. The problem is not the mechanism, it is being caught unaware by it, particularly if you were relying on a refund that never came or you assumed a credit had covered your next payment plan instalment.

The business owners who never get caught out are the ones who know their position across every ATO account before they lodge, keep their payment plans running on schedule, and have an advisor in the conversation before decisions are made rather than after. If you are carrying an ATO debt, expecting a refund, or thinking about how to structure your affairs to avoid these surprises in the first place, that is exactly the kind of proactive tax planning we do every day.

Why did I not get my tax refund from the ATO?

The most common reason is offsetting. If you had a debt on another ATO account, such as GST or PAYG on your Integrated Client Account, the ATO can automatically apply your income tax refund against that debt before paying you anything. It can also offset against debts previously placed on hold and against debts with other government departments. The ATO will notify you when it does this, and the movement will appear on your statement of account.

Can the ATO take my refund if I am on a payment plan?

It can, though there is some flexibility. The ATO is not required to offset where the debt is subject to a payment arrangement you are complying with, so it may still refund you in that situation if it considers it appropriate. It is not guaranteed, though, so if you are counting on a refund while on a plan, it is worth contacting the ATO before you lodge to understand what is likely to happen.

Does a credit reduce my payment plan instalments?

No. A credit or refund applied to your debt reduces the overall balance, but it does not replace your required instalment. You must keep making the agreed payments on schedule until the balance reaches nil. Skipping a payment because a credit was applied can cause the plan to default, which makes the full overdue balance immediately payable.

Can I pause or change my ATO payment plan?

A payment plan does not pause automatically. If your circumstances change and the current arrangement is no longer affordable, you may be able to contact the ATO to cancel the existing plan and set up a new one on different terms. The ATO may request further information first, such as financial statements and a budget, before agreeing to a new arrangement. Speak to your accountant before making any change so you go in with the right numbers.

Is the General Interest Charge still tax deductible?

No. From 1 July 2025, the General Interest Charge is no longer deductible. Any GIC incurred on or after that date cannot be claimed as a deduction, even if the underlying debt relates to an earlier year. Because GIC also compounds daily, carrying an ATO debt is now more expensive than it used to be, which is a strong reason to clear it as quickly as your cash flow allows.

Frequently Asked Questions

Frequently Asked Questions

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If your business pays contractors, the end of August brings one of the most overlooked deadlines on the calendar: the Taxable Payments Annual Report, or TPAR. It is due by 28 August each year, and the ATO is no longer quiet about it. In a single recent year the ATO issued more than 11,000 businesses with around $18 million in penalties for overdue TPARs. This is not a form to leave until the last minute.

There is also an important change for 2026 that cuts the other way. If you are a contractor or sole trader who receives those payments, the ATO now pre-fills that income straight into your tax return, and lodging too early can actually cost you. In this guide I will explain who must lodge a TPAR, what the new pre-fill means, why some businesses should deliberately wait until after 28 August before lodging their own return, and how to get the whole thing right. I am Mina Baselyous, a Chartered Tax Advisor (CTA) and CPA, and this is the kind of detail we watch closely for our clients at Pinnacle Accounting & Advisory.

What is a TPAR (Taxable Payments Annual Report)?

A Taxable Payments Annual Report is an annual report to the ATO that tells them how much your business paid contractors and subcontractors during the financial year. It sits under the Taxable Payments Reporting System (TPRS), a data-matching program the ATO uses to catch contractors who under-report their income. In short, the ATO takes what you say you paid your contractors and matches it against what those contractors declared. If the numbers do not line up, the ATO knows exactly where to look.

The system exists to level the playing field. Honest business owners who declare everything should not be competing against operators who quietly leave income off their return. A TPAR is not a tax you pay; it is an information report. But treating it as “just paperwork” is where businesses get caught out, because the penalties for lodging late are real.

Who has to lodge a TPAR?

You may need to lodge a TPAR if your business pays contractors to deliver services in any of these five industries defined under the Taxable Payments Reporting System:

• Building and construction services
• Cleaning services
• Courier and road freight services
• Information technology (IT) services
• Security, investigation or surveillance services

If your business provides one or more of these services and pays contractors or subcontractors to help deliver them, a TPAR is likely on your list of obligations. Government entities have their own reporting rules that also cover grants paid to organisations with an ABN, but for most Melbourne business owners the five industries above are what matters.

A common trap is assuming you are exempt because you are “not really a construction business”. If you are a builder, an electrician, a plumber, a commercial cleaner, a delivery operator, an IT consultancy that subcontracts developers, or a security firm, and you pay other contractors, you are squarely in scope. If that describes you, our guide to tradie tax deductions is also worth a read alongside this one.

