On 1 July 2026, Australia’s income tax brackets changed. The 16% rate that applied to income between $18,201 and $45,000 dropped to 15%, putting money back in the pockets of every Australian taxpayer who earns above the tax-free threshold.

Whether you are a sole trader, a company director drawing a salary, or an individual reviewing your financial position, understanding the current rates is essential for accurate tax planning. In this guide, Mina Baselyous (CPA + Chartered Tax Advisor, Pinnacle Accounting & Advisory) walks you through every bracket, explains what changed, and shows you how to calculate your 2026-27 tax liability.

Australian Income Tax Rates 2026-27 (Individual Residents)

The following rates apply to Australian resident individuals for the 2026-27 financial year (1 July 2026 to 30 June 2027). The 2% Medicare levy applies separately on top of these rates.

Note: These are the rates on taxable income. Your actual tax payable will also be affected by tax offsets such as the Low Income Tax Offset (LITO), the Medicare levy, and any applicable surcharges or rebates.

What Changed from 2025-26 to 2026-27?

The only change to income tax brackets in 2026-27 is the reduction of the second-lowest rate from 16% to 15%. Everything else remains the same: the tax-free threshold stays at $18,200, and the bracket boundaries at $45,000, $135,000, and $190,000 are all unchanged.

This change was legislated through the Treasury Laws Amendment (More Cost of Living Relief) Act 2025 and is designed to provide cost-of-living relief to low and middle-income earners. Every taxpayer who earns at least $45,000 in 2026-27 will receive the full benefit: a $268 reduction in their annual tax bill compared to 2025-26.

For those earning between $18,201 and $45,000, the saving is proportionally smaller — 1% of income above $18,200 — but still meaningful.

How to Calculate Your 2026-27 Income Tax

To calculate the base tax on your taxable income, identify which bracket your income falls into, then apply the formula for that bracket. Here are three worked examples:

Example 1: Taxable income of $60,000

• First $18,200: Nil
• $18,201 to $45,000 (= $26,800) at 15%: $4,020
• $45,001 to $60,000 (= $15,000) at 30%: $4,500
• Base tax: $8,520
• Medicare levy (2%): $1,200
• Total tax payable before offsets: $9,720

Example 2: Taxable income of $120,000

• First $18,200: Nil
• $18,201 to $45,000 (= $26,800) at 15%: $4,020
• $45,001 to $120,000 (= $75,000) at 30%: $22,500
• Base tax: $26,520
• Medicare levy (2%): $2,400
• Total tax payable before offsets: $28,920

Example 3: Taxable income of $200,000

• First $18,200: Nil
• $18,201 to $45,000 (= $26,800) at 15%: $4,020
• $45,001 to $135,000 (= $90,000) at 30%: $27,000
• $135,001 to $190,000 (= $55,000) at 37%: $20,350
• $190,001 to $200,000 (= $10,000) at 45%: $4,500
• Base tax: $55,870
• Medicare levy (2%): $4,000
• Total tax payable before offsets: $59,870

Remember: these figures are base tax before applying the Low Income Tax Offset or any other reductions. Your actual tax return position will differ based on your specific circumstances.

Low Income Tax Offset (LITO) 2026-27

The Low Income Tax Offset (LITO) reduces the tax payable for lower-income earners. For 2026-27, the thresholds are unchanged from 2025-26:

The LITO effectively raises the tax-free threshold for low-income earners. At the maximum offset of $700, a taxpayer earning $37,500 would have their tax liability reduced to nil. The LITO is automatically applied when you lodge your tax return — you do not need to claim it separately.

Medicare Levy 2026-27

In addition to income tax, most Australian residents pay the Medicare levy of 2% on their taxable income. This funds Australia’s public health system.

Low-income earners are exempt from or pay a reduced Medicare levy:

• Singles: No levy if income is below the low-income threshold (check the ATO for the current threshold, which is indexed each year). A reduced levy applies on income between the low-income threshold and a phase-in limit.
• Families: Similar reduction based on combined family income and the number of dependants.

High-income earners who do not have private hospital cover may also be liable for the Medicare Levy Surcharge (an additional 1% to 1.5%) on top of the standard 2% levy. For 2026-27, the MLS threshold for singles starts at $97,000 in taxable income.

Senior Australians and Pensioners Tax Offset (SAPTO) 2026-27

Eligible senior Australians and pensioners receive the SAPTO, which reduces their income tax payable and effectively raises their tax-free threshold significantly above $18,200. The 2026-27 SAPTO thresholds are:

SAPTO is available to individuals who are eligible for an Australian Government pension or have reached the qualifying age. It is applied automatically based on information in your tax return.

What Is Coming in 2027-28?

The Treasury Laws Amendment (More Cost of Living Relief) Act 2025 legislated a second reduction for the following year. From 1 July 2027, the 15% rate on income between $18,201 and $45,000 will reduce further to 14%.

This will deliver an additional $268 saving compared to 2026-27, bringing the cumulative tax saving to $536 per year for those earning $45,000 or more, compared to the 2025-26 rates.

If you are planning your finances over a 2-to-3 year horizon, factoring in these staged reductions is worth discussing with your accountant — particularly if you are making decisions around salary packaging, superannuation contributions, or business distributions.

Non-Resident Income Tax Rates 2026-27

Non-residents are taxed differently. They do not receive the tax-free threshold, and the rates are structured as follows for 2026-27:

• $0 to $135,000: 30c for each $1
• $135,001 to $190,000: $40,500 plus 37c for each $1 over $135,000
• $190,001 and above: $60,850 plus 45c for each $1 over $190,000

Non-residents are also not subject to the Medicare levy (though they may be subject to the Medicare levy surcharge if applicable). If your residency status is uncertain, seek specific tax advice — residency for tax purposes is determined by the ATO based on your circumstances, not your visa type.

Tax Planning Strategies for Business Owners in 2026-27

Understanding the tax brackets is the starting point. The more important question for business owners is: how can you legally arrange your affairs to ensure income is taxed at the lowest possible rate?

Here are the key levers available to business owners in 2026-27:

1. Distribute income through a family trust

A family discretionary trust allows the trustee to allocate income each year to adult beneficiaries who are in lower tax brackets. Rather than concentrating all business income in the hands of one individual at the 45% rate, distributions can be made to a spouse, adult children, or a company beneficiary — all of whom may be taxed at significantly lower rates.

Given the staged tax cuts, planning trust distributions carefully in both 2026-27 and 2027-28 can generate meaningful, compounding savings over time.

2. Use a company to cap tax at 25% or 30%

A base rate entity (small company with passive income below 80% of total income) is taxed at 25% for 2026-27. A larger company is taxed at 30%. Either rate is below the 37% and 45% individual marginal rates that apply once income exceeds $135,000 or $190,000 respectively.

Retaining profits inside a company structure rather than distributing them immediately can defer tax and allow the business to reinvest earnings at a lower effective rate. The timing of any eventual distribution (and the associated franking credits) is a key planning consideration.

3. Maximise concessional superannuation contributions

Concessional (pre-tax) super contributions are taxed inside the fund at 15% — well below any individual marginal rate above the 15% bracket. For 2026-27, the concessional contributions cap is $30,000 (check the ATO for any indexation updates).

For business owners earning above $45,000, contributing to super rather than taking additional salary effectively converts income taxed at 30% or higher into income taxed at 15% — an immediate arbitrage.

4. Time your income and deductions

With the 2027-28 rate reduction already legislated, there may be merit in deferring certain income to the next financial year and bringing forward deductions to the current year. This is standard tax planning that needs to be assessed against your specific cash flow and business situation — but it is worth modelling with your accountant before 30 June 2027.

5. Review your structure annually

Tax rates change. Business structures that were optimal two or three years ago may no longer be the most efficient. A proactive review at the start of or during the financial year — not just at year-end — ensures your structure is still working for you as both the law and your business evolve.

If you want specific advice on how to structure your business and personal income to minimise tax in 2026-27, book a consultation with Pinnacle Accounting & Advisory. As Chartered Tax Advisors and CPAs, we work through this with clients throughout the year, not just at lodgement time.

Frequently Asked Questions: Australian Income Tax Rates 2026-27

What are the Australian income tax rates for 2026-27?

For resident individuals, the 2026-27 rates are: nil on income up to $18,200; 15% on $18,201 to $45,000; 30% on $45,001 to $135,000; 37% on $135,001 to $190,000; and 45% on income above $190,000. The Medicare levy of 2% also applies in addition to these rates.

What changed between 2025-26 and 2026-27 tax rates?

The only change is that the rate on income between $18,201 and $45,000 dropped from 16% to 15%. All other brackets and thresholds remained the same. This saves taxpayers earning $45,000 or more a maximum of $268 per year.

How much tax do I pay on $100,000 in 2026-27?

On taxable income of $100,000, the base tax is $4,020 (on the first $45,000 bracket above the threshold) plus $16,500 (30% on the $55,000 between $45,001 and $100,000), totalling $20,520. Adding the 2% Medicare levy ($2,000) gives $22,520 before any offsets such as the LITO.

Will the tax rates change again in 2027-28?

Yes. From 1 July 2027, the rate on income between $18,201 and $45,000 will reduce again from 15% to 14%. This is already legislated via the Treasury Laws Amendment (More Cost of Living Relief) Act 2025. No other brackets are currently scheduled to change in that year.

Does the Medicare levy apply on top of these rates?

Yes. The income tax rates in the table above do not include the Medicare levy. Most Australian residents pay an additional 2% on their taxable income as the Medicare levy, taking the effective top marginal rate to 47% for income above $190,000. Low-income earners may be exempt or pay a reduced levy.

Can a business owner reduce their personal income tax through their business structure?

Yes, in many cases. Business owners have options that employees do not, including distributing income through a discretionary trust to lower-bracket beneficiaries, retaining profits inside a company taxed at 25% or 30%, and making additional concessional super contributions. The right strategy depends on your structure, income level, and business circumstances. Speak with a qualified tax adviser before making changes.

Frequently Asked Questions

General Advice Warning: The information on this page is general in nature and does not take into account your personal objectives, financial situation, or needs. It is not a substitute for personalised tax or financial advice. Please consult with a qualified tax professional such as a Registered Tax Agent before making any decisions based on this information. Pinnacle Accounting & Advisory is a Registered Tax Agent (Tax Practitioners Board).

Knowing the rates is one thing; a proactive tax accountant in Melbourne helps you legally reduce what you actually pay.

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The 2026-27 Federal Budget included a proposal that has quietly alarmed many small business owners across Australia: a 30% minimum tax on distributions from discretionary family trusts. On the surface, it sounds like a measure aimed at wealthy investors using trusts to minimise tax. In practice, the people most affected are growth-stage business owners who have structured their affairs responsibly, and who need the family trust the most.

This guide is part of our complete guide to trusts in Australia.

This post breaks down what the proposal involves, who it actually targets (versus who it claims to target), and why the case for family trusts, particularly the asset protection case, remains as strong as ever, regardless of how the tax landscape shifts.

What Is the Proposed 30% Minimum Trust Tax?

Under the current rules, when a family discretionary trust distributes income to a beneficiary, that beneficiary pays tax at their personal marginal rate. If your adult child earns $30,000 a year from other sources and receives a $50,000 distribution from the family trust, the trust income is taxed at their marginal rate, which may be 19% or lower on much of that amount.

The proposed change would impose a 30% minimum tax rate on distributions to certain beneficiaries from discretionary trusts. The stated policy intention is to prevent high-income individuals from routing income through trusts to low-bracket beneficiaries purely to reduce their own tax bill. In theory, it sounds fair. In practice, the unintended consequences fall almost entirely on the wrong group of people.

It is important to note: as of the time of writing, this proposal has not been legislated. It is a Budget announcement that is subject to consultation and parliamentary process. But the direction of travel is clear enough that business owners with family trusts should understand the implications now, before the legislation is finalised.

