Before you can invoice a customer, register for GST, or register a business name, you need one thing: an Australian Business Number. The good news is it is free and, for most people, quick. The catch is that you have to be genuinely entitled to one, and getting the application wrong can hold up everything else.

This guide walks through what an ABN is, whether you are entitled to one, how to apply, and the mistakes that cause applications to be delayed or reviewed. It is written for Melbourne business owners who want to start on the right foot.

What is an ABN?

An Australian Business Number (ABN) is a unique 11-digit number that identifies your business to the government, the ATO, and the people you do business with. It is issued through the Australian Business Register (ABR) and it is free to apply for.

Your ABN is used to:

• Invoice customers and be identified on your tax invoices;
• Register for GST and lodge your BAS;
• Claim energy grants and fuel tax credits where eligible;
• Deal with the ATO and other government agencies; and
• Confirm your business details to other businesses through the free ABN Lookup service.

The 47% reason you need an ABN

Here is the one that costs people money. If another business pays you for goods or services and you do not quote an ABN, they are generally required to withhold 47% of the payment and send it to the ATO. You eventually reconcile it through your tax return, but in the meantime your cash flow takes a serious hit. For any business dealing with other businesses, an ABN is non-negotiable.

Are you entitled to an ABN?

Not everyone who wants an ABN can get one. To be entitled, you must be carrying on an enterprise in Australia, broadly, running a business or commercial activity with a genuine intention to make a profit. A one-off private sale or a hobby does not qualify.

Signs you are carrying on an enterprise include operating in a business-like way, keeping records, invoicing clients, having repeat customers, and intending to make a profit. If you apply without a genuine enterprise, the ABR can refuse or cancel the ABN.

Your business structure determines who actually holds the ABN: a sole trader applies as an individual, while a company, partnership or trust applies as that entity. Choosing the right structure first saves you re-applying later.

ABN vs ACN: what is the difference?

These get confused constantly. An ABN is for any business type and is issued by the ABR. An ACN (Australian Company Number) is a 9-digit number issued by ASIC that only companies receive when they are registered as a company. If you operate through a company, you will have both: an ACN for the company itself and an ABN for doing business. Our guide on moving from sole trader to company explains when a company structure is worth it.

How to apply for an ABN

You apply through the Australian Business Register, and it is free; be wary of third-party sites that charge a fee to do it for you. Before you start, have these ready:

• Your tax file number (and those of any associates such as partners or directors);
• Your chosen business structure (sole trader, company, partnership or trust);
• Details of your business activity and start date; and
• Your business contact and location details.

You can apply directly through the Australian Business Register, or have your accountant lodge it as part of setting up your business correctly. Many applications are approved instantly; others are held for review if the details are incomplete or the entitlement is unclear.

ABN, business name and GST: how they fit together

An ABN is one piece of the set-up puzzle. Depending on your plans you may also need to:

• Register a business name with ASIC: required if you trade under anything other than your own personal name;
• Register for GST: compulsory once your turnover reaches $75,000; and
• Register a company with ASIC (getting an ACN) if you choose a company structure.

Doing these in the right order, under the right entity, is what keeps things clean. Our full guide on how to start a business in Australia puts the whole sequence together.

Frequently Asked Questions

• Facebook
• Instagram
• LinkedIn
• YouTube
• TikTok
• X

Every time you pay your staff, the ATO expects to hear about it, on the same day, automatically. That is Single Touch Payroll, and if you employ people in Australia it is not optional. And once your total Australian wages grow past the state threshold, you may also face payroll tax in Victoria, a separate obligation many growing employers miss.

For most employers it runs quietly in the background through their payroll software. But when it goes wrong, a missed finalisation, a super figure that does not match, an employee who cannot see their income statement in myGov, it lands squarely on the business owner. And with the shift to STP Phase 2, the amount of detail you are reporting has grown.

This guide explains what Single Touch Payroll is, what you must report, the deadlines that matter, and where employers most often trip up. It is written for Melbourne business owners who want payroll to be one less thing to worry about. If you are still setting up, see our complete guide to how to start a business in Australia.

What is Single Touch Payroll (STP)?

Single Touch Payroll is the way employers report payroll information to the ATO. Instead of sending payment summaries once a year, you report each pay run to the ATO at the time you pay your employees, every payday, through STP-enabled software.