The 10% rule: when mixed services trigger a TPAR

Plenty of businesses do more than one thing. A hardware retailer might also offer a delivery service. An IT company might sell hardware and provide support. So how do you know whether a TPRS service is a big enough part of your business to trigger a TPAR?

The ATO applies a 10% test. If the payments you receive for a relevant TPRS service are 10% or more of your total business income for the financial year, you must lodge a TPAR. If they are less than 10%, you do not. The formula is straightforward:

• Total payments received for the relevant service, divided by your current or projected business income, multiplied by 100.

There is one important exception. The 10% test does not apply to building and construction services. If you provide building and construction services and pay contractors for them, you must lodge a TPAR regardless of what percentage of your income they represent. For courier and road freight, you also need to combine the payments for both when working out whether you cross the threshold.

What you actually have to report

For each contractor you paid during the year, your TPAR needs to capture their name, ABN, address, and the gross amount you paid them (including GST). This is why clean records matter so much. If your bookkeeping is behind, or contractor ABNs are missing from your accounting file, TPAR season becomes a scramble.

The good news is that if you keep your books current in software like Xero throughout the year, most of the work is already done. Xero can generate the TPAR from your contractor payment data and lodge it directly to the ATO, provided your contractor records are complete. If you want a walkthrough of the lodgement mechanics, see our guide on how to lodge your BAS using Xero, which covers the same principle of keeping your file ATO-ready. Getting your bookkeeping right during the year is the single biggest thing that makes TPAR painless.

New for 2026: contractor payments now pre-fill your tax return

Here is the big change, and it affects a different group of people. From tax time 2026, the ATO has expanded pre-fill for individuals in business. If you are a sole trader or contractor providing TPRS services, the payments that other businesses report about you through their TPAR will now be pre-filled directly into your income tax return.

In practice, the ATO securely imports that verified data into your return, places the income in the correct labels with GST excluded, and reduces the manual entry you would otherwise do. It applies across industries such as construction, courier and food delivery, and many gig economy platforms. Alongside the contractor income, the ATO is also pre-filling government grants reported through TPAR, your business details such as ABN and address, and last year’s closing stock as this year’s opening stock.

This is genuinely helpful. It means fewer transcription errors and a return that reflects what the ATO already knows. But it comes with a timing catch that most people will not spot until it is too late.

Why you should wait until after 28 August to lodge your return

This is the part to get right, and it is where the two sides of TPAR come together. It helps to separate the two groups of people involved:

• Businesses that pay contractors must lodge their TPAR by 28 August. That deadline has not changed.
• Contractors and sole traders who receive those payments should generally wait until after 28 August before lodging their own income tax return.

The reason is simple. Most TPAR data only becomes available after 28 August, because that is when the paying businesses lodge their reports. If you are a contractor and you lodge your own return in July or early August, the pre-filled contractor income may not have arrived yet. Lodge too early and you risk leaving income off your return, which can lead to omissions, an amendment later, and in some cases repaying a refund you were not actually entitled to.

Lodging after 28 August gives the pre-fill time to fully populate, which means a more accurate return the first time and far less risk of the ATO contacting you down the track. It is one of those small timing decisions that quietly saves a lot of stress.

A word of caution though. Pre-fill is not the complete picture. You still need to include all other income that is not reported through TPAR, such as cash jobs, private clients, and work outside the TPRS industries. You can also review, change and confirm any pre-filled amount before you lodge; if you change a figure, the ATO asks for a short reason code. Good record keeping remains essential even with the expanded pre-fill, because you are still the one signing off on the return.

TPAR deadlines and penalties

The TPAR is due by 28 August each year and must be lodged electronically. If you have determined you do not need to lodge, you can submit a non-lodgment advice form so the ATO knows not to chase you, and you can use the same form to signal that you will not need to lodge in future if you have stopped paying contractors.

Lodging late carries a failure to lodge (FTL) on time penalty. This is calculated at one penalty unit for every 28 days (or part of that period) the report is overdue, up to a maximum of five penalty units. A penalty unit is $330 for infringements up to 30 June 2026 and $364 for those from 1 July 2026 onwards, so a small business lodging its TPAR well past the deadline can face a penalty running into four figures.

There is a sting in the tail that catches many business owners off guard. The ATO generally does not apply an FTL penalty to a late return that results in a refund or nil result, but it specifically carves out third-party data reports like the TPAR from that concession. In other words, “I would not have owed anything anyway” does not protect you on a late TPAR. This is exactly why the ATO was able to issue around $18 million in TPAR penalties in a single year.