Who Gets Hit Hardest, and Why It Isn’t Who You Think

The policy framing suggests this measure is aimed at wealthy individuals parking income in trusts to split it to non-working family members and dramatically reduce their tax bill. That scenario exists. But it is not the dominant use case for family trusts among the small and medium business owners who make up the bulk of trust users in Australia.

The Growth-Stage Owner Who Doesn’t Pay Themselves a Market Wage

Consider a common scenario: a business owner who is building their company. They have a family trust as the operating or investment structure. They don’t pay themselves a formal salary, partly because the business is still growing, partly because they are reinvesting every dollar they can back into operations, equipment, staff, or working capital.

Here is the part that often gets overlooked in this debate. A business owner who does not pay themselves a salary is not an employee of their own business. That means they have no superannuation guarantee (SG) obligation on themselves. The 12% that would otherwise flow out of the business as compulsory super stays inside the business as working capital. It is reinvested, not extracted.

The trust then distributes income to working family members: a spouse who handles administration, an adult child who has stepped in to run operations, a parent who contributed to the business in its early years. These family members are on lower marginal rates because they have limited income from other sources. The distribution is taxed at their rate, not the business owner’s rate.

That is not tax avoidance. That is a working family running a business together, being compensated for contributions that would cost far more to outsource, while keeping capital inside the enterprise. The 30% minimum tax would treat this family exactly the same as a passive investor who uses a trust solely to reduce their personal tax bill by routing income to a spouse who has never set foot in the business. They are not the same situation.

The Income-Splitting Benefit Disappears at the Top

Here is the core irony of the proposed minimum tax. The income-splitting benefit of a family trust is most valuable when the beneficiary’s marginal rate is significantly below 30%. That means the benefit is concentrated among beneficiaries in the 0% to 19% bracket: the low-income earners, the part-time contributors, the family members who genuinely earn their distributions but earn them at a modest level.

A high-income earner whose beneficiaries are already paying 37% or 45% on other income doesn’t benefit meaningfully from distributing trust income to them. Their marginal rates are already well above the proposed 30% floor. The minimum tax changes very little for the genuinely wealthy.

The floor hits hardest at the owners who need every structural efficiency they can access: the growth-stage SME owner, the family business in its first decade, the sole operator building something for the next generation. These are not the people the policy is aimed at. They are the people who will wear the cost.

The Asset Protection Case: This Was Never Really About Tax

Even setting aside the income tax argument entirely, there is a separate and compelling reason why family trusts are used by Australian business owners, and it has nothing to do with minimising distributions tax. It is asset protection.

In a properly structured discretionary trust, no beneficiary has a fixed, legal entitlement to the underlying trust assets. The trustee holds legal title to the assets. The beneficiaries have a right to be considered for distributions, not a right to any specific asset or share of the corpus. In practice, this means that in the conventional legal sense, no one “owns” the assets inside the trust.

The practical consequence of that structure is significant. If a beneficiary faces a creditor action (a lawsuit, a personal debt, a business failure, a bankruptcy proceeding), the creditor cannot automatically reach the assets held inside the trust. The creditor cannot compel distributions. They cannot place a charge over trust assets as though the beneficiary owned them, because the beneficiary does not own them in the way a shareholder owns shares.

Compare that to a company structure. Shareholders own shares. Those shares are assets in the shareholder’s name. A creditor can freeze shares, litigate over them, and in a bankruptcy scenario, have them liquidated. The share value flows back to creditors. The asset protection logic of a company is categorically weaker than that of a discretionary trust: not by a small margin, but fundamentally, in terms of how ownership and creditor access work.

This is why many business owners use family trusts to hold investment assets (property, shares, and other capital) separately from the operating business. If the business is sued, the assets in the trust are harder for creditors to reach. If a trust beneficiary runs into personal financial difficulty, the trust assets are not automatically exposed. This protection does not disappear because of a 30% minimum tax on distributions. The structural protection is separate from the tax treatment of income flows.

Families who use trusts for asset protection, which has always been a primary motivation for establishing the structure, will continue to do so. The question for most clients is not “should I have a trust?” but “how do I structure distributions under the new rules most effectively?” That is a planning question, not a reason to abandon the structure.

Does This Mean Family Trusts Are No Longer Worth It?

Not at all, but the calculus changes depending on your circumstances, and this is exactly the kind of change that warrants a conversation with your accountant before it is enacted, not after.

For families where the primary beneficiaries are already paying tax at or above 30% on their personal income, the proposed change has limited practical impact. The trust still provides flexibility, asset protection, and estate planning advantages. The income tax efficiency is already constrained by beneficiary tax positions, so the 30% floor changes little.

For families where the primary beneficiaries are in the 0–19% bracket, where income-splitting through the trust has been most tax-effective, the impact is more significant. A beneficiary who previously paid 0–19% on a trust distribution would now face a 30% minimum rate. That is a material increase. It needs to be modelled and planned for.

What it does not change is the strategic value of the structure itself. The asset protection, the discretionary distribution flexibility, the estate planning outcomes, the ability to retain income inside the trust at the 30% corporate trustee rate: these remain intact. The family trust is not being abolished. The income-splitting tax efficiency is being narrowed for certain distributions, and for certain beneficiaries, and only if the proposal is enacted as currently drafted.

Good tax planning means understanding the change before it takes effect, modelling the impact on your specific situation, and adjusting distribution strategies where necessary. That is what proactive advisory looks like, and it is exactly the kind of conversation you should be having with your accountant now, while there is still time to respond.

What Should Business Owners Do Now?

The proposal is not yet law, but the direction is clear. Here is what makes sense to do before this change is enacted.

Review your current distribution strategy. Understand who receives distributions from your trust, what their current marginal tax rates are, and how a 30% minimum would change the effective tax cost of those distributions. In some cases, the impact is minimal. In others, it is significant. You need to know which situation you are in.

Consider beneficiary income positions. If your trust distributes to a beneficiary who currently earns very little, the 30% floor may represent a large increase. Consider whether there are legitimate ways to adjust beneficiary income levels, such as salary arrangements for genuine work contributions, before the rules change.

Don’t dismantle the structure based on the proposal alone. The asset protection and estate planning advantages of the family trust are not affected by this change. Unwinding a trust has significant costs and consequences. Wait for the legislation, take advice, and adjust the strategy where appropriate, not the structure.

Get proper advice specific to your situation. The right response depends on your beneficiary profile, your business structure, your asset base, and your long-term goals. General commentary on the proposal, including this post, cannot replace advice tailored to your circumstances.

Frequently Asked Questions

Is the 30% minimum trust tax already law in Australia?

No. As of the date of this article, the proposed 30% minimum tax on discretionary trust distributions is a 2026-27 Budget announcement. It has not been enacted. It is subject to consultation and parliamentary process before it can become law. You should monitor developments closely and seek advice once the legislation is in draft form.

Will the 30% minimum tax apply to all trust distributions?

Based on the Budget announcement, the minimum tax is intended to apply to distributions from discretionary trusts to certain beneficiaries. The exact scope, including which beneficiaries are covered and whether any exemptions apply, will be determined by the draft legislation. Details are expected as part of the consultation process.

Does a family trust still provide asset protection if the 30% tax is introduced?

Yes. The asset protection features of a discretionary trust (the absence of fixed beneficiary ownership, the trustee’s legal title, and the limitation on creditor access to trust assets) are structural and exist independently of how trust income is taxed. A change to the income tax treatment of distributions does not affect the asset protection rationale for using the structure.

How does a family trust compare to a company for asset protection?

A discretionary trust generally provides stronger asset protection than a company because beneficiaries do not hold fixed ownership interests in trust assets. In a company, shareholders own shares that can be subject to creditor claims, freezing orders, and liquidation. In a properly structured trust, no beneficiary has a fixed legal entitlement to the underlying assets, making it more difficult for a creditor to access those assets through a beneficiary’s personal legal difficulties.

Should I wind up my family trust because of this proposal?

In most cases, no. Unwinding a trust is a significant and often costly process with its own tax and legal consequences. The appropriate response to a proposed change in how trust distributions are taxed is to adjust your distribution strategy, not to dismantle the structure. Seek specific advice before making any decisions about restructuring.

Who should I speak to about how this change affects my situation?

A registered tax agent or Chartered Tax Advisor with experience in trust structures is best placed to assess how the proposed change affects your specific situation. At Pinnacle Accounting & Advisory, we work with business owners to review their trust structures, model the tax impact of proposed changes, and put in place distribution strategies that are appropriate for the current environment. Book a consultation to discuss your situation.

Frequently Asked Questions

General Advice Disclaimer: The information in this article is general in nature and does not constitute personal financial, tax, or legal advice. The proposed 30% minimum tax on discretionary trust distributions is a 2026-27 Budget proposal that has not been enacted at the time of writing. Tax laws are subject to change. You should seek advice specific to your circumstances from a qualified tax adviser before making any decisions about your trust structure or distribution strategy.

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Small businesses in Australia can claim deductions for most costs incurred in earning income, including wages, rent, equipment, vehicle and travel costs, insurance, marketing, professional fees and the business portion of home and phone expenses. Claiming everything you are entitled to, with records to support it, is the simplest way to reduce tax. If your company experiments or innovates, the R&D Tax Incentive can be worth far more than an ordinary deduction.

One of the most reliable ways to reduce your tax bill is to make sure you’re claiming every deduction you’re legitimately entitled to. But most Australian small business owners are either leaving money on the table by not claiming everything they can, or — just as problematically — claiming things they can’t and exposing themselves to ATO scrutiny. In this comprehensive guide, I’ll walk you through every major category of deduction available to Australian small businesses in 2026–27, including what the ATO looks for and the mistakes I see most often.

The Golden Rule of Business Deductions

Before we get into the categories, let’s establish the rule that underpins all of them. Under Section 8-1 of the Income Tax Assessment Act 1997, you can deduct a loss or outgoing to the extent it is:

• Incurred in gaining or producing your assessable income, or
• Necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income

If an expense doesn’t meet this test — if it’s personal, private, or domestic in nature — it’s not deductible. The key is nexus: there must be a direct connection between the expense and your income-earning activities.

Operating Expenses

Day-to-day operating expenses are the bread and butter of business deductions. These are generally fully deductible in the year they’re incurred:

• Rent for business premises (office, retail space, warehouse)
• Utilities (electricity, gas, internet, phone) for business use
• Office supplies, stationery and consumables
• Software subscriptions (Xero, MYOB, Microsoft 365, Slack, project management tools)
• Bank fees and merchant fees charged on business accounts and transactions
• Insurance premiums — business insurance, professional indemnity, public liability, income protection (if not through super)
• Subscriptions and memberships directly related to your business or profession
• Postage and courier costs
• Repairs and maintenance on business assets (not capital improvements)

The distinction between a repair and a capital improvement matters: a repair restores something to its original condition (deductible now) while a capital improvement adds new functionality (must be depreciated over time).

Vehicle and Travel Expenses

Vehicle expenses are one of the most scrutinised categories by the ATO — and one of the most commonly overclaimed or underclaimed. Here’s what you need to know:

For businesses: If a vehicle is used for business purposes, the business proportion of costs is deductible. This includes fuel, registration, insurance, maintenance, depreciation, and lease payments. You must keep a logbook for 12 continuous weeks (at least once every five years) to establish the business-use percentage.

For vehicles under the instant asset write-off: Eligible small businesses can immediately deduct the cost of a qualifying vehicle up to the instant asset write-off threshold. For passenger vehicles, the car limit for 2026–27 is $69,674 — the deduction is capped at this amount regardless of the purchase price.

Travel expenses:

• Flights, accommodation, meals, and taxis for genuine business travel are deductible
• If travel combines business and personal purposes, only the business portion is deductible
• Travel between home and your regular workplace is not deductible — this is considered private travel
• Travel from your regular workplace to another business location (client visit, second site, etc.) is deductible

Home Office Expenses

If you work from home — whether as your primary office or as part of your role — you can claim a portion of your home running costs. The ATO offers two methods:

Fixed rate method: 70 cents per hour for every hour worked from home. This covers electricity, internet, phone, computer consumables, and stationery. You still need to separately calculate depreciation on home office equipment. You must keep records of hours worked.