Each STP report sends the ATO three key pieces of information for every employee:

• Salaries and wages: what you paid each person;
• PAYG withholding: the tax you withheld from their pay; and
• Superannuation: the super you are liable to pay on their behalf.

Because the ATO receives this in real time, your employees can see their year-to-date pay, tax and super in their myGov account, and their end-of-year income statement is built automatically from your reports.

Who has to use STP?

Effectively every employer in Australia. STP is mandatory for all businesses that pay employees, including small employers with only one or a handful of staff. The concessions that once applied to very small and closely held employers have largely ended, so if you run payroll, you report through STP.

There are still some special arrangements for closely held payees, family members, directors, shareholders and beneficiaries, who can be reported quarterly rather than each payday in some cases. Getting that concession applied correctly is worth a conversation with your accountant.

STP Phase 2: what changed

STP Phase 2 expanded the detail employers report, without changing the way you lodge. The goal is to reduce duplicate reporting to other government agencies, so more information now flows through your pay events. Key changes include:

• Disaggregation of gross: income is now itemised into components such as overtime, bonuses, allowances, paid leave and directors’ fees, rather than a single gross figure;
• Employment and taxation conditions: details like employment basis (full-time, part-time, casual) and the reason employment ended are reported through STP;
• Income type and country codes: each payment is categorised, which matters for closely held payees, working holiday makers and others.

Modern payroll software handles the mechanics, but only if your pay items are mapped correctly. A poorly configured set-up quietly reports the wrong categories all year, something we regularly find and fix during payroll reviews.

The STP deadlines that matter

Report on or before each payday

Your STP report is due on or before the day you pay your employees. For most businesses this is automatic: you finalise the pay run in your software and the report lodges itself.

Finalise by 14 July

After the end of each financial year you must make an STP finalisation declaration, a tick that tells the ATO your figures for the year are complete and correct. The deadline is 14 July. Once you finalise, your employees’ income statements are marked ‘Tax ready’ in myGov and they (or their accountant) can lodge their tax returns with confidence.

Miss the finalisation and your staff see ‘Not tax ready’ against their income, a common source of frustrated phone calls in July. It is a small step that makes a big difference to your team.

Where employers go wrong with STP

• Not finalising by 14 July: the most common issue, and the one your employees notice first.
• Incorrect pay item mapping under Phase 2: allowances or bonuses coded to the wrong category all year.
• Super reported but not paid: STP reports your super liability, but you still have to actually pay it by the due date. The two are separate, and the ATO can see the gap.
• Onboarding new employees incorrectly: wrong tax file number declarations or employment basis flowing into every report.

Because STP feeds the ATO live data, errors are visible almost immediately. That is a good reason to get the set-up right: our Xero Payroll guide covers the software side, and if you are unsure about your super obligations, start with the super guarantee charge.

STP Phase 3 and real-time data-matching: what is coming

You may have seen the term STP Phase 3 used online. It is worth being clear: the ATO has not legislated or formally branded a program called STP Phase 3. What the phrase describes is the clear direction of travel, payroll reporting and compliance moving to real time, backed by increasingly automated data-matching. The mechanics below are already law or already in place, whatever label gets attached to them.

The concrete change is Payday Super. From 1 July 2026, employers must pay super guarantee at the same time as wages on each payday, rather than quarterly, and must report year-to-date qualifying earnings for each employee through their STP reporting every payday. Payroll, PAYG, and super reporting effectively converge into a single real-time stream. You can read the detail on the ATO’s Payday Super pages.

The second shift is how the ATO uses that data. It now matches the payroll information you report through STP against the contribution data super funds report when money reaches an employee’s account. That lets the ATO reconcile, close to real time, whether the right super was paid to the right fund on time, and it surfaces late or short payments almost immediately rather than months later. The same live matching applies to PAYG withholding. In practice, the ATO’s systems increasingly flag discrepancies automatically, which is why some commentators describe this as an AI-driven, real-time approach to payroll compliance.

For employers, the message is simple: the margin for error is shrinking. Late super, mismapped pay items, or figures that do not reconcile will be visible to the ATO quickly, so getting your payroll set-up and payment timing right matters more than ever.