If you do miss the deadline and receive a penalty, you can request a remission based on your circumstances, and if a registered tax or BAS agent lodges for you, safe harbour provisions may apply where you gave them everything they needed on time. But the far better position is simply not to be late. If deadlines are your weak point, our full breakdown of BAS and tax lodgement dates puts the whole year on one page.

How to get your TPAR right

Getting TPAR right is less about the report itself and more about the habits behind it. A few things make all the difference:

• Collect ABNs and details up front. Capture every contractor’s ABN, name and address before you pay them the first time, not at the end of the year.
• Keep your books current. If your contractor payments are coded correctly in Xero throughout the year, the TPAR almost writes itself.
• Confirm your industry status early. Run the 10% test each year if you provide mixed services, so you know well before August whether you need to lodge.
• Separate the two obligations. If you both pay contractors and work as a contractor yourself, remember you lodge your TPAR by 28 August but hold off on your own return until after that date.
• Do not ignore a non-lodgment advice. If you genuinely do not need to lodge, tell the ATO so, rather than leaving it and risking reminder letters and penalties.

If you also engage contractors, it is worth checking your obligations do not stop at TPAR. Depending on the arrangement, you may also have super to pay; our guide on whether you have to pay super for contractors covers the trap that catches a lot of businesses.

Frequently asked questions

When is the TPAR due?

The Taxable Payments Annual Report is due by 28 August each year and must be lodged electronically. If you pay contractors in a TPRS industry, mark this date well ahead of time.

Do I have to lodge a TPAR if I only pay a few contractors?

Possibly. For most TPRS industries, you must lodge if payments for the relevant service are 10% or more of your business income and you paid contractors for that service. For building and construction, the 10% test does not apply, so even a small amount of contractor payments can trigger the obligation.

Why should I wait until after 28 August to lodge my tax return?

If you are a contractor or sole trader, the payments reported about you through other businesses’ TPARs now pre-fill your return, but most of that data only lands after 28 August. Lodging earlier risks an incomplete return, an amendment, or repaying a refund later. Waiting gives the pre-fill time to fully populate.

What happens if I lodge my TPAR late?

You can be hit with a failure to lodge on time penalty of one penalty unit per 28 days overdue, up to five units. Unlike some other reports, a late TPAR can attract a penalty even if you would have owed nothing, because it is a third-party data report. The ATO issued around $18 million in TPAR penalties in a single recent year.

What if I do not need to lodge a TPAR anymore?

Submit a non-lodgment advice form to the ATO. This tells them you do not need to lodge for the year, and you can also indicate you will not need to lodge in future if you have stopped paying contractors, which prevents reminder letters and penalties.

Frequently Asked Questions

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The chart of accounts in Xero is the list of categories used to record every transaction, covering income, expenses, assets, liabilities and equity. A well-structured chart of accounts gives you clear, meaningful reports, while a messy one makes your numbers hard to trust, so set it up thoughtfully from the start.

Your chart of accounts is the backbone of your Xero file. Every transaction you record, every report you generate, and every BAS you lodge flows through it. Yet most small business owners set it up once — or let Xero’s defaults run — without ever thinking about whether it actually reflects how their business operates.

That’s a problem. A poorly structured Xero chart of accounts leads to messy reports, incorrect BAS lodgements, and tax returns that take longer (and cost more) to prepare. This guide explains how the chart of accounts works in Xero, what Xero includes by default, how to customise it, and — critically — when you should bring in a professional to set it up properly.

What Is a Chart of Accounts?

A chart of accounts is a structured list of every financial category your business uses to record transactions. Think of it as the filing system for your entire financial operation. Every dollar that comes in or goes out gets assigned to an account — and those accounts determine what appears on your profit and loss report, your balance sheet, and your tax return.

In Australia, your chart of accounts needs to align with ATO reporting requirements. The ATO requires businesses to keep accurate financial records that explain all transactions — and a well-structured chart of accounts is the foundation of that record-keeping. You can read the ATO’s record-keeping requirements at ato.gov.au.

A chart of accounts isn’t just an administrative formality. It’s a management tool. When structured correctly, it tells you exactly where your money is coming from, where it’s going, and whether your business is actually profitable. When structured poorly, it creates noise — and noise makes it impossible to make good decisions.

How the Chart of Accounts Works in Xero

Xero organises every account into one of five types. Understanding these five types is essential before you start adding, removing, or renaming anything.

Assets

Assets are everything your business owns or is owed. This includes your bank accounts, accounts receivable (money customers owe you), equipment, vehicles, and inventory. In Xero, your bank accounts connect directly to your chart of accounts as asset accounts — which is why setting up your accounts correctly from day one matters so much.