Actual cost method: Calculate the actual expenses attributable to your home office — a proportion of rent/mortgage interest, electricity, internet, cleaning — based on the floor area of your office as a proportion of your total home area. This method requires more detailed records but may produce a larger deduction.

Important: If you claim your home office expenses as a business deduction through a company or trust, be careful about the interaction with the main residence CGT exemption. If part of your home is used exclusively for business, part of any future capital gain may be taxable. Seek advice before making this election.

Staff and Superannuation

Employment costs are fully deductible:

• Wages and salaries paid to employees (including family members, provided the amount is commercially reasonable for the work performed)
• Superannuation guarantee contributions — for 2026–27, the SGC rate is 12%. These are deductible in the year they are actually paid — not when accrued. Make sure super is paid by 30 June if you want the deduction this year.
• Workers’ compensation insurance premiums
• Payroll tax (where applicable, based on your state’s threshold)
• Fringe benefits tax (FBT) — deductible when paid
• Staff training and professional development
• Recruitment costs — job ads, agency fees, background checks

Timing of super payments matters significantly. Super contributions paid after 30 June but for the previous financial year are only deductible in the year they are actually paid. Missing the deadline costs you the deduction for that year. Read about the 2026 payday super changes here.

Asset Write-Offs and Depreciation

Small businesses have access to generous immediate deduction rules for depreciating assets. For 2026–27, eligible small business entities (aggregated annual turnover under $10 million) can immediately deduct the full cost of eligible depreciating assets under the small business simplified depreciation rules.

Eligible assets include:

• Computer equipment, printers, servers
• Plant and equipment (manufacturing, construction, trade tools)
• Office furniture and fit-out
• Vehicles (subject to the car cost limit)
• Signage

The instant asset write-off for small businesses has been a significant planning tool. Read our detailed 2026 guide to the instant asset write-off here. Timing asset purchases around 30 June — buying before the end of the financial year rather than after — can bring the deduction forward by a full year.

Professional Fees and Advisor Costs

Fees paid for professional services relating to your business are deductible:

• Accounting and tax agent fees — including fees for preparation of business tax returns, BAS preparation, and advisory services
• Legal fees relating to business contracts, employment disputes, debt recovery (not capital expenditure)
• Financial planning fees to the extent they relate to managing income-producing investments
• Consulting fees for business strategy, IT, marketing, HR

Note: legal fees relating to the purchase or sale of a capital asset (like a business or property) are capital in nature and are not immediately deductible — they form part of the cost base for CGT purposes.

Marketing and Advertising

Expenses incurred to promote your business are deductible:

• Google Ads, Facebook Ads, LinkedIn advertising
• Website development (ongoing costs; initial build may be capital)
• SEO and content marketing services
• Print advertising, brochures, flyers, business cards
• Sponsorships (if they have a clear commercial promotional purpose)
• Trade show and exhibition costs
• Promotional gifts (subject to FBT and income tax rules on entertainment)

Entertainment — taking clients to dinner, events, or experiences — is not deductible and not claimable as a business expense under Division 32 of the ITAA 1997, even if it has a business purpose. This surprises many business owners. Meals during travel or meals provided to employees in a break room (minor benefit) have different treatment.

Training and Professional Development

Expenses for training and education are deductible when they are directly related to your current income-earning activities:

• Courses and workshops related to your current profession or trade
• Professional memberships (CPA, CA ANZ, industry bodies)
• Books and publications directly relevant to your work
• Conferences and seminars

Training to enter a new field or secure a different type of employment is generally not deductible — it must be connected to your current role or business.

What You Cannot Claim

This is where many small business owners get into trouble:

• Personal or private expenses: Groceries, personal clothing (unless it’s protective or a specific uniform), private school fees, personal holidays
• Entertainment: Client dinners and entertainment are not deductible under Division 32
• Travel between home and your regular workplace
• Capital expenditure (generally) — the cost of purchasing a business, buying a building, or major structural improvements must be depreciated over time or claimed under specific rules
• Fines and penalties — ATO penalties, parking fines, regulatory fines are not deductible
• Private use portion of mixed expenses — you can only claim the business proportion

Mistakes to Avoid

The ATO regularly reviews small business deductions. Common errors that attract attention include:

• Claiming 100% of a vehicle without a logbook
• Claiming private expenses through the business
• Not keeping receipts and records (you need to be able to substantiate every claim)
• Claiming entertainment as a deductible expense
• Overclaiming home office without a proper calculation
• Failing to apportion mixed-use expenses correctly

The ATO’s data-matching capabilities have expanded significantly — they receive data from banks, share registries, state revenue offices, and hundreds of other sources. For more on what the regulator is now targeting and how to stay safe, see our guide to the ATO crackdown on personal versus business deductions. If your claims look out of step with comparable businesses, you may be selected for review.

How Pinnacle Approaches This With Small Business Clients

At Pinnacle, we help small business clients identify every legitimate deduction they’re entitled to — and make sure the ones they’re claiming are properly documented and defensible. We review your accounts throughout the year (not just at tax time) so we’re picking up missed deductions and flagging issues before they become problems.

We also advise on the timing of deductions — whether to prepay expenses before 30 June, whether to bring an asset purchase forward, and how to structure discretionary spending to maximise deductibility. These timing decisions can make a meaningful difference to your annual tax bill.

If you’re not confident you’re claiming everything you’re entitled to — or if you’re worried you might be claiming something you shouldn’t — get in touch with Pinnacle for a review. We’re here to make sure every dollar works for you. Explore our full range of tax planning services here.

Frequently Asked Questions

Do I need receipts for every deduction?

For most expenses over $10, yes — the ATO requires documentary evidence. This can be a receipt, invoice, bank statement, or other document that shows what was purchased, the date, the amount, and the supplier. Keep records for at least five years. For vehicle expenses using the logbook method, keep the logbook and odometer records.

Can I claim my home internet if I work from home?

Yes, but only the business-use proportion. If you use the internet 50% for business and 50% personally, only 50% of the cost is deductible. Under the fixed rate method (70 cents per hour), internet is already included in the rate — you cannot claim it separately.

Are client gifts tax deductible?

Generally no — gifts to clients are considered entertainment or private expenses and are not deductible. There are narrow exceptions, such as gifts with a genuine promotional purpose (e.g. branded merchandise), but even these require care. Gifts of food, wine, or entertainment are not deductible.

Can I claim my mobile phone as a business expense?

Yes — the business-use proportion. If your mobile phone is used 70% for business and 30% personally, 70% of the plan cost and handset depreciation is deductible. Keep records to support your claimed percentage.

Can I claim the cost of setting up my company or trust?

Yes — formation costs such as ASIC fees and solicitor fees for setting up your business structure are deductible as business formation expenses, typically claimed in the first year of operation under the blackhole expenditure provisions.

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Frequently Asked Questions

Claiming everything you are entitled to is easier with a proactive tax accountant in Melbourne reviewing your return through a tax-planning lens.

Food and drink is one of the most commonly miscoded deductions of all. Tea, coffee, fruit and biscuits provided to staff are deductible amenities, while a client lunch is entertainment and is not. Our guide to staff amenities versus entertainment sets out the four-factor test the ATO applies.

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If your business operates through a family discretionary trust — and there’s a bucket company or holding structure involved — there are two tax elections you need to know about. Not because your accountant mentioned them in passing, but because getting them wrong can trap losses in your structure, create unexpected tax bills, or cost you the ability to use franking credits.

This guide is part of our complete guide to trusts in Australia.

These are the family trust election (FTE) under section 272-80 of Schedule 2F of the Income Tax Assessment Act 1936, and the interposed entity election (IEE) under section 272-85 of the same Act. Together, they define how your trust interacts with the tax loss provisions and how distributions can flow through your structure without triggering punitive tax.

This article explains what each election does, when it’s required, and the real-world consequences of getting it wrong — in plain language, without the legislation jargon.

What Is a Family Trust Election?

A family trust election is a formal choice you make to have your discretionary trust treated as a “family trust” for tax purposes. Once made, the election specifies a single individual — called the test individual — whose family group the trust must generally distribute income and capital to.

The test individual is typically the patriarch or matriarch of the family — the parent or grandparent who the broader family wealth flows through. Their “family group” under the legislation includes:

• The test individual themselves
• Their spouse
• Their parents and grandparents
• Their siblings (and their spouses)
• Their children, grandchildren, and lineal descendants
• The spouses of those children and grandchildren
• Companies and trusts controlled by members of the family group (once an IEE is made — more on this below)

Distributing income or capital outside this family group triggers Family Trust Distribution Tax (FTDT) — currently charged at the top marginal tax rate of 47% (including Medicare levy). This is a serious deterrent, so once an FTE is made, distributions must stay within the defined family group or the tax cost is severe.

What are the benefits of making a family trust election?

The main benefit is access to the trust loss provisions in Schedule 2F of the ITAA 1936. These provisions govern:

• Whether a trust can carry forward and use prior year losses
• Whether a trust can transfer losses to other group entities
• Whether a trust can benefit from franking credits flowing from a company in which it holds shares
• The distribution requirements that must be satisfied to access these benefits

Without an FTE, a discretionary trust must satisfy alternative tests (the “income injection test” and the “pattern of distributions test”) to use losses — tests that are notoriously difficult to pass and that often result in losses being permanently trapped.

With an FTE in place, the trust bypasses those tests. Losses are accessible as long as distributions remain within the family group. For business owners with trust structures that hold shares, property, or operating businesses, this is a significant practical advantage.

What Is an Interposed Entity Election?

An interposed entity election (IEE) is made by an entity that sits between individuals and a family trust — most commonly a private company or another trust that is itself a beneficiary of the family trust.

The most common scenario in a typical small-to-medium business structure looks like this:

By making an IEE, the bucket company (or interposed trust) formally joins the family group. This means:

• Distributions from the FTE trust to the company do not risk triggering FTDT
• The company is treated as part of the family group for trust loss purposes
• The consolidated structure can use trust losses that would otherwise be inaccessible

The IEE must specify the same test individual as the FTE — they are linked elections, not independent choices.

When Is a Family Trust Election Required?

Technically, there is no law that compels you to make a family trust election. But there are several situations where making one becomes commercially necessary — and where failing to make it carries real cost.

1. The trust wants to use prior year losses

This is the most common trigger. If your trust ran at a loss in a prior year (from property, an operating business, or investment activity), and you want to offset that loss against future income, the trust must satisfy one of the trust loss tests. For most discretionary trusts, the FTE is the simplest and most reliable path — the alternatives are highly restrictive.

2. The trust holds shares in companies and wants to access franking credits

When a company pays a dividend with attached franking credits to a trust, the trust can generally pass those credits to its individual beneficiaries. But whether those credits can be used by the trust beneficiaries depends on the trust satisfying certain conditions (see our guide to franking credits when a company is held in a family trust). An FTE makes this process cleaner and more defensible under ATO scrutiny.

3. A restructure introduces a company or new trust as a beneficiary

If you add a bucket company or holding company to your structure as a beneficiary of the trust, you are potentially moving outside the natural family group without an IEE in place. An FTE and accompanying IEE should be put in place before or at the time of the restructure — not discovered three years later.

4. The ATO conducts a review of the trust’s distributions

The ATO’s trust tax compliance program looks closely at how discretionary trusts distribute income and to whom. Trusts with consistent distributions to low-tax-rate beneficiaries or corporate beneficiaries can attract attention. Having an FTE on file is one clear marker that the structure is compliant and intentional rather than opportunistic.

When Is an Interposed Entity Election Required?

An IEE is required whenever a company, trust, or partnership:

• Is a beneficiary of a trust that has made (or wants to make) an FTE, and
• You want that entity to be treated as part of the family group for trust loss and distribution purposes

The practical test is simple: if any entity in your structure receives a distribution from your trust, and that entity is not an individual who falls naturally within the test individual’s family, then an IEE is likely needed.

Common entities that need IEEs:

When Can the Elections Be Made — and Can They Be Backdated?