Frequently Asked Questions

• Facebook
• Instagram
• LinkedIn
• YouTube
• TikTok
• X

You have just landed a run of bigger jobs, revenue is climbing, and somewhere in the back of your mind a question is nagging: do I need to register for GST yet? Get the timing wrong and you can end up personally out of pocket, paying the ATO 10% on sales you never charged GST on, plus penalties.

Most business owners we meet either register too late and cop a nasty bill, or register too early and take on paperwork they did not need. Neither is fatal, but both are avoidable.

This guide explains exactly when you have to register for GST in Australia, when it is worth doing voluntarily, how to register, and what changes the day you do. It is written for established Melbourne business owners who want to get this right and move on.

What is GST registration, in plain English?

GST (Goods and Services Tax) is a flat 10% tax on most goods and services sold in Australia. When your business is registered for GST, you add 10% to your prices, collect it from your customers, and pass it on to the ATO through your Business Activity Statement (BAS). In return, you can claim back the GST you pay on your own business purchases; these are called GST credits.

Registration is what switches all of this on. Until you are registered, you must not charge GST; once you are registered, you must. That is why the timing matters so much.

The $75,000 GST registration threshold

The core rule is simple. You must register for GST when your business’s GST turnover reaches $75,000 or more in a 12-month period. Turnover here means your gross income from sales, not your profit, and before expenses.

This catches NDIS providers in particular, because GST-free supports still count towards the threshold. Our guide to GST on NDIS therapy services explains which supports are actually GST-free and which are not.

Critically, the test is forward-looking as well as backward-looking. You have to register if either of these is true:

• Your current GST turnover, this month plus the previous 11 months, is $75,000 or more; or
• Your projected GST turnover, this month plus the next 11 months, is likely to be $75,000 or more.

That projected test catches a lot of growing businesses. If you sign a contract or win work that you know will push you over $75,000 in the coming year, the obligation to register is triggered then, not at the end of the financial year.

A few important variations on the threshold:

• Non-profit organisations have a higher threshold of $150,000.
• Taxi, limousine and ride-sourcing drivers (including rideshare) must register for GST regardless of turnover; there is no threshold at all.
• If you want to claim fuel tax credits, you must be registered for GST.

You have 21 days: do not sit on it

Once you become aware that your turnover has reached, or will reach, the threshold, you have 21 days to register. Miss that window and the ATO can require you to pay GST on all the sales you made from the date you should have registered, even though you never charged your customers that 10%. On $200,000 of sales, that is roughly $18,000 coming straight out of your margin, plus potential penalties and interest.

This is the single most expensive GST mistake we see. It is entirely preventable with a bit of forward planning and someone keeping an eye on your rolling turnover.

Should you register for GST voluntarily?

If your turnover is under $75,000 you can still choose to register. Whether you should comes down to who your customers are and what you buy.

When voluntary registration makes sense

• Your customers are other businesses. They claim back the GST you charge, so your 10% is not a real cost to them, and you get to claim GST credits on your own purchases.
• You have significant start-up or equipment costs. Registering lets you claim back the GST on those purchases, which can be a meaningful cash refund early on.
• You are close to the threshold anyway. Registering early avoids the scramble, and the risk of blowing past $75,000 without noticing.

When it is usually not worth it

• You sell mostly to consumers (the general public), who cannot claim the GST back, so adding 10% either makes you dearer than competitors or eats your margin.
• You want to keep BAS paperwork and cash-flow management to a minimum while you are small.

How to register for GST

You need an Australian Business Number (ABN) before you can register for GST; the two are linked. Once you have an ABN, you can register in a few ways:

• Through the ATO’s Business Portal or the ATO’s registering for GST page;
• Through the online Business Registration Service when you first apply for your ABN;
• By phoning the ATO; or
• Through your registered tax or BAS agent, the simplest option, because they confirm the right registration date and reporting cycle for you.

When you register you will also choose how often you lodge your BAS, usually quarterly for small business, though monthly and annual options exist. Getting this cycle right matters for cash flow.

What changes the day you are registered

Registration brings three ongoing obligations:

• Charge 10% GST on your taxable sales and issue tax invoices that show the GST.
• Lodge a BAS each period, reporting the GST you collected and the GST credits you are claiming.
• Pay the net GST to the ATO (or receive a refund if your credits exceed what you collected).