Liabilities

Liabilities are everything your business owes. This includes accounts payable (what you owe suppliers), GST payable, PAYG withholding payable, loan balances, and credit card balances. Your BAS liability sits here, which is why correct GST coding in Xero directly affects what appears in this section.

Equity

Equity represents the owner’s stake in the business — what’s left after you subtract liabilities from assets. For most small businesses, this includes owner’s equity, retained earnings, and drawings. If you’re a company, share capital sits here. If you’re a sole trader or trust, the equity structure looks different and needs to be set up to match your entity type.

Revenue

Revenue accounts capture all the income your business generates. Xero lets you create multiple revenue accounts, which is useful if your business has different income streams you want to track separately — for example, separating product sales from service income, or tracking income from different business divisions.

Expenses

Expenses are where most of the customisation work happens. These accounts capture everything you spend to run your business — rent, wages, marketing, subscriptions, professional fees, vehicle costs, and more. The level of detail you build into your expense accounts determines how useful your reports will be. Too few accounts and you can’t see where your money is going. Too many and your reports become unreadable.

Xero’s Default Chart of Accounts — What’s Included?

When you set up a new Xero file, Xero provides a default chart of accounts based on your selected industry. It’s a reasonable starting point, but it’s generic by design. The default accounts are built to work for a wide range of businesses, not specifically for yours.

Xero’s defaults typically include:

• Standard bank and cash accounts
• Accounts receivable and accounts payable
• GST accounts (already mapped to your BAS)
• Basic revenue accounts (Sales, Other Revenue)
• Common expense accounts (Wages, Rent, Advertising, Interest, Depreciation)
• Standard equity accounts

The defaults are workable — but they’re not tailored. A construction business has very different account needs to a professional services firm or a retail operation. A business with employees needs payroll-related accounts structured differently to a sole trader who pays themselves drawings. And if you’re GST-registered, the tax codes attached to each account need to be correct from the start.

Running on Xero’s defaults without reviewing them is like wearing shoes that are roughly the right size — technically functional, but not a good fit.

How to Customise Your Chart of Accounts in Xero

Xero makes it straightforward to add, edit, and archive accounts. You can access your chart of accounts through the Accounting menu, then Chart of Accounts. From there you can:

• Add new accounts — give each account a code, name, type, and tax code
• Edit existing accounts — rename accounts or change their descriptions
• Archive accounts — remove accounts you don’t need without deleting historical data
• Import accounts — use a CSV import if you’re setting up a new file from scratch

When adding or editing accounts, the most important decision beyond the name is the tax code. Xero’s tax codes determine how transactions flow through to your BAS. Getting the tax code wrong means your BAS figures will be wrong — which can trigger ATO attention and result in penalties or interest charges.

Common customisation decisions for Australian businesses include:

• Creating separate revenue accounts for different income streams (especially useful if you have a mix of GST-taxable and GST-free sales)
• Splitting wages into base salary, superannuation, and payroll tax for cleaner reporting
• Adding specific expense accounts for vehicle costs if you want to separate fuel from registration from insurance
• Setting up a dedicated account for owner drawings or director fees
• Creating fixed asset accounts with matching accumulated depreciation accounts for each asset class

If you’re working with a bookkeeper, they should be involved in any significant chart of accounts changes — because those changes affect how transactions get coded going forward, and inconsistency creates reporting problems.

Common Chart of Accounts Mistakes (and Their Tax Consequences)

These are the mistakes we see most often — and each one has real consequences.

Using the wrong tax codes

Every account in Xero has a default tax code. If that code is wrong, every transaction coded to that account will have the wrong GST treatment. This can mean overclaiming or underclaiming GST on your BAS — both of which create problems with the ATO. Overclaiming GST is the more serious error: it can result in a debt, penalties, and interest.

Lumping everything into one or two accounts

Coding all expenses to “General Expenses” or all income to “Sales” makes your Xero file virtually useless as a management tool. You can’t see what’s driving your costs or where your revenue comes from. And at tax time, your accountant has to untangle everything — which takes time and costs you money.

Mixing personal and business expenses

This is particularly common for sole traders and small business owners who use a single account for personal and business spending. If personal expenses end up in your Xero file under business expense accounts, your profit and loss is wrong, your tax return is wrong, and you’re potentially claiming deductions you’re not entitled to.

Not setting up accounts to match your entity type

A trust has different equity requirements to a company. A sole trader reports income differently to a partnership. If your chart of accounts doesn’t reflect your entity structure, your financial statements won’t be ATO-compliant — and your accountant will need to do additional work at year-end to fix it.

Renaming accounts without understanding the downstream effect

Changing an account name in Xero doesn’t change its type or tax code. But it can create confusion — especially if you rename a liability account to look like an expense, or vice versa. Always understand what an account does before you change it.