Both the FTE and IEE can be made at any time during the income year, and they take effect from the start of that income year — or from an earlier income year, right back to when the trust was established.

This backdating option is a significant practical benefit. If you have held a structure for several years without an FTE, you can often make the election retrospectively. However, there are limits:

• The election cannot be backdated to a year where it would retroactively change a distribution that was made outside the family group — you cannot retrospectively fix an FTDT event that already occurred
• Backdating is allowed only where the trust would have satisfied the family trust conditions during that earlier period — meaning the pattern of distributions must have been consistent with the family group even before the election was formally made
• The ATO can question retrospective elections if the timing appears to be motivated by tax avoidance rather than regularising the structure

Real-World Scenarios: How These Elections Apply

Scenario 1: The trading trust with a loss year

The problem: Without an FTE, the trust must pass the income injection test and the pattern of distributions test to use the prior year loss. The income injection test asks whether new income was injected into the trust in a way that enables the loss to be used. The pattern of distributions test looks at whether distributions were made to the same beneficiaries in the prior loss year. A discretionary trust that changed its distribution pattern — even for legitimate reasons — may fail this test.

The solution: Make a retrospective FTE covering the loss year. As long as distributions in the loss year were made within what would have been the family group, the election regularises the structure and makes the $120,000 loss available in the current year.

Scenario 2: The trust structure with a bucket company added late

The problem: The bucket company is not a natural member of the family group. Without an IEE made before the distribution, the $180,000 distribution is a distribution outside the family group — triggering FTDT at 47%. The total tax bill on that distribution: approximately $84,600 in FTDT alone, before any tax at the company level.

The solution: Make the FTE (nominating the head of the family as test individual) and IEE (from the bucket company) prior to the first distribution to the company. If the structure has already been running without elections, seek advice immediately about whether backdating is possible and whether any FTDT exposure exists.

Scenario 3: Two discretionary trusts — one distributing to another

The problem: The trading trust is an interposed entity. Without an IEE, it sits outside the family group and distributions from the property trust to it may be subject to FTDT.

The solution: The trading trust makes an IEE specifying the same test individual as the property trust FTE. It may also need to make its own FTE if it wants to access loss provisions for its own distributions.

What Happens If You Never Make These Elections?

For many family trusts, the absence of an FTE causes no immediate problem — until something goes wrong. The elections matter most when:

• The trust has a loss year and needs to use it
• A new entity joins the structure as a beneficiary
• Franking credit benefits need to flow through to individuals
• The ATO scrutinises the distribution pattern
• The structure is restructured, sold, or transferred

The risk of not having elections in place is not abstract. The ATO has increased its audit activity on trust structures, particularly around unpaid present entitlements (UPEs), Division 7A, and trust distributions to corporate beneficiaries. A structure without proper elections is more exposed.

More importantly, the elections are relatively straightforward to make when planned in advance. They become complex — and sometimes impossible to fix without cost — when addressed reactively after a problem has occurred.

Frequently Asked Questions

Frequently Asked Questions

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Xero for sole traders is accounting software that lets you invoice, track expenses, reconcile your bank, manage GST and prepare for tax in one place. For a sole trader it replaces spreadsheets and shoeboxes of receipts, giving you accurate records, a clear view of your numbers, and an easier tax time.

Xero for Sole Traders: Is It Worth It? A Complete Guide

If you’re a sole trader wondering whether you need accounting software — or whether a spreadsheet and a shoebox of receipts will cut it — you’re asking exactly the right question. The honest answer is: it depends on where you’re at. But if your business is growing, you’re dealing with GST, or tax time fills you with dread, Xero is worth a serious look.

This guide walks you through what Xero actually does for sole traders, what it costs, where it earns its keep, and where it falls short. No fluff — just what you need to make a smart decision for your business.

What Is Xero and How Does It Work for Sole Traders?

Xero is cloud-based accounting software that connects your bank accounts, tracks your income and expenses, generates invoices, and helps you stay on top of your tax obligations — all in one place. You log in through a browser or the Xero app, and your financial data is updated in real time.

For sole traders, Xero isn’t overkill. The platform is designed to scale, which means it works just as well for a freelance graphic designer turning over $80,000 a year as it does for a growing trade business with multiple revenue streams. The key features that matter most for sole traders are:

• Bank feeds: Your transactions import automatically from your bank, so you’re not manually entering every sale and purchase.
• Invoicing: Create, send, and track professional invoices from your phone or laptop.
• Expense tracking: Photograph receipts with the Xero app and match them to transactions instantly.
• BAS preparation: Xero calculates your GST position as you go, making BAS lodgement far less painful.
• Reports: Profit and loss, cash flow, and tax summaries at the click of a button.

Unlike a paper system or a basic spreadsheet, Xero gives you a live view of your business finances. You can see exactly what you’ve earned, what you’ve spent, and what you owe the ATO — at any point in the month, not just when tax time rolls around.

What Does Xero Cost for Sole Traders?

Xero offers tiered subscription plans, and for most sole traders the Xero Starter plan is the right starting point. As at 2025, the Starter plan is priced at around $35 per month (AUD), though Xero does update its pricing from time to time, so it’s worth checking their website for the current rate.

The Starter plan covers:

• Up to 20 invoices and quotes per month
• Up to 5 bills per month
• Bank reconciliation
• GST and BAS reporting
• Xero app access
• Receipt capture

For sole traders with modest transaction volumes — say, a consultant who invoices a handful of clients each month — the Starter plan is generally sufficient. If your business is more active, you may find the invoice and bill limits restrictive. In that case, stepping up to the Standard plan (around $65–$70/month) removes those limits and adds payroll functionality if you ever take on a contractor or employee.

To put the cost in perspective: $35 per month is $420 per year. For a sole trader who’s registered for GST, that’s comfortably less than the cost of a single BAS lodgement by a bookkeeper — and Xero is doing the heavy lifting on your records all year round. Whether that cost makes sense for you depends on your turnover, complexity, and how much time you’re currently losing to manual record-keeping.

What Can Sole Traders Use Xero For?

Here’s a practical breakdown of the features sole traders use day-to-day:

Invoicing

Xero lets you create branded invoices in minutes. You can set up automatic payment reminders so clients get nudged if an invoice goes overdue — without you having to chase them personally. Invoice status is tracked in real time, so you know exactly which clients have paid and which haven’t.

Expense Tracking

The Xero app lets you photograph receipts on the spot and attach them to transactions. This is a genuine time-saver at tax time — instead of hunting through a pile of paper receipts in June, your records are already matched and categorised throughout the year. Your accountant will thank you.

Bank Feeds

Connect your business bank account (and credit card if you use one for business purchases) and transactions import automatically, usually within 24 hours. You then categorise each transaction — fuel, tools, subcontractors, subscriptions — and Xero builds your financial picture from that data.

BAS Preparation

If you’re registered for GST, Xero calculates the GST collected and paid on every transaction as you go. When your BAS period ends, your GST position is already tallied. Many sole traders and their bookkeepers or accountants lodge directly from Xero, which dramatically reduces the the time and cost of BAS preparation.

Tax Time Reporting

Xero generates profit and loss reports, which form the basis of your sole trader income tax return. At year end, your accountant can access your Xero file directly — at year end, your accountant can access your Xero file directly — no spreadsheet exports, no emailing files back and forth. This alone tends to reduce accounting fees, because your accountant spends less time organising your records and more time on actual tax planning.

If you’d like help setting up Xero so your records are actually usable come tax time, our bookkeeping services are designed specifically to keep sole traders organised throughout the year.

Xero and Tax for Sole Traders — What You Need to Know

Xero is a record-keeping tool, not a tax adviser. Understanding the basics of sole trader tax obligations will help you use it properly.

Individual Income Tax

As a sole trader, your business income is taxed at your personal marginal rate. There’s no separate company tax return — your business profit is declared in your individual tax return under the business and professional income schedule. The ATO’s guidance on sole trader income sets out what must be declared and how it’s calculated.

Xero’s profit and loss report gives you (and your accountant) the figures needed to complete that schedule accurately.

PAYG Instalments

Once your tax bill reaches a certain threshold, the ATO will enrol you in PAYG instalments — quarterly tax prepayments that spread your tax liability across the year rather than hitting you with one large bill at return time. Xero doesn’t automatically manage PAYG instalments for you, but because it tracks your profit in real time, you can get a clear sense of what you’re likely to owe and put the money aside proactively. A good accountant will help you vary your instalments if your income fluctuates — something a spreadsheet can’t flag.

GST Registration

You’re required to register for GST once your annual turnover reaches $75,000. If you’re approaching that threshold, registering and setting up GST tracking in Xero sooner rather than later avoids a messy backtrack. Xero handles GST on a cash or accruals basis (your accountant will advise which suits you), and it separates GST from your income automatically in every transaction.

Even below the $75,000 threshold, some sole traders choose to register voluntarily — particularly if their clients are businesses that can claim back the GST. If you’re weighing that decision, our tax planning service can help you work through what makes sense for your situation.

Is Xero Worth It for Sole Traders? An Honest Assessment

Let’s be direct: Xero is a solid product, but it’s not the right fit for everyone. Here’s a balanced look at the pros and cons.

Where Xero Earns Its Keep

• Time savings are real. If you’re spending hours every quarter manually sorting transactions and preparing BAS, Xero genuinely cuts that time down. Bank feeds and automatic categorisation do most of the grunt work.
• GST accuracy improves. Manual spreadsheets are prone to errors — missing GST on a purchase, double-counting income. Xero’s structured transaction system reduces those mistakes.
• Accountant collaboration is seamless. When your accountant can log into your Xero file directly, you get faster turnarounds, fewer back-and-forth emails, and often lower fees.
• Cash flow visibility. Knowing your real-time cash position — not just what’s in your bank account, but what’s owed to you and what’s due — is genuinely valuable for making business decisions.
• Professional invoicing. Branded invoices with online payment links (via Stripe or similar) can reduce the time it takes clients to pay.

Where Xero Has Limits

• It won’t run itself. Xero only works if you keep it up to date. If you fall behind on reconciling transactions, you’re back to square one at tax time. Consistency matters.
• It doesn’t replace advice. Xero tells you what happened in your business. It doesn’t tell you whether you should be making trust distributions, restructuring your business, or varying your PAYG instalments. That’s what an accountant is for.
• Low-turnover businesses may not need it yet. If you earn under $30,000 a year, aren’t registered for GST, and have very simple finances, a well-maintained spreadsheet might be genuinely sufficient for now. There’s no prize for buying software you don’t need.
• There’s a learning curve. Setting up bank feeds, chart of accounts, and GST settings correctly from the start takes some know-how. Doing it wrong creates headaches later.

The verdict: For sole traders turning over more than $50,000–$60,000, registered or approaching GST registration, or anyone who wants to spend less time on admin and more time on their actual business — Xero is worth it. For very early-stage, low-complexity sole traders, it’s optional for now but worth revisiting as you grow.

Tips for Getting the Most Out of Xero as a Sole Trader

If you decide to subscribe, here’s how to make sure you actually get value from it:

• Set up a dedicated business bank account. Mixing business and personal transactions in Xero is a headache. A separate business account makes reconciliation clean and simple.
• Reconcile weekly, not quarterly. Fifteen minutes a week beats three hours at BAS time. The more current your records, the more useful Xero actually is.
• Use the Xero app for receipts. Capture receipts immediately. Trying to recall what a $47 charge from six months ago was for is a waste of your time and potentially a missed deduction.
• Get your chart of accounts set up properly. The default categories in Xero won’t match every sole trader’s business perfectly. Getting an accountant or bookkeeper to configure your chart of accounts correctly from the start saves a lot of reclassifying later.
• Don’t ignore the reports. Log in and review your profit and loss at least once a month. Knowing whether you’re on track — and whether you need to put more aside for tax — is one of the main benefits of having the software.
• Connect your accountant. Invite your accountant or bookkeeper as a user in Xero. This is free, and it means they can review your file, spot issues, and advise you without waiting for you to export anything.

When Does a Sole Trader Need an Accountant, Not Just Software?