Coding your transactions correctly from day one keeps this clean; our guide on GST coding walks through the common traps. If you want the mechanics of the statement itself, start with what a BAS actually is and the key lodgement dates.

At registration you also choose how you will report GST. That choice is worth real money if your customers pay slowly, so read GST cash vs accruals before you accept the default.

Frequently Asked Questions

• Facebook
• Instagram
• LinkedIn
• YouTube
• TikTok
• X

Your Australian company pays 25% if it is a base rate entity for that income year and 30% if it is not. For the 2021-22 income year onwards, a base rate entity is a company with aggregated turnover under $50 million whose base rate entity passive income is no more than 80% of its assessable income.

Ask most business owners what tax rate their company pays and you will hear “25%” or “30%” with roughly equal confidence. Both answers are right, for different companies. And getting it wrong doesn’t just affect your tax bill; it changes how much of your profit you can pass to shareholders tax-effectively.

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

The rule that decides which rate applies is the “base rate entity” test, and it trips up more owners than almost any other part of company tax. This guide explains the two rates, how the test works, why your mix of income matters, and how the rate flows through to franking and dividends. It then works through six numbered examples with the percentages shown, so you can find the one that looks like your group. Mina Baselyous, the CPA and Chartered Tax Advisor behind Pinnacle Accounting & Advisory, runs this calculation across client structures every year.

The two company tax rates in Australia

Australia has two company tax rates:

• 25%: the lower rate, for companies that qualify as a “base rate entity”.
• 30%: the full rate, for every other company.

Unlike personal income tax, there are no brackets. A company pays a single flat rate on all of its taxable income: the whole question is simply which of the two rates applies to it. That is decided each year by the base rate entity test.

The 25% rate has applied to base rate entities from the 2021-22 income year onwards, and the $50 million aggregated turnover threshold has been in place since 2018-19, according to the ATO’s Changes to company tax rates guidance, last updated 4 September 2026.

What is a base rate entity?

Your company qualifies for the 25% rate in a given year if it meets both of these conditions:

• Aggregated turnover under $50 million: your company’s turnover plus that of any connected or affiliated entities.
• No more than 80% “base rate entity passive income”: meaning passive income is 80% or less of your assessable income.

Both conditions sit in section 23AA of the Income Tax Rates Act 1986. Fail either one and the company is taxed at 30% for that year. Because it is tested annually, and because aggregated turnover is worked out at the end of the year, the same company can move between the two rates from one year to the next as its income mix changes.

The passive income test: where it gets tricky

The turnover test is easy for most small businesses to satisfy. The one that catches people out is the passive income test.

Base rate entity passive income, or BREPI, is defined in section 23AB of the Income Tax Rates Act 1986. It is a closed list:

• Dividends and other corporate distributions, other than a non-portfolio dividend
• Franking credits attached to those distributions
• Non-share dividends
• Interest, royalties and rent
• Gains on qualifying securities
• Net capital gains
• A share of trust or partnership income, to the extent it traces back to one of the categories above

Here is the trap. A company that trades actively for most of its income is a base rate entity. But a company set up mainly to hold investments, a “bucket company” receiving trust distributions, or a company holding a rental property, can easily have more than 80% passive income, which pushes it to the 30% rate. So two companies owned by the same person can pay different rates depending entirely on what kind of income they earn.

This is why the way you use a bucket company needs to be thought through: the tax rate it pays affects the whole strategy. Our comparison of a family trust and bucket company goes deeper on this, and if you are holding profit inside a company rather than drawing it, our guide to retained earnings explains what that actually means on your balance sheet.

Trust income keeps its character when it reaches your company

Trust income does not become passive just because it passed through a trust. Section 23AB(1)(g) of the Income Tax Rates Act 1986 makes a company beneficiary’s share of trust net income base rate entity passive income only to the extent it is referable to an amount that was already passive in the trust.

That single rule settles most of the arguments we hear. If a trading trust distributes its business profit to a bucket company, that distribution is active income in the company’s hands, not passive, and it does not count towards the 80% ceiling. If a property trust distributes rent to the same company, it is passive all the way through. The character follows the money.