How Your Chart of Accounts Affects Your BAS and Tax Returns

Your Xero chart of accounts is directly connected to your BAS. Every account in Xero has a tax code assigned to it — and those codes determine what flows into each label on your BAS (G1, G2, G3, and so on). If your accounts are set up incorrectly, your BAS figures will be wrong from the moment you start coding transactions.

The ATO’s record-keeping requirements are clear: businesses must keep records that explain all transactions and support the amounts reported on their tax returns and activity statements. A correctly structured chart of accounts makes meeting this requirement straightforward. A poorly structured one creates gaps in your records that are difficult to explain under audit.

At tax time, your accountant uses your chart of accounts to prepare your financial statements and tax return. If your accounts are categorised clearly and consistently, this process is efficient. If accounts are muddled, misnamed, or misused, the preparation process takes longer — and the risk of errors in your tax return increases.

This is also relevant for management accounting purposes. If you want to use Xero to track performance against budget, identify cost blowouts, or make decisions about pricing or staffing, your chart of accounts needs to be structured with that purpose in mind.

When to Get Your Accountant to Set Up Your Chart of Accounts

There are situations where it makes sense to set up or review your chart of accounts yourself. If you’re a simple sole trader with straightforward income and expenses, Xero’s defaults may get you most of the way there.

But in most cases, getting a Xero accountant in Melbourne to set up or review your chart of accounts is the better investment. Here’s when it’s particularly important:

• When you’re starting a new business — setting up the chart of accounts correctly from day one prevents years of cleanup work later
• When you’re converting from another system — bringing historical data into Xero requires careful account mapping
• When your business has multiple revenue streams — a professional can structure your accounts to give you meaningful segment-level reporting
• When you have employees — payroll accounts need to be set up correctly to flow through to your STP reporting and year-end obligations
• When you’ve grown quickly — businesses that outgrow their original chart of accounts often need a restructure to get useful reporting again
• When your BAS is consistently wrong — this is often a symptom of incorrect tax codes in your chart of accounts

At Pinnacle Accounting & Advisory, we work with Melbourne business owners to set up and review Xero files that are built for their specific business — not just the Xero default. When your chart of accounts is structured correctly, everything downstream (BAS, tax returns, management reports) becomes more accurate and less time-consuming.

Frequently Asked Questions

Can I change my chart of accounts after I’ve already been using Xero?

Yes, you can add, edit, and archive accounts at any time. However, changes to existing accounts affect how historical transactions are categorised, so you need to be careful. If you’re making significant structural changes, it’s worth having your accountant or bookkeeper involved to ensure the changes are applied consistently and don’t create reporting inconsistencies. Archiving an account (rather than deleting it) preserves the historical transaction data attached to that account.

How many accounts should I have in my chart of accounts?

There’s no universal answer — it depends on the complexity of your business. A simple service business might need 30 to 50 accounts. A business with multiple revenue streams, inventory, employees, and multiple asset classes might need 100 or more. The guiding principle is to have enough accounts to produce meaningful reports without so many that your file becomes unmanageable. If you find yourself creating a new account every time a new type of expense comes up, that’s often a sign your structure needs a rethink.

Does the chart of accounts in Xero affect my BAS?

Yes — directly. The tax codes assigned to each account in your chart of accounts determine what figures flow through to your BAS. If GST is coded incorrectly on an account, every transaction coded to that account will produce incorrect BAS figures. This is one of the most common causes of BAS errors for small businesses using Xero. If your BAS figures don’t look right, the first place to check is the tax codes on your accounts.

Get Your Xero File Set Up to Work for Your Business

Your chart of accounts isn’t a set-and-forget task. As your business grows and changes, your account structure should evolve with it. The businesses we work with at Pinnacle Accounting & Advisory consistently get more value from their Xero file when their chart of accounts is tailored to reflect how their business actually operates — not just the generic default.

If you’re not confident your Xero chart of accounts is set up correctly, or if your reports aren’t giving you the information you need to run your business, let’s look at it together. Book a no-obligation consultation with Mina Baselyous and the Pinnacle team — we’ll assess your current setup and tell you exactly what needs to change.

Frequently Asked Questions

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If you use your own car for work or business, the cents per kilometre method is the simplest way to claim a deduction, no receipts, no logbook, no fuss. But simple does not mean generous by default. Most business owners either under-claim because they lose track of their work kilometres, or over-claim and hand the ATO an easy reason to knock the deduction back. Getting it right starts with knowing the current rate and the rules that sit around it.

For the 2026-27 income year, the ATO cents per kilometre rate is 91 cents per kilometre. Here is exactly how the method works, how much you can claim, and how to decide whether it beats the logbook method for your situation.