This is the question that doesn’t get asked often enough.

Xero is excellent at recording what happens in your business. But recording isn’t the same as advising. There’s a meaningful difference between having tidy books and having a tax strategy — and for many sole traders, the gap between those two things is where real money is either saved or lost.

Here are the situations where software alone isn’t enough:

• Your turnover is growing and you’re not sure of your structure. Sole trader is often the right structure to start with, but it’s not always the right structure to stay in. When does it make sense to consider a company or trust? That depends on your specific income, circumstances, and goals — not a default setting in any piece of software.
• You’re not sure what you can and can’t claim. Xero will categorise expenses, but it won’t tell you whether a particular expense is actually deductible, or whether you’re missing legitimate deductions entirely. A sole trader working from home, using a personal vehicle for work, or incurring industry-specific costs needs proper advice to ensure they’re not leaving money on the table.
• You have a large PAYG bill and no plan for it. If you’re regularly surprised by a big tax bill in October or November, that’s not a Xero problem — it’s a planning problem. Proactive tax planning throughout the year, including varying instalments and timing income and expenses strategically, is how you avoid that annual shock.
• You’re taking on employees or contractors. Payroll, superannuation obligations, and contractor payments all add complexity. Getting this wrong has real ATO consequences.
• You’re buying or selling assets. Capital gains, depreciation, and the small business CGT concessions are areas where a good accountant can make a significant difference to your outcome.

At Pinnacle Accounting & Advisory, we work with sole traders who use Xero — and we take it further. Mina Baselyous (CPA, CTA) works directly with clients to turn good bookkeeping into an actual tax strategy. We’re not just ticking boxes at year end; we’re advising on structure, cash flow, and decisions that affect what you keep from what you earn.

If you want an accountant who actually understands Xero (and uses it every day), explore what our Xero accounting services look like. Or if you’d prefer to start with a conversation, book a no-obligation consultation and we’ll talk through your situation with no obligation.

Frequently Asked Questions

Can I use Xero as a sole trader without an accountant?

Yes, you can use Xero independently to manage your day-to-day records, invoicing, and BAS if you’re confident with the basics. However, even if you manage your own bookkeeping in Xero, having an accountant review your file at least annually — and certainly before your tax return is lodged — is strongly recommended. The cost of a review is typically far less than the cost of errors, missed deductions, or a poorly structured business.

Does Xero lodge my BAS for me?

Xero prepares your BAS figures automatically based on your coded transactions, but it doesn’t lodge directly to the ATO on your behalf unless you work with a registered BAS agent or tax agent who does so through the software. Many sole traders prepare their BAS in Xero and then lodge through the ATO’s Business Portal themselves, or have a bookkeeper or accountant lodge it on their behalf.

Is Xero the same as having a bookkeeper?

No — Xero is software; a bookkeeper is a person. Xero automates data capture and categorisation, but a bookkeeper actively reviews your transactions, ensures they’re coded correctly, manages reconciliations, and flags anything that looks off. Many sole traders use both: Xero as the platform and a bookkeeper (even on a part-time or monthly basis) to keep the records in good shape. If you’re considering that setup, our bookkeeping service is built for exactly this kind of arrangement.

What happens if I don’t keep up with Xero?

If you fall behind on reconciling transactions, you end up with a backlog that’s time-consuming (and sometimes costly) to clean up. Uncoded transactions mean your reports are inaccurate, your BAS figures can’t be trusted, and your accountant has to spend more time sorting out your records instead of advising you. The software only works as well as the habits behind it.

The Bottom Line

Xero is one of the better tools available to Australian sole traders who want to keep clean records, stay on top of GST, and reduce the admin burden of running a business. At around $35 per month for the Starter plan, it’s an accessible investment for most working sole traders — particularly once your turnover makes GST registration mandatory or your tax situation starts to have moving parts.

That said, Xero is infrastructure, not strategy. The software keeps your records. What you do with those records — how you structure your business, plan your tax, and make financial decisions — is where a good accountant earns their place.

If you’re a sole trader in Melbourne looking for an accountant who actually works in Xero every day, Pinnacle Accounting & Advisory is worth a conversation. Book your no-obligation consultation today — no jargon, no obligation, just a straightforward chat about where you’re at and what good support looks like for your business.

Frequently Asked Questions

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As a sole trader you operate under one ABN and one individual tax file number, even if you run two businesses. This means the two businesses are combined for GST: their turnover is added together, so once your total turnover reaches $75,000 you must register for GST across both.

You run a repair business and you sell cakes on the weekend. Neither one turns over $75,000. So neither needs GST, right?

This is the single most common GST mistake I see with sole traders, and it is expensive to fix after the fact. The good news is the rule itself is not complicated once you understand who it applies to.

My name is Mina Baselyous. I am a CPA and Chartered Tax Advisor based in Melbourne, and I work with sole traders and small business owners across Australia every day. This guide explains exactly how GST registration works when you run two separate activities under one ABN, and where the threshold trap catches people out.

GST Registration Attaches to the Entity, Not the Business Activity

This is the core principle that clears up the confusion: GST registration in Australia applies to the entity, not to individual business activities.

As a sole trader, you are the entity. You have one ABN. You may have registered multiple business names — perhaps one for your repair work and one for your cake sales — but those names do not create separate legal entities. They are trading names for the same person.

Once you are registered for GST, every taxable supply you make, from every activity, in every business name, carries GST. There is no mechanism under Australian tax law to register one activity for GST and leave another outside it. The registration covers everything you do as that entity.

This matters for the threshold calculation too. The ATO does not ask whether your repair business turns over $75,000. It asks whether you, as the entity running all your enterprises, are approaching or have exceeded $75,000 in GST turnover.

The Threshold Is Aggregated Across Everything You Do

This is the section that catches sole traders out — and it is the reason the ATO sees so many cases of late or missed GST registration.

The GST registration threshold is $75,000 per year in current or projected GST turnover. That $75,000 is calculated across every enterprise activity you carry on, not per business name or per activity.

Here is a concrete example:

• Repair business annual revenue: $48,000
• Weekend cake sales annual revenue: $34,000
• Combined GST turnover: $82,000

In isolation, neither activity reaches $75,000. But you are not assessed in isolation. Your combined GST turnover is $82,000, which exceeds the threshold. You are required to register for GST.

The same logic applies to the projected turnover test. If you reasonably expect that your total turnover across all activities will exceed $75,000 in the next 12 months, you are required to register before you hit that figure — not after.

What Happens If You Miss the Registration Deadline?

If you should have been registered but were not, the ATO can require backdated registration to the date you first exceeded the threshold. That means GST becomes payable on all taxable supplies you made from that date, even if you never charged GST to your customers. The General Interest Charge applies on the unpaid amounts, compounding daily. The practical outcome is that money you received and already spent becomes a GST liability out of your own pocket.

The question to ask yourself is never “does this business need GST?” The right question is “do I, as the person running all of these activities, need to be registered for GST?”

What Changes on the Day You Register for GST

You Charge GST on Every Taxable Supply, Across Both Activities

Once registered, you must charge 10% GST on every taxable supply from every activity. If you were pricing your cake sales without GST and you register, your pricing needs to be reviewed immediately. You either absorb the GST out of your existing margin, or you adjust your prices upward to recover it. For consumer-facing activities like market stalls, that pricing conversation can be awkward — another reason to get your registration timing right from the start.

You Can Claim Input Tax Credits on Both Activities Too

The upside of registration is that you can claim input tax credits on purchases and expenses across both activities, not just one. That means:

• Ingredients and packaging for your cakes
• Tools, parts, and equipment for your repair work
• Vehicle costs used across both activities (apportioned if there is private use)
• Business software, phone costs, and professional services

For many sole traders, the credit entitlement from two activities combined is meaningfully larger than from one alone, which can partially offset the compliance overhead of GST registration. It is worth factoring this in when you are modelling the real cost of registration.

Everything Reports on One BAS

You have one ABN and one GST registration, so you lodge one Business Activity Statement. You do not lodge a separate BAS for each trading name. Your bookkeeping should still separate the two activities clearly so you can track which one is actually profitable, but for GST reporting, everything consolidates into a single return. Getting your GST coding right in your accounting software across both activities is essential for an accurate BAS.

Watch: How to Check If a Business Is Registered for GST

Not sure how to verify GST registration status for yourself or a supplier? Mina walks through the process in this short BusiHealth video:

Two Genuine Exceptions Worth Knowing

Registration Does Not Turn a Supply Into a Taxable Supply

Being registered for GST does not automatically make every supply you make a taxable supply. The character of the supply still governs. GST-free and input-taxed supplies remain so regardless of your registration status.

Common GST-free supplies include most basic food, medical services, education, and childcare. Input-taxed supplies include residential rent and financial services. If you are registered for GST and you rent out a residential property, the rent remains input-taxed — you do not add GST to rent, and you cannot claim GST credits on the related expenses.

On Cakes Specifically, the Food Concession Does Not Help

Most basic food in Australia is GST-free under Schedule 1 of the A New Tax System (Goods and Services Tax) Act 1999. However, bakery products are specifically carved out of that concession. Cakes, slices, pastries, muffins, and biscuits are classified as taxable food, not GST-free food. GST applies at 10%.

If you sell birthday cakes, celebration cakes, muffins, or slices — whether at a market stall, online, or on custom order — you charge GST on those sales once registered. The basic food concession does not apply to bakery products. The ATO’s guidance on GST and food is specific on this point, and the distinction has been tested.

Is the Second Activity Even an Enterprise?

For GST to apply, the supply must be made in the course or furtherance of an enterprise. A genuine hobby — one with no commercial character and no profit expectation — is not making taxable supplies, and income from it does not count toward your GST turnover.

Be honest with yourself here. Most side activities that generate meaningful revenue will fail the ATO’s business versus hobby test. The ATO considers whether there is a profit intent, whether you operate in a businesslike way, whether there is repetition and regularity, and whether the activity resembles what others do commercially in the same field. Selling cakes at a regular market stall, taking custom orders, and earning $34,000 in a year is not a hobby.

When Two Activities Should Sit in Separate Entities

A common follow-up question is whether setting up a second entity — a company or a trust — to run the second activity would solve the GST issue by keeping each entity’s turnover below $75,000.

The short answer is no, not as a GST strategy. The ATO would likely treat deliberate fragmentation of a single economic enterprise into separate entities to avoid GST obligations as a scheme. The threshold is assessed per entity, but the intention behind the structure matters.

Where separate entities do make genuine sense is for reasons that have nothing to do with GST: asset protection between activities with different risk profiles, cleaner ownership for activities heading toward different growth paths, positioning one activity for future sale, or accessing different tax rates as revenue grows. These are legitimate structural reasons. If any of them apply to you, the right conversation is about business structure, not GST avoidance.

Running two entities also comes with real cost — two sets of accounts, two returns, separate ASIC or trust compliance obligations — and those costs need to be weighed against the actual structural benefit. It is worth modelling before committing.

If you are weighing up whether to separate your activities or stay as a sole trader, the guide to business structures in Australia is a useful starting point before we work through your specific numbers.

Frequently Asked Questions

Can I have two businesses under one ABN in Australia?

Yes. As a sole trader, you can operate multiple business activities under a single ABN. You can register different trading names for each activity through the Australian Business Register, but the ABN and the legal entity behind it remain the same person. GST obligations, income tax, and other regulatory requirements apply to you as the entity, not separately to each business name.

Do I need to register for GST for each business I run?

No. GST registration in Australia is per entity, not per business activity or business name. If you are registered, all your taxable supplies across every activity are covered by that one registration. When working out whether you need to register, the $75,000 threshold is applied to your combined GST turnover across all enterprise activities, not per activity in isolation.

Is the $75,000 GST threshold per business or per ABN?

It is per entity, which in practice means per ABN for a sole trader. All enterprise activities you carry on under that ABN count toward the one threshold. If you run two activities and their combined annual turnover exceeds $75,000, you must register for GST, even if neither activity alone reaches that figure.

Do I charge GST on cake sales in Australia?