The ATO says the same thing in Law Companion Ruling LCR 2019/5 (consolidated 20 October 2021, and still current). Paragraph 17 states that a company assessed on a share of trust net income has passive income “to the extent that” the amount is referable to the trust’s own passive income. Paragraph 18 adds that where there is a chain of trusts, the test is applied at each level, so a sub-trust in the middle does not launder the character either.

One important exception runs the other way. A franked dividend that a trust receives and then streams to a corporate beneficiary is not a non-portfolio dividend of that company, because the dividend was not paid to a company holding at least 10% of the voting power in the paying company (LCR 2019/5, paragraph 20). So a dividend that would have been excluded from passive income had the company held the shares directly becomes passive income once it arrives via a trust. If your group holds shares inside a family trust, our guide to franking credits where a company is held in a family trust works through the related traps.

Six worked examples: 25% or 30%?

The test is arithmetic, not judgement. Add up assessable income, add up the part of it that is base rate entity passive income, and divide. If the answer is 80% or less and aggregated turnover is under $50 million, the company pays 25%. Every example below assumes turnover is comfortably under the threshold.

Case	Assessable income	Passive income (BREPI)	BREPI %	Result
1. Trading trust to bucket company	$400,000	$0	0%	PASSES, 25%
2. Own trading income plus trust rent	$700,000	$200,000	28.6%	PASSES, 25%
3. Mixed trust, proportionate share	$500,000	$200,000	40%	PASSES, 25%
4. Property trust to bucket company	$300,000	$300,000	100%	FAILS, 30%
5. A capital gain tips it over	$1,000,000	$850,000	85%	FAILS, 30%
6. Exactly on the line	$1,000,000	$800,000	80%	PASSES, 25%

Case 1. Trading trust to bucket company. The family trust runs the business. It distributes $400,000 of trading profit to Bucket Co, which has no other income. Every dollar traces back to the trust’s business income, so none of it is passive. BREPI is $0 of $400,000, or 0%. PASSES. 25%. This is the outcome most owners assume they have, and it is correct only when the trust earns nothing but business income.

Case 2. Own trading income plus trust rent. A cafe company earns $500,000 of its own trading income and also receives $200,000 of rent distributed from a trust that owns the building. Assessable income is $700,000; the rent is passive. BREPI is $200,000 of $700,000, or 28.6%. PASSES. 25%. This mirrors the ATO’s own “Coffee and Cake Pty Ltd” example on its company tax rate page (last updated 4 September 2026), which lands on the same 28.6%.

Case 3. Mixed trust, proportionate share. The trust’s net income is $1,000,000: $600,000 trading, $250,000 rent, $150,000 interest. Bucket Co is presently entitled to 50% of the trust’s distributable income, so it is assessed on $500,000. That $500,000 is attributed proportionately across every income type: $300,000 trading, $125,000 rent, $75,000 interest. BREPI is $200,000 of $500,000, or 40%. PASSES. 25%. Note what did not happen: the company did not get to take the trading income first.

Case 4. Property trust to bucket company. A property trust distributes $300,000 of rent to a company with no other income. Everything traces back to rent, which is passive. BREPI is $300,000 of $300,000, or 100%. FAILS. 30%. A company used purely as a landing pad for rent will almost always sit here.

Case 5. A capital gain tips it over. A software company earns $150,000 of trading income and makes an $850,000 net capital gain selling the office building it traded from. Assessable income is $1,000,000. A net capital gain is passive income under section 23AB(1)(f), even when the asset was an active business asset. BREPI is $850,000 of $1,000,000, or 85%. FAILS. 30%. This mirrors the ATO’s “SoftDev Pty Ltd” example. One transaction moved an active trading company to the full rate for the whole year.

Case 6. Exactly on the line. A company has $200,000 of trading income and $800,000 of passive income, so BREPI is exactly 80%. PASSES. 25%. People assume 80% fails. It does not. Section 23AA asks whether “no more than 80%” of assessable income is passive, so 80.0% is inside the test and 80.1% is outside it. The ATO reaches the same conclusion on identical facts in LCR 2019/5, Example 1.1, where a company with exactly 80% passive income is held to be eligible for the lower rate.