What is the cents per kilometre method?

The cents per kilometre method lets you claim a set rate for every business or work kilometre you drive in your own car, up to a yearly cap. The single rate is designed to cover all of your car running costs rolled into one number, so you do not add fuel, servicing or anything else on top.

It only applies to a car, a vehicle designed to carry a load of less than one tonne and fewer than nine passengers. Larger utes, vans and trucks over one tonne do not use this method; they claim actual running costs instead. If you are unsure which category your vehicle falls into, our full guide to claiming motor vehicle expenses on tax walks through every vehicle type.

The ATO cents per km rate for 2026-27

The rate for the 2026-27 income year (1 July 2026 to 30 June 2027) is 91 cents per kilometre. That is up from 88 cents in 2025-26. The ATO reviews the rate each year to reflect movements in the cost of running a car, so it is worth checking the current figure before you lodge rather than reusing last year’s number.

One rate applies for the whole year regardless of the size of your engine or the make of your car. A small hatchback and a large SUV are claimed at the same 91 cents. You can confirm the current rate directly on the ATO’s motor vehicle and car expenses page.

How much can you claim?

You can claim for a maximum of 5,000 business kilometres per car, per year. At 91 cents, that caps the deduction at $4,550 per car for 2026-27. If two people share the use of a car, each can claim up to their own 5,000 kilometre limit for their own work travel.

The maths is straightforward: business kilometres travelled, multiplied by 91 cents. A few worked examples for 2026-27:

• 2,000 business km x $0.91 = $1,820
• 3,500 business km x $0.91 = $3,185
• 5,000 business km (the cap) x $0.91 = $4,550

If you genuinely drive more than 5,000 business kilometres a year, the cents per kilometre method will short-change you once you hit the cap. That is the point where the logbook method usually starts to win, more on that below.

What the 91 cent rate actually covers

The single rate bundles together every running cost of the car, so you cannot claim any of these separately on top:

• Fuel and oil
• Registration and insurance
• Servicing, repairs and tyres
• Depreciation (decline in value) of the car

This is the trade-off for not keeping receipts. The rate is meant to approximate all of these costs across an average car. If your car is expensive to run or you drive a lot for work, the actual costs may well exceed what 91 cents per kilometre returns, which is exactly why the method comparison matters.

Cents per km vs the logbook method

There are two ways to claim car expenses, and you can choose whichever gives the better result each year:

• Cents per kilometre, best for lower business use (roughly under 5,000 km) and people who want minimal paperwork. Capped at $4,550 for 2026-27.
• Logbook method, best for higher business use. You keep a 12-week logbook to establish your business-use percentage, then claim that percentage of your actual running costs including fuel, insurance, servicing and depreciation. No 5,000 km cap.

For a business owner clocking up 15,000 work kilometres a year in a car that costs real money to run, the logbook method can return several times the cents per kilometre cap. The catch is discipline: a valid logbook, kept for a continuous 12 weeks, plus receipts for the year. If that sounds like a lot to manage, it often pays for itself, and it is one of the first things we review when a new client comes on board.

Record-keeping: what the ATO expects

You do not need receipts to use the cents per kilometre method, but you do need to be able to show how you worked out your business kilometres. A reasonable estimate is acceptable, but it has to be based on something real, for example a regular pattern of trips (three client visits a week, 40 km round trip, 46 working weeks) or a representative diary of your travel over a period.

Only work-related travel counts. The daily commute between home and your regular place of business is private and cannot be claimed. Trips between job sites, to clients, to the accountant or bank, or to buy stock generally can. For the finer points on what counts, we answer the most common queries in our car tax deductions questions answered article.

Common mistakes business owners make

• Claiming the commute. Home to your usual workplace is private travel, not business kilometres.
• Guessing without a basis. “About 5,000 km” with nothing behind it is the claim most likely to be adjusted on review.
• Double dipping. Adding fuel or servicing on top of the cents per kilometre claim. The rate already includes them.
• Using the wrong method by default. Sticking with cents per kilometre out of habit when a logbook would return far more.
• Claiming for a vehicle that is not a car. Over-one-tonne utes and vans use actual costs, not this method.

Which method is right for your business?

The right answer depends on how far you drive for work, how much your car costs to run, and how the vehicle is owned, personally, through a company, or through a trust. Ownership structure changes not just how you claim the car, but the fringe benefits tax and asset protection picture around it. This is the kind of decision that is far cheaper to get right up front than to unwind later.