If you are registered for GST, yes — for most bakery products. Cakes, muffins, slices, biscuits, and pastries are taxable food under Schedule 1 of the GST Act. The general GST-free food concession does not apply to these products. You charge GST at 10% on those sales.

What happens if I register for GST late?

The ATO can require backdated registration to the date you first exceeded the $75,000 threshold. GST becomes payable on all taxable supplies made from that date, even if you never collected GST from customers. The General Interest Charge applies on the unpaid amounts. Voluntary disclosure before the ATO identifies the issue can reduce penalties in some circumstances, so if you think you may have missed the registration point, get advice quickly.

Should I set up a separate ABN for my second business?

Only if there is a genuine structural reason to do so, such as asset protection, different ownership arrangements, or significantly different risk profiles. Setting up a separate entity to keep each entity’s turnover under $75,000 and avoid GST would likely be treated by the ATO as a GST avoidance arrangement. Get proper advice on your specific situation before restructuring.

The aggregated GST threshold catches more sole traders than any other GST rule. If your combined activities are approaching $75,000, or if you have already crossed it without registering, contact us at Pinnacle Accounting & Advisory before the situation becomes more expensive to resolve. With 81 5-Star Google Reviews from Melbourne business owners, we have helped a lot of people work through exactly this problem. Book a Consultation and we will look at your numbers together.

Frequently Asked Questions

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Many property investors who hold residential real estate inside a family trust wonder whether they need to register their trust for GST. It is a fair question, trusts can be complex, and the GST rules around property are some of the most misunderstood in Australian tax law.

The short answer is: in most cases, no. A family trust that earns only residential rental income does not need to register for GST. But there are exceptions, and getting this wrong can create compliance headaches with the ATO. This article explains when GST registration applies, and when it does not, for a family trust holding residential investment property.

At Pinnacle Accounting & Advisory, we work with Melbourne property investors and business owners who use family trusts to hold and grow their asset portfolios. Understanding how GST interacts with your trust structure is an important part of managing your obligations correctly.

What Is Residential Rent for GST Purposes?

Residential rent is the income a landlord receives from renting out residential premises, a house, apartment, unit, or townhouse used for accommodation. Under the GST Act, this type of supply is specifically classified as an input-taxed supply.

Input-taxed does not mean exempt in the traditional sense. It is a specific GST treatment with two consequences:

• The landlord does not charge GST on the rent
• The landlord cannot claim GST credits (input tax credits) on expenses related to the property, such as property management fees, repairs, and maintenance

This applies whether the landlord is an individual, a company, or a family trust. The legal entity holding the property does not change how the rent is classified for GST purposes.

The GST Registration Threshold and Rental Income

Businesses with a GST turnover of $75,000 or more per year are generally required to register for GST. Many landlords with high rental income assume this threshold means they need to register, particularly if their property generates $75,000 or more in annual rent.

However, the threshold only applies to taxable supplies. Because residential rent is an input-taxed supply, it does not count toward the $75,000 GST registration threshold.

This means a family trust that earns only residential rental income, even if that income exceeds $75,000 per year, is generally not required to register for GST. The ATO confirms this position: residential rent is not subject to GST.

When a Family Trust Does Need to Register for GST

There are several situations where a family trust holding residential property might need to register for GST, or where the GST treatment becomes more complex. These are worth understanding before assuming you are in the clear.

The Trust Has Other Business Income

If the family trust conducts business activities beyond residential property rental, for example, running a trading business, providing services, or holding commercial property, those activities may generate taxable supplies. If the combined taxable supplies from those other activities reach $75,000 or more per year, the trust must register for GST.

Once registered, the trust must charge GST on its taxable supplies and lodge BAS returns. However, the residential rent component remains input-taxed. The trust cannot claim GST credits on rental property expenses just because it is registered for GST in relation to a separate business activity.

The Trust Sells a New Residential Property

This is the most commonly overlooked exception. If the family trust sells new residential premises, a property that has never been sold as a residential premises before, or one that has been substantially renovated, the sale is generally a taxable supply for GST purposes.

A substantially renovated property is one where the renovations have removed or replaced substantially all of the building’s internal or external structural components. If the trust engages in property development or sells new dwellings, GST registration may be required and GST must be remitted on the sale price, typically one-eleventh of the contract price.

Commercial Residential Property

Commercial residential premises, such as hotels, motels, boarding houses, and residential parks, are treated differently to ordinary residential premises. Rent from these properties is a taxable supply, not an input-taxed supply. If the family trust owns and operates commercial residential property and the income exceeds the $75,000 threshold, GST registration is required.

Short-Term Holiday Letting

The ATO’s position on short-term accommodation, such as properties listed on holiday rental platforms, is that it may or may not be input-taxed, depending on the circumstances. Continuous residential accommodation (standard long-term tenants) is input-taxed. High-volume short-term holiday letting may be treated as a taxable supply if the property is considered commercial residential premises. If a family trust operates a holiday rental at scale, specialist advice is warranted before assuming the income is input-taxed.

Watch: Rental Property in a Family Trust

What Happens If Your Trust Is Registered for GST?

If the family trust is registered for GST, either because of other business activities or because it meets the threshold through taxable supplies, here is what that means in practice:

• The trust must lodge Business Activity Statements (BAS) quarterly or monthly
• GST collected on taxable supplies must be remitted to the ATO
• The trust can claim GST credits on expenses related to taxable supplies
• Residential rental income remains input-taxed, no GST is charged to tenants, and no credits can be claimed on rental property costs

Running a trust with both taxable business income and input-taxed rental income requires careful record-keeping to correctly apportion expenses. Many property investors underestimate the administrative complexity this creates, particularly at BAS time.

Should You Voluntarily Register for GST?

Voluntary GST registration is possible even if the trust’s income falls below the $75,000 threshold. However, for a family trust holding only residential rental property, voluntary registration rarely makes sense:

• Residential rent is input-taxed, so registration does not allow the trust to claim GST credits on property expenses
• Registration creates an ongoing BAS lodgement obligation with no corresponding benefit
• There is no GST to collect on residential rent, so the administrative burden outweighs any advantage

The position is different if the trust also engages in taxable business activities. In that case, voluntary registration may allow the trust to claim credits earlier or manage cash flow more effectively. This is worth discussing with a registered tax agent before making the decision.

How This Interacts With Negative Gearing

It is worth clarifying how GST treatment relates to negative gearing. Negative gearing is an income tax concept, it refers to claiming a deduction for a net rental loss (where expenses exceed income) against other assessable income. GST and income tax are separate systems that operate independently.

Because residential rent is input-taxed for GST, the trust cannot claim GST credits on property expenses. However, those same expenses, property management fees, loan interest, repairs, maintenance, and depreciation, are generally deductible for income tax purposes under the ordinary negative gearing rules. The two systems do not affect each other.

If you are considering using a family trust to hold investment property, our guide to setting up a family trust in Australia covers the structure, costs, and decisions involved. And if you are thinking through how trust income is distributed to beneficiaries each year, our article on family trust distributions explains the rules and strategies in plain language.

Frequently Asked Questions

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You can pay less tax legally in Australia by claiming every deduction you are entitled to, using the right business structure, contributing to super within the caps, timing income and expenses, and planning before 30 June rather than after. Legitimate tax planning uses the law as intended and is very different from tax evasion. Innovative companies should also look at the R&D Tax Incentive, a refundable offset that can return up to 43.5 percent of eligible spend.

Every year, Australian business owners hand the ATO more money than they legally need to. Not through fraud or error — but through inaction, poor structure, and the simple failure to plan ahead. If your tax bill feels shocking every June, that’s a sign your current approach is reactive rather than strategic. In this post, I’m sharing the eight most powerful and entirely legal strategies I use with my clients to reduce their tax burden — and keep more of what they earn working for them.

Why Most Business Owners Overpay Tax

The Australian tax system is complex, but it is also remarkably generous to those who understand and use its rules. The problem is that most business owners are focused on running their business — not on optimising their tax position. They rely on an accountant who processes their returns but doesn’t proactively advise on structure. They make decisions in isolation — buying assets, paying family members, withdrawing from their company — without understanding the tax implications. And they wait until after 30 June to think about tax, by which point most opportunities have already closed.

The good news is that every strategy I’m about to share is available to you right now. We’ve written about the biggest tax mistakes Australians make — read that too, because avoiding mistakes is just as important as implementing strategies.

Strategy 1: Operate Through the Right Business Structure

Your business structure is the foundation of your tax position. Operating as a sole trader when you’re earning over $100,000 is almost always costing you money. As a sole trader, every dollar of profit is taxed at your personal marginal rate — up to 47% including Medicare levy.

Moving to a company capped at 25–30%, or a discretionary trust that allows income splitting across the family group, can dramatically reduce your effective tax rate. This is the single biggest lever most business owners can pull — and it requires proper advice to implement correctly without triggering CGT or stamp duty on the transition. See our approach to tax planning here.

Strategy 2: Income Splitting Through a Family Trust

A family (discretionary) trust allows the trustee to distribute income to multiple beneficiaries — each taxed at their own marginal rate. This is one of the most powerful income-splitting tools available in Australia.

For example: if your business generates $250,000 in profit and you have a spouse earning $60,000 from other sources, you can distribute income from the trust to fill their lower tax brackets, to adult children who are studying or working part-time, and to a bucket company. Done correctly, you might reduce your effective tax rate from 47% to an average of 28–32% across the family group — a substantial annual saving.

The ATO’s Section 100A rules apply here — distributions must not be made to a low-rate beneficiary where the economic benefit is enjoyed by a higher-rate beneficiary. Proper documentation and genuine arrangements are essential.

Strategy 3: Use a Bucket Company to Cap Your Tax Rate

When all family members are already fully utilising their lower tax brackets, the next dollar of trust income faces the top marginal rate. The solution is a bucket company — a corporate beneficiary that receives excess trust distributions and pays company tax at 25% instead of the 47% that would otherwise apply.

On a $100,000 distribution to a bucket company vs an individual in the top bracket, the tax saving is $22,000. Over multiple years, these savings compound significantly. The funds in the bucket company can then be invested — in shares, property, or back into the business — providing further returns on the tax saved.

Strategy 4: Maximise Superannuation Contributions

Superannuation is the most tax-advantaged long-term savings vehicle in Australia, and it’s one that business owners consistently under-utilise. Here’s why it’s so powerful:

• Concessional contributions (employer contributions, salary sacrifice, personal deductible contributions) are taxed at 15% inside the fund — compared to your personal marginal rate of up to 47%
• The 2026–27 concessional cap is $30,000 per person per year
• If you have unused concessional cap from the past five years (and your super balance is under $500,000), you can make catch-up contributions — potentially contributing much more in a single year
• Spouse contributions and contributions on behalf of a spouse can also provide tax offsets

A business owner making a $30,000 concessional contribution who would otherwise be taxed at 47% saves approximately $9,600 in tax on that contribution — and the money continues to grow in a tax-advantaged environment. Read about the 2026 payday super changes affecting employers.

Strategy 5: Instant Asset Write-Off and Accelerated Depreciation

Australian tax law provides generous deductions for businesses that invest in assets. The instant asset write-off allows eligible small businesses to immediately deduct the full cost of qualifying assets rather than depreciating them over time. This brings forward the tax deduction — reducing your taxable income in the year you acquire the asset.

For a business purchasing a $50,000 piece of equipment in June 2026 and claiming it as an immediate deduction at a 25% tax rate, the net cost after tax is $37,500. The timing of asset purchases — particularly around the end of the financial year — can have a meaningful impact on your tax bill. Read our complete guide to the instant asset write-off for 2026.

Strategy 6: Pre-Year-End Tax Planning

June is not when tax planning happens — it’s when tax planning concludes. The real work is done in March through May, when there’s still time to act on what you find. Pre-year-end planning involves:

• Reviewing your profit to date and projecting year-end position
• Deciding on trust distributions before 30 June
• Making super contributions before 30 June
• Prepaying deductible expenses where appropriate (e.g. insurance, subscriptions, interest on investment loans)
• Reviewing capital assets — selling underperforming assets before year-end to crystallise losses that offset gains
• Timing invoices and purchases to shift income and deductions between years where appropriate

Business owners who engage in proactive pre-year-end planning consistently pay less tax than those who don’t. The best time to start is now — for the 2026–27 year, get your planning conversations happening in March or April 2027, not June.