The streaming trap: your resolution does not fix the mix

A trustee cannot choose which type of income a company beneficiary receives, except for capital gains and franked distributions. Everything else is attributed proportionately, based on the company’s share of the trust’s distributable income. So a resolution that makes a bucket company entitled to “the net business income” does not stop the trust’s rent and interest flowing through with it.

The ATO sets this out in LCR 2019/5, Example 1.2. The Busy Trust earned $500,000 of business income, a $300,000 unfranked dividend and $200,000 of rent. The trustee resolved to make Company 1 presently entitled to the net business income specifically. It did not work. Because Company 1’s entitlement was $500,000 of a $1,000,000 pool, it was assessed on 50% of the trust’s net income, and that $500,000 was attributed as $250,000 business income, $150,000 unfranked dividend and $100,000 rent. Its passive income came out at 50%, not zero.

That proportionate approach is not an ATO invention. It is the principle the Full Federal Court applied in Commissioner of Taxation v Greenhatch [2012] FCAFC 84 (7 June 2012): a beneficiary’s share of trust net income under Division 6 is a proportionate share of the whole, not a slice traced to a particular class of receipt. Parliament later carved out two exceptions, capital gains and franked distributions, which can be streamed to a specifically entitled beneficiary under Subdivisions 115-C and 207-B of the Income Tax Assessment Act 1997. Nothing else can.

In practice, says Mina Baselyous (CPA, CTA, Registered Tax Agent), the mistake we see most often is a trustee resolving to send “only the business income” to the bucket company and assuming that settles the rate. It does not. The company is assessed on a proportionate slice of everything the trust earned that year, and if the trust holds property or a share portfolio alongside the business, that slice can be enough to push the company to 30%.

The practical fix is structural rather than clerical: separate the passive assets from the trading trust so the mix at the top is clean. That usually means more than one trust, or a company that holds the shares directly rather than through a trust. Our guides to the types of trusts used in Australia and family trust and interposed entity elections cover how those groups are usually built. For the other half of this story, how a holding company sits above a trading company and why a non-portfolio dividend changes the answer, read our guide to holding companies, tax and asset protection.

Why the rate affects franking and dividends

The company tax rate isn’t just about the company’s own bill: it sets the rate at which the company franks its dividends. A company that pays 25% tax will usually, though not always, frank dividends at 25%; one paying 30% usually franks at 30%. The exception is explained in the next section, and it matters.

That matters when profit is later paid out to shareholders. Franking credits pass on the tax the company has already paid, so shareholders aren’t taxed twice. A mismatch, for example, tax paid at 30% in an earlier year but dividends franked at 25% now, can leave franking credits trapped in the company. This is a genuinely fiddly area, and it is one of the reasons the rate question is worth getting right rather than guessing. If you are working out the most efficient way to get money out of the company, start with how to pay yourself from your company, and check the share classes you actually have on issue before you declare anything.

The imputation mismatch: 25% tax, 30% franking

A company’s tax rate and its franking rate are worked out from different years, so they can disagree. The rate you pay tax at uses this year’s figures. The rate you frank at, called the corporate tax rate for imputation purposes, is worked out by assuming your aggregated turnover, assessable income and passive income are the same as they were in the previous income year.

The ATO explains the mechanics under “Maximum franking credits” on its company tax rate page, and LCR 2019/5 works through it at paragraphs 53 to 70. The consequences are easy to picture:

• A company that failed the test last year because it sold a building, but is back to normal trading this year, pays tax at 25% and franks at 30%. It can attach more credits than it paid, which drains the franking account faster than it fills.
• A company that passed last year but tips over 80% this year pays tax at 30% and franks at 25%. Credits build up in the franking account that shareholders never see.
• A company with no previous income year is treated as a base rate entity for imputation purposes, so a brand new company franks at 25%.

In a group that runs a Division 7A loan account or a bucket company, this is worth checking before the dividend is declared, not after. The High Court’s decision in Bendel changed how unpaid present entitlements to a bucket company are treated, but it did not change the base rate entity test or the franking rate, and a company that has already converted a UPE to a complying loan still has to service it.

How the company rate fits your overall structure

The 25% company rate looks attractive next to the top personal marginal rate, and it is a big part of why so many business owners trade through a company. But a low company rate is only useful if the profit can then reach you, or be reinvested, efficiently. That is a structuring question, not just a rate question.