At Pinnacle Accounting & Advisory we look at the whole picture, not just the car line on your return. As part of ongoing tax planning, we work out which method leaves you better off, make sure your record-keeping will stand up, and structure vehicle ownership so it works with the rest of your affairs. If you want a second opinion on how you are claiming your car, our Melbourne tax accountants are here to help.

Frequently asked questions

What is the cents per km rate for 2026-27?

The ATO cents per kilometre rate for the 2026-27 income year is 91 cents per kilometre, up from 88 cents in 2025-26. It applies to all cars regardless of engine size.

How much car expense can I claim without a logbook?

Using the cents per kilometre method you can claim up to 5,000 business kilometres per car per year. At 91 cents, that is a maximum deduction of $4,550 for 2026-27, with no receipts required, though you must be able to show how you calculated your kilometres.

Can I switch between the cents per km and logbook methods?

Yes. You can choose the method that gives the best result each income year. Many business owners use cents per kilometre in low-travel years and switch to the logbook method when their work kilometres climb.

Does the cents per km rate include fuel and depreciation?

Yes. The 91 cent rate already covers fuel, oil, registration, insurance, servicing, repairs and depreciation. You cannot claim any of these costs separately on top of a cents per kilometre claim.

Can I claim the drive between home and work?

Generally no. Travel between home and your regular place of work is private and cannot be claimed. Travel between work locations, to clients, or to buy business supplies usually can be. There are limited exceptions, so it is worth checking your specific circumstances.

Frequently Asked Questions

This article provides general information only and does not take into account your personal circumstances. It is not tax, financial or legal advice. Rates and thresholds change, so please confirm the current figures and speak with a registered tax agent before acting. Pinnacle Accounting & Advisory would be glad to help.

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When you set up a company, the share structure you choose quietly decides three things that matter enormously later: who controls the business, who gets paid and how much, and how flexibly you can manage tax. Most owners never think about it. They accept a single class of ordinary shares off a $99 online setup and move on.

Then a partner comes on board, an investor wants in, a spouse should be receiving dividends, or you want to reward a key employee, and the structure that was fine on day one is suddenly working against you. Fixing it later can trigger capital gains tax, stamp duty, and legal fees that dwarf what it would have cost to get right from the start.

This guide explains the different classes of shares in an Australian company in plain English, what each one is actually used for, and where business owners most often get it wrong.

What Is a Share Class?

A share class is simply a category of shares that carries a defined set of rights. Every company limited by shares issues shares, and each share carries rights across three main areas: the right to vote, the right to receive dividends (a share of profits), and the right to capital if the company is wound up or sold.

When every share carries identical rights, you have one class. When you want different shareholders to have different rights, you create separate classes and name them (commonly A class, B class, C class, and so on). The class names themselves mean nothing in law. What matters is the rights attached to each class, which are set out in the company constitution and recorded with the Australian Securities and Investments Commission. You can read the basics of how shares work on the ASIC company registration pages.

The Main Classes of Shares in an Australian Company

There is no fixed legal list of share classes. A company can create whatever classes its constitution allows. In practice, a handful come up again and again for Australian business owners.

Ordinary Shares

The standard, most common class. Ordinary shares typically carry one vote each, a right to dividends when declared, and a right to a share of capital on winding up. If your company has one class of shares, they are almost certainly ordinary shares. They give the holder full participation in the upside of the business, and full exposure to its risk.

Preference Shares

Preference shares rank ahead of ordinary shares for dividends and, usually, for the return of capital. They often pay a fixed dividend and frequently carry no voting rights. They are the classic tool for bringing in an investor who wants a priority return and some security, without handing them control of the company. Preference shares can be cumulative (unpaid dividends accumulate and must be paid before ordinary shareholders receive anything) or non-cumulative.

Redeemable Preference Shares

The same as preference shares, but the company can buy them back (redeem them) at an agreed point. Useful when an investor is only meant to be in for a defined period, or when you want a clean, pre-agreed exit built into the arrangement rather than negotiated under pressure later.

Dividend Access Shares

Often a separate class (sometimes non-voting, no rights to capital) created specifically so the company can direct dividends to a particular shareholder. Used carefully and with proper advice, they add flexibility to how profits are distributed. Used carelessly, they attract ATO attention, so this is an area where advice matters.

Non-Voting and Deferred Shares

Non-voting shares give an economic interest without a say in decisions, which suits family members or employees you want to reward financially but not put in the control seat. Deferred shares rank behind other classes for dividends or capital until a condition is met. Both are niche, but they solve specific control and reward problems neatly.

Ordinary vs Preference Shares: The Practical Difference

For most business owners, the real decision comes down to ordinary versus preference shares, so it is worth being clear on the trade-off.