Strategy 7: Income Splitting With a Spouse or Family Member

Beyond trust distributions, there are several legitimate ways to direct income to a spouse or family member in a lower tax bracket:

• Employ your spouse: If your spouse works in the business — even part-time in an administrative capacity — paying them a salary that reflects the market rate for their services is tax deductible. The salary is taxed at their lower marginal rate.
• Superannuation contributions for a spouse: You can make non-concessional contributions to your spouse’s super and receive a tax offset of up to $540 if their income is under $37,000.
• Shareholding in a company: If a family member holds shares in your company, dividends can be paid to them proportional to their shareholding — subject to the family trust rules and the company’s constitution.

These strategies must reflect genuine commercial arrangements. The ATO scrutinises salary payments to family members — the amount paid must be commercially reasonable for the work performed.

Strategy 8: Work With a Proactive Advisor, Not Just a Compliance Accountant

Perhaps the most impactful “strategy” of all is not a tax technique — it’s choosing the right accountant. There is a significant difference between an accountant who prepares your returns and an advisor who actively works to reduce your tax burden year-round.

A proactive tax advisor will:

• Review your structure annually and recommend changes as your circumstances evolve
• Contact you before 30 June with specific, actionable recommendations
• Model the tax impact of major decisions before you make them (buying a property, hiring staff, restructuring)
• Keep you informed of ATO changes and new legislation that affects your position
• Help you build long-term wealth through tax-efficient investing, not just manage last year’s tax

Most of my clients tell me the same thing when they first come to Pinnacle: their previous accountant was perfectly competent at compliance but never proactively reached out to suggest ways to save money. That reactive approach costs business owners dearly over time.

How Pinnacle Approaches This With Business Owners

At Pinnacle, tax planning is not a once-a-year conversation — it’s an ongoing advisory relationship. From the moment you engage us, we review your existing structure, identify where you’re overpaying, and develop a tax-minimisation roadmap for the next two to three years.

We implement strategies in the right order: structure first, then distributions, then super, then timing. We model the numbers so you can see exactly what each strategy will save you in real dollar terms. And we stay on top of ATO developments so you’re never blindsided by changes to the rules.

The goal is not to push the boundaries — it’s to make sure you’re legitimately paying the least amount of tax the law requires. That’s not aggressive planning; that’s smart business. Reach out to Pinnacle today to start the conversation.

Frequently Asked Questions

Is it legal to minimise tax in Australia?

Absolutely. The High Court of Australia has affirmed the right of taxpayers to arrange their affairs in a way that minimises their tax liability, provided they do not engage in fraud, evasion, or arrangements that fall within the general anti-avoidance rules (Part IVA of the ITAA 1936). Every strategy in this article is legal, well-established, and used by thousands of Australian business owners.

How much can I realistically save?

It depends entirely on your income, structure, and family situation. Business owners earning over $200,000 in business profit who are operating under a suboptimal structure often save between $20,000 and $60,000 per year once properly structured. The savings grow as income grows. Speak to Mina for a specific assessment of your situation.

When is the best time to start tax planning?

The best time was when you first started your business. The second best time is right now. For the current financial year (2026–27), there’s still time to implement most of these strategies — but don’t wait until June. Many opportunities close at year-end and cannot be applied retrospectively.

What is the difference between tax minimisation and tax evasion?

Tax minimisation (or avoidance) is legal — it involves arranging your affairs within the law to reduce the tax you owe. Tax evasion is illegal — it involves deliberately hiding income, falsifying records, or making fraudulent claims. Everything in this article is legal tax minimisation. If an advisor suggests something that feels like it crosses a line, get a second opinion.

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Frequently Asked Questions

For a business owner, the biggest wins come from applying these tax minimisation strategies with the right structure in place.

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To lodge your BAS using Xero, make sure your bank is reconciled and transactions are coded correctly, run and review the Activity Statement report, then lodge directly to the ATO through Xero’s connected lodgement, or use the figures to lodge via your agent or the ATO portal. Accurate coding is the key to a correct BAS.

How to Lodge Your BAS Using Xero: A Complete Guide for Australian Businesses

If you run a business in Australia, your BAS — Business Activity Statement — is one of the most important tax obligations you’ll manage throughout the year. Get it right, and you stay on the ATO’s good side, maintain healthy cash flow, and avoid penalties. Get it wrong, and you could be facing interest charges, audits, or a nasty catch-up bill you weren’t expecting.

The good news is that Xero makes the BAS process significantly more manageable than it used to be. With automated GST tracking, built-in reconciliation tools, and direct lodgement capability, most Australian small business owners can handle their BAS in Xero without drowning in spreadsheets or manual calculations — provided their books are kept in good order throughout the quarter.

In this guide, we’ll walk you through everything you need to know: what a BAS is, who needs to lodge one, how to prepare and lodge your BAS using Xero, the mistakes that catch businesses out, and when it genuinely makes sense to hand the whole thing over to a registered BAS Agent.

What Is a BAS? (Business Activity Statement Explained Simply)

A Business Activity Statement — almost always referred to as a BAS — is a form you submit to the Australian Taxation Office (ATO) to report and pay several tax obligations in one hit. Depending on your business structure and circumstances, a BAS can include:

• GST (Goods and Services Tax) — the 10% tax collected on most sales, less the GST you’ve paid on business purchases
• PAYG Withholding — the tax you’ve withheld from employees’ wages and need to remit to the ATO
• PAYG Instalments — prepayments toward your own income tax liability (common for sole traders and company directors)
• Fuel Tax Credits — if applicable to your industry
• Wine Equalisation Tax or Luxury Car Tax — where relevant

For most small to medium businesses, the BAS is primarily about GST and PAYG withholding. The ATO uses the information you report to reconcile what you’ve collected from customers and what you owe — or in some periods, what you’re owed as a refund.

You can find the ATO’s official overview of Business Activity Statements here: ATO — Business Activity Statements (BAS).

Who Needs to Lodge a BAS in Australia?

Not every Australian business needs to lodge a BAS. Your obligation depends primarily on whether you’re registered for GST.

The GST Registration Threshold

You are required to register for GST — and therefore lodge a BAS — if your business has a GST turnover of $75,000 or more per year. For non-profit organisations, the threshold is $150,000. If you’re a taxi driver or ride-share driver (including Uber), you must register for GST regardless of your turnover.

Even if you’re below the $75,000 threshold, you can choose to voluntarily register for GST. This is sometimes worthwhile if your clients are GST-registered businesses who can claim the GST back, or if you have significant business purchases you’d like to claim input tax credits on. Once you register, you must lodge a BAS.

You can check the ATO’s GST registration requirements here: ATO — Registering for GST.

Quarterly vs Monthly BAS Lodgement

Most small businesses lodge their BAS quarterly. The four quarters follow the Australian financial year:

• Q1: July — September (due 28 October)
• Q2: October — December (due 28 February)
• Q3: January — March (due 28 April)
• Q4: April — June (due 28 July)

Businesses with a GST turnover exceeding $20 million are required to lodge and pay monthly. Some businesses also voluntarily opt for monthly lodgement to manage cash flow more actively — paying smaller, more frequent amounts rather than one large quarterly amount.

If you have employees, you’re also paying PAYG withholding — usually monthly or quarterly depending on the amount you withhold. Your BAS will capture this as well.

How Xero Helps With Your BAS

Xero is built with Australian tax compliance in mind, and the BAS functionality is one of its strongest features. Here’s how Xero works to make the BAS process more accurate and efficient.

GST Coding in Xero

Every transaction in Xero is assigned a tax rate — also called a GST code. These codes tell Xero how to treat each transaction for GST purposes. The most common codes you’ll encounter are:

• GST (10%) — standard taxable sales and purchases
• BAS Excluded — transactions that don’t affect your BAS at all (wages, ATO payments, owner drawings)
• GST Free (0%) — sales or purchases that are GST-free under the law (certain food, exported goods, some medical services)
• Input Taxed — for financial supplies such as bank interest or residential rent

Getting these codes right is absolutely critical. Xero uses them to automatically populate your BAS fields — so if a transaction is coded incorrectly, your BAS figures will be wrong before you even open the BAS screen.

How Xero Tracks GST Automatically

Once your transactions are correctly coded, Xero’s GST tracking does the heavy lifting. As you reconcile transactions in your bank feed, Xero records the GST component of each transaction and accumulates these figures in the background. By the time you’re ready to prepare your BAS, Xero has already calculated your:

• G1 — Total Sales (your gross income including GST)
• 1A — GST on Sales (the GST you collected)
• 1B — GST on Purchases (the input tax credits you can claim)

This automation dramatically reduces the manual effort of calculating your GST liability and significantly lowers the risk of arithmetic errors.

Connecting to the ATO

Xero connects directly to the ATO, which means you can lodge your BAS straight from within Xero without needing to log into the ATO Business Portal or myGov separately.

If you work with a Xero accountant or registered BAS Agent, they can also access your Xero file directly to review, finalise, and lodge your BAS on your behalf — all without needing to be physically present.

Step-by-Step: How to Prepare Your BAS in Xero

Here’s a practical walkthrough of the BAS preparation process in Xero. Before you start, make sure your bookkeeping is up to date for the period.

Step 1: Review and Reconcile Your Accounts

Before you do anything with your BAS, your bank accounts need to be fully reconciled for the entire BAS period. This means every transaction in your Xero bank feed has been matched or coded.

Step 2: Open the BAS in Xero

Navigate to Accounting > Tax > Activity Statements. Xero will show you the current or upcoming BAS periods. Select the relevant period and open the draft BAS.

Step 3: Check Your GST Amounts

Review the pre-populated figures against what you’d expect based on your income and expenses for the quarter. If anything looks off, drill down into the GST Audit Report to see a transaction-by-transaction breakdown.

Step 4: Finalise and Lodge

Once you’re satisfied the figures are accurate, you have two lodgement options from within Xero: Lodge directly via Xero, or export and lodge manually via the ATO Business Portal or your registered BAS Agent.

Common BAS Mistakes Business Owners Make in Xero

Even with Xero doing much of the calculation work, there are several mistakes that regularly trip up business owners.

Using the Wrong GST Codes

Coding a GST-free sale as a taxable sale, or using “GST (10%)” for a bank charge that should be “BAS Excluded” — these errors compound over time. Take the time to set up your chart of accounts correctly from the start.

Not Reconciling Before Lodging

Lodging a BAS when your bank accounts aren’t fully reconciled is one of the fastest ways to get your figures wrong. Always reconcile fully before opening your BAS in Xero.

Missing or Incorrect PAYG Withholding

If you have employees, you must report the PAYG withholding you’ve deducted from their wages in the W2 field of your BAS.

Claiming GST on Expenses That Are Input Taxed or GST-Free

Not everything you buy has GST on it. Bank fees, some insurance products, wages, and residential rent are common examples of expenses that are either input taxed or GST-free.

BAS Due Dates — When Do You Need to Lodge?

Missing your BAS due date attracts a Failure to Lodge (FTL) penalty from the ATO. Standard quarterly due dates:

• Q1 (July-September): Due 28 October
• Q2 (October-December): Due 28 February
• Q3 (January-March): Due 28 April
• Q4 (April-June): Due 28 July

If you lodge through a registered BAS Agent, you’re typically entitled to extended lodgement deadlines.

Should You Use a BAS Agent?

Many business owners start out lodging their own BAS and do so successfully. But as your business grows, handing your BAS to a registered BAS Agent becomes a smart investment.

At Pinnacle Accounting & Advisory, our lead accountant Mina Baselyous holds CPA, CTA, and Registered BAS Agent credentials. Key benefits of using a registered BAS Agent include extended lodgement deadlines, accuracy review, time savings, ATO representation, and strategic tax planning advice.