Ordinary shareholders control the company and share fully in its growth, but they rank last if things go wrong and there is no guarantee of a dividend. Preference shareholders give up control and usually give up unlimited upside, in exchange for priority on dividends and capital. In short: ordinary shares are about control and growth, preference shares are about security and priority.

That is exactly why the two are often used together. Founders hold ordinary shares to keep control and capture the growth, while an incoming investor takes preference shares for a protected, priority return. Get that split right and everyone’s interests are aligned. Get it wrong and you have either given away control you did not need to, or promised returns the business cannot sustain.

Why Share Classes Matter for Business Owners

Beyond raising money, the way your shares are structured drives several things that affect you directly:

• Dividend flexibility. Separate classes let the company declare a dividend on one class without being forced to pay the same on every other share. This is central to distributing profits sensibly across a family group or to a holding entity.
• Control. Voting rights decide who runs the company. You can bring in capital or reward people without diluting your control if the structure is designed for it.
• Bringing in partners and investors. The right class lets a new participant share in profit or growth on clearly defined terms, which prevents disputes down the track.
• Succession and estate planning. Different classes can pass economic benefit to the next generation while control stays where you want it.

Share classes rarely work in isolation. They interact with your broader structure, including whether a family trust or a bucket company holds some of the shares. That is where the real tax planning happens, and it is why share structure should never be decided in a vacuum. For the bigger picture, see our guide to business structures in Australia and our comparison of a company versus a trust.

The Risk of Getting Your Share Structure Wrong

This is where the theory becomes expensive. A share structure that was set up without thought, or copied from a template, creates real problems as a business grows:

• You cannot stream dividends. With a single class of ordinary shares held equally, every dividend must be paid in proportion to shareholding. If you own 60% and your spouse owns 40%, you cannot pay them more in a year where it would be tax-effective. The flexibility simply is not there.
• Restructuring later is costly. Changing share structure or moving shares into a trust or holding company after the fact can trigger capital gains tax and, in some states, stamp duty. What would have cost little at setup can cost tens of thousands to unwind.
• Disputes with partners. When rights are not clearly defined by class, disagreements over control, dividends, and exit become messy and sometimes end up in court.
• ATO scrutiny. Dividend access shares and profit-streaming arrangements that are not set up correctly can attract anti-avoidance attention. Dividends also interact with the rules on loans from private companies, so it pays to understand how Division 7A fits with how you take money out.

The common thread is that share structure mistakes are cheap to prevent and expensive to fix. By the time the problem is obvious, the low-cost window has usually closed.

Getting the Entity and Share Structure Right From the Start

The right answer is never “shares” in isolation. It is the right entity holding the right class of shares, designed around both your commercial goals (control, growth, bringing people in) and your investment and tax goals (income flexibility, asset protection, a clean eventual exit).

In practice that often means a company for trading, with some shares held by a family trust so profits can be distributed flexibly, and a defined class for any investor or partner so their rights are clear. There is no single template. The right structure depends on who is involved, where the business is heading, and what you eventually want to do with it.

This is exactly the work Pinnacle does through our business structuring services. As a Melbourne tax accountant and Chartered Tax Advisor, Mina looks at your commercial plans and your tax position together, then designs an entity and share structure that fits, rather than one you have to unwind in three years. If a company already exists, we review whether the current structure still serves you and what it would take to improve it.

How many classes of shares can a company have?

There is no legal limit. A company can create as many classes as its constitution allows, each with its own rights to voting, dividends, and capital. What matters is not the number of classes but that each one is properly defined and serves a genuine purpose in your structure.

Can I add a new class of shares to an existing company?

Often yes, but it depends on your constitution and existing shareholder rights, and it can have tax and duty consequences. Creating or issuing new classes needs to be done correctly and documented properly. This is not a change to make from an online form without advice, because errors here are difficult and costly to reverse.

What is the difference between A class and B class shares?

The letters themselves have no fixed legal meaning. A class and B class are just labels for different classes whose rights are defined in the company constitution. One company’s B class shares might be non-voting dividend shares; another’s might be something entirely different. Always check the actual rights, not the label.

Should my family trust or I personally hold the company shares?

It depends on your goals. Holding shares through a family trust can add flexibility for distributing dividends and can help with asset protection, but it is not automatically the right answer for everyone. This is a decision to make with your accountant as part of designing the whole structure, not in isolation.

Do dividends have to be paid equally to all shareholders?

Within a single class, yes, dividends are paid in proportion to shareholding. Across different classes, no. That is precisely why separate share classes exist, and why the structure you set up determines how much flexibility you have to distribute profits tax-effectively. The ATO explains how dividends and franking work on the ATO dividends page.

Frequently Asked Questions

Frequently Asked Questions

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