If you’re in Melbourne and looking for a registered BAS Agent who works exclusively in Xero, our BAS Agent services page explains exactly how we work and what’s included.

Frequently Asked Questions

Can I lodge my BAS directly from Xero?

Yes. If your Xero organisation is connected to the ATO, you can lodge directly from the Xero Activity Statements screen.

What happens if I make a mistake on a lodged BAS?

For small errors (under $10,000 in GST), you can include the correction in your next BAS. For larger errors, you’ll need to lodge a revised BAS.

Do I need to lodge a BAS if my business made no income?

Yes. Once registered for GST, you must lodge a BAS for every period — even a nil BAS.

How far back can the ATO audit my BAS?

For most businesses, the ATO can review your BAS for up to four years from the date of lodgement. Keep accurate records for at least five years.

Ready to Take the Stress Out of Your BAS?

At Pinnacle Accounting & Advisory, we’re a Melbourne-based, Xero-specialist accounting firm and registered BAS Agent practice. Ready to get your BAS sorted? Book a Consultation with Mina today.

Frequently Asked Questions

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Family trusts are one of Australia’s most powerful tax planning tools — yet most business owners set one up and then leave money on the table every single year. The reason? They’re not distributing income strategically. A family trust gives the trustee genuine discretion over who receives the trust’s income each year, but exercising that discretion intelligently takes more than ticking a box before 30 June.

This guide is part of our complete guide to trusts in Australia.

Done well, trust distributions can legally reduce your family’s combined tax bill by tens of thousands of dollars annually. Done poorly — or not at all — you risk income being taxed at the highest marginal rate, penalty tax on distributions to minors, and compliance issues with the ATO’s increasingly focused scrutiny on trust arrangements, particularly under Section 100A and its reimbursement agreement rules.

In this guide, we explain how trust distributions work in Australia, who should receive them and why, how to use a bucket company to cap tax at 25–30%, and the critical 30 June deadline that catches too many trustees off guard. If you have a family trust, this article will help you understand whether your distribution strategy is actually working for you.

If you are still deciding whether a family trust is the right structure for your business, our complete guide to business structures in Australia covers all four main options and helps you determine which suits your stage of growth.

What Is a Trust Distribution?

A family trust (also called a discretionary trust) earns income throughout the financial year from business operations, investments, rent, or other sources. At the end of each year, the trustee must decide how that income is allocated among the trust’s beneficiaries. This allocation is called a trust distribution.

The key feature of a discretionary trust is exactly that — discretion. The trustee can choose how much income each beneficiary receives each year, subject to the trust deed and tax law. Unlike a unit trust where entitlements are fixed by unit holdings, a discretionary trust allows the trustee to direct income to whoever will pay the least tax on it.

This discretion is the entire foundation of trust-based tax planning. If everyone in your family has the same marginal tax rate, a trust offers limited income-splitting benefit. But if beneficiaries have different rates — a spouse working part-time, adult children, or a corporate beneficiary — the trustee can direct income to lower-rate recipients to minimise the total tax payable across the group.

Who Can Receive Distributions From a Family Trust?

The trust deed defines who is an eligible beneficiary. In a typical family trust, this includes:

• Individual family members — the primary beneficiaries, including a spouse, adult children, parents, and siblings. If they’re on a lower marginal tax rate, directing income their way reduces the family’s overall tax bill.
• Corporate beneficiaries — a company (often called a bucket company) that is eligible to be taxed at the base rate of 25% (for base rate entities with turnover under $50 million) or 30% for other companies. This is a powerful tool when trust income is high.
• Other trusts — such as a beneficiary who is themselves the trustee of a separate trust. This adds complexity but can be useful in multi-entity structures.

A critical rule regarding minors: Distributions to children under 18 years of age are subject to penalty tax under the ATO’s “kiddie tax” rules (Division 6AA of the Income Tax Assessment Act 1936). Income over $416 is taxed at 66 cents in the dollar (up to $1,307), and at 45% for amounts above that. This effectively eliminates the tax benefit of distributing to young children in most cases. An exception applies if the income is from a deceased estate or is genuine employment income.

How to Minimise Tax Through Strategic Distributions

The core strategies used by Pinnacle to help clients reduce their tax through trust distributions are:

Income Splitting

If your spouse earns little or no other income, distributing trust income to them first — up to the tax-free threshold of $18,200, then at 19% — keeps significant income off your higher-rate tax return. The same applies to adult children who are students or working part-time.

Waterfall Distributions

A waterfall strategy distributes income to the lowest-rate beneficiaries first — filling up their lower tax brackets — and then distributing the excess to a corporate beneficiary (bucket company) to cap the tax rate at 25–30%. This approach maximises the income-splitting benefit while containing the remaining income at a fixed corporate rate.

Practical Example

Say a family trust generates $400,000 in income in 2025–26. Without a strategy, all $400,000 might flow to the primary business owner, with roughly $146,000 going to the ATO at the top rate.

With strategic distributions:

• $45,000 to spouse (tax: ~$4,794 after the tax-free threshold)
• $45,000 to adult child A (tax: ~$4,794)
• $45,000 to adult child B (tax: ~$4,794)
• $265,000 to bucket company (tax: $66,250 at 25%)
• Total tax: ~$80,632 — a saving of approximately $65,000 compared to a single-beneficiary distribution

The exact saving depends on each beneficiary’s other income, deductions, and applicable rates. The principle, however, is clear: the trustee’s discretion, exercised properly, is one of the most effective legal tax reduction tools available in Australia.

The 30 June Deadline — Why It Matters

One of the most costly and common trust mistakes in Australia is missing the 30 June trustee resolution deadline.

Under Australian trust law and the ATO’s interpretation, the trustee must make and record a resolution to distribute the trust’s income to specific beneficiaries before midnight on 30 June of each income year. If no valid resolution is made in time, one of two things happens depending on the trust deed:

• The income is allocated to the default beneficiary named in the deed (often the trustee themselves, or a single individual), or
• The trust becomes a “trustee assessed” trust, meaning the ATO taxes all undistributed income at the highest marginal rate of 45% plus Medicare levy

Neither outcome is desirable. A 30 June resolution must be signed and dated — verbal decisions or informal notes are not sufficient. The ATO has been increasingly focused on the adequacy of trustee resolutions as part of its trust compliance programme.

At Pinnacle, we contact clients before 30 June every year to review income projections and finalise the trustee resolution. If you are unsure whether your accountant does the same, that is worth a conversation — because a missed deadline cannot be corrected after the fact.

Using a Bucket Company to Reduce Trust Tax

A bucket company is a corporate beneficiary set up specifically to receive distributions from a family trust. When used correctly, it is one of the most effective tools for managing trust income that exceeds what individual beneficiaries can absorb at lower marginal rates.

Here is how it works:

• The trust distributes income to the bucket company as a beneficiary
• The company pays tax at either 25% (for base rate entities with aggregated turnover under $50 million) or 30%
• The after-tax profit sits inside the company as retained earnings
• If the funds are eventually needed personally, they can be paid out as a franked dividend — with the shareholder receiving a franking credit for the tax already paid at the company level

The bucket company strategy works particularly well for business owners who do not need to draw all their trust income personally each year. The income parks inside the company at a lower tax rate and can be accessed later as working capital or distributed to shareholders in a tax-efficient way.

It is important to structure this correctly from the outset. The trust deed must name the company as a potential beneficiary, and the company must be set up and in place before the distribution is made. For more detail on how this integrates with a broader tax planning strategy, speak with a qualified adviser.

ATO Rules and Compliance Traps

The ATO has significantly increased its focus on family trust distributions in recent years. There are several compliance areas that business owners and trustees need to be aware of.

TA 2022/1 — ATO’s 2022 Trust Distribution Guidance

In February 2022, the ATO released Taxpayer Alert TA 2022/1, flagging concerns about certain trust distribution arrangements where income is directed to low-rate taxpayers who do not genuinely benefit economically from the distribution. The ATO’s concern is that some arrangements are structured purely for tax purposes, without genuine commercial substance.

Under section 100A of the Income Tax Assessment Act 1936, if a beneficiary is made presently entitled to trust income as part of a “reimbursement agreement” — where someone else actually benefits from the funds — the ATO can apply penalty tax rates. Purpose and substance matter: the ATO looks at whether the beneficiary genuinely receives and benefits from the distribution, or whether the funds flow back to a higher-rate taxpayer. See the ATO’s current guidance at ato.gov.au.

Unpaid Present Entitlements (UPEs) and Division 7A

When trust income is distributed to a corporate beneficiary but the funds are not physically transferred, the beneficiary holds an unpaid present entitlement (UPE). If the trust uses those funds and the UPE remains unpaid, Division 7A of the Income Tax Assessment Act 1936 can apply — treating the UPE as a deemed dividend to the corporate beneficiary’s shareholders. This is a significant and common trap in bucket company arrangements. Our guide to family trust distributions covers the treatment of UPEs in more detail.

Personal Services Income (PSI)

If the trust’s income is classified as personal services income — earned primarily through the personal effort or skills of one individual — the PSI rules may limit the ability to distribute to other beneficiaries. In that case, most or all of the income may need to be attributed back to the individual who earned it, regardless of the trustee resolution.

How Pinnacle Structures Trust Distributions for Clients

At Pinnacle Accounting & Advisory, trust distribution planning is not something we do once at tax time and forget about. We work with business owners throughout the year to make sure their distribution strategy is current, compliant, and maximising after-tax outcomes.

Our process typically involves:

• Reviewing beneficiary marginal rates — understanding what each family member or corporate beneficiary earns from other sources, so we can model the most tax-effective distribution mix
• Modelling distribution scenarios — running numbers on different split options (individual vs bucket company, proportions) before the 30 June deadline
• Preparing the trustee resolution — drafting a compliant, signed resolution before 30 June each year, with clear documentation of who receives what and why
• Annual structure review — checking whether the existing trust structure still suits the business, or whether a bucket company or changes to the deed would improve outcomes

If you have a family trust and are not sure whether your distributions are being optimised, we would welcome a conversation. Book a consultation and we will review your structure together.

Frequently Asked Questions

Can I change my trust distribution strategy each year?

Yes. Because a family trust is discretionary, the trustee has the flexibility to make a fresh distribution decision each income year. You are not locked into the previous year’s split. However, you must make and document the resolution before 30 June each year — you cannot backdate it after the financial year has closed.

What happens if I miss the 30 June distribution deadline?

If no valid trustee resolution is made before 30 June, the trust income will either flow to the default beneficiary named in the deed (which may not be who you intended) or be taxed at the top marginal rate of 45% plus Medicare levy as trustee-assessed income. This is one of the most expensive mistakes a trustee can make, and it cannot be fixed after the fact.

Can a non-resident be a beneficiary of a family trust?

Technically yes, but distributing to non-resident beneficiaries is complex. Non-residents are subject to different withholding tax rates on Australian-sourced trust income, and the double taxation implications can be significant. Before making any distribution to a non-resident beneficiary, seek specific advice from a tax adviser familiar with cross-border trust arrangements.

Is distributing to a bucket company always the best strategy?

Not always. A bucket company works well when you want to retain income inside a low-tax entity rather than drawing it personally. However, if the funds are ultimately paid out as dividends, the shareholder pays income tax on those dividends (offset by franking credits). The overall tax benefit depends on how and when you eventually access the funds. In some cases, distributing to lower-rate individual beneficiaries may be more efficient than routing through a company. Model both scenarios before deciding.

How does the ATO’s 2022 guidance affect trust distributions?

The ATO’s Taxpayer Alert TA 2022/1 focused on arrangements where a beneficiary is made entitled to trust income on paper but does not genuinely benefit from it — particularly where funds flow back to a higher-rate taxpayer informally. If your distributions have genuine commercial substance and the beneficiaries actually receive and use the income, the alert is unlikely to apply to your situation. However, if funds are being “distributed” to family members but used by the business owner, seek specific advice urgently.

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

Frequently Asked Questions

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