Whether a company is the right vehicle at all depends on where your business is heading, how much profit you retain versus draw, and how you want to protect assets. Our guides on company versus trust and structuring your business to build wealth work through those decisions, and ongoing tax planning is where the rate test actually gets applied each year. You can also check the current rates directly on the ATO’s company tax rate page.

Frequently Asked Questions

Your headline rate is only the starting point; proactive tax planning in Melbourne determines what you actually pay.

• Facebook
• Instagram
• LinkedIn
• YouTube
• TikTok
• X

Payroll tax is the tax growing businesses never see coming. You hire a few more people, your wage bill creeps up, and one day you cross a threshold you didn’t know existed, and suddenly the State Revenue Office wants a monthly return and a cheque.

Want a quick estimate first? Try our Victorian payroll tax calculator to work out your liability from your annual Victorian wages.

It is a state tax, not a federal one, so it works differently to income tax and GST, and the rules change from state to state. If you employ people in Victoria, this is the guide to knowing where you stand before a surprise assessment finds you.

Below we cover what payroll tax is, the Victorian threshold and rate for 2025-26, what counts as wages, the grouping rules that catch business owners out, and how to plan for it as you grow.

What is payroll tax?

Payroll tax is a state and territory tax on the wages an employer pays, once total wages exceed a tax-free threshold. It is self-assessed: the onus is on you to register, lodge, and pay, not on the government to chase you.

The key thing to understand is that it is levied on your total wage bill above the threshold, not just the amount over it in the way income tax brackets work. Once you are in the system, it applies to your whole taxable wages figure after the deduction. That is why crossing the threshold is a genuine cost step, and why it deserves planning rather than a shrug.

The Victorian payroll tax threshold and rate for 2025-26

For the 2025-26 financial year in Victoria, the numbers that matter are:

• Tax-free threshold: $1,000,000 in annual Australian taxable wages (equivalent to $83,333 per month). This rose from $900,000 on 1 July 2025.
• Metropolitan rate: 4.85% on wages above the threshold.
• Regional employer rate: 1.2125% for eligible regional Victorian businesses.

There is also a phase-out to be aware of. Once your Australian wages exceed $3 million, the tax-free threshold begins to reduce, and it disappears entirely once wages reach $5 million. Above $5 million, payroll tax applies to your full wage bill with no deduction. You can confirm the current figures on the State Revenue Office Victoria website.

A quick illustration: a metropolitan employer with $1.4 million in annual wages pays 4.85% on the $400,000 above the threshold, roughly $19,400 for the year. It is a real number, and it grows quickly as you add staff.

What counts as wages for payroll tax?

“Wages” is broader than the salaries in your payroll software. In Victoria, taxable wages generally include:

• Salaries, wages, commissions, bonuses and allowances
• Superannuation contributions
• The grossed-up value of fringe benefits
• Certain payments to contractors caught by the contractor provisions
• Termination payments and some directors’ fees

That contractor point is a common trap. Paying someone as a contractor does not automatically keep them out of your payroll tax calculation: the relevant contract provisions can pull those payments back in. If you rely heavily on subcontractors, this is worth reviewing carefully. Our guide on super obligations for contractors covers the related question of when contractors are treated like employees.

Grouping: the rule that catches business owners out

This is the single most misunderstood part of payroll tax. If you control more than one business, the grouping rules can force you to add all the businesses’ wages together and apply a single threshold across the whole group, not one threshold per entity.

Businesses can be grouped where there is common ownership or control, shared employees, or one entity has a controlling interest in another. For owners who run several companies or trusts, a common set-up for tax and asset-protection reasons, this can mean you cross the payroll tax threshold far earlier than you expected, because the group is assessed as one.

Grouping is precisely where your business structure and your payroll tax position collide, which is why the two should be planned together. If you are running multiple entities, our overview of business structures in Australia is a useful companion read.

Surcharges for larger employers

Victoria applies additional levies to larger employers on top of the base rate. Businesses with large national payrolls can be subject to the mental health and wellbeing surcharge and a temporary levy introduced to repay pandemic-era debt. These are aimed at bigger employers, but if your group’s national wages are climbing into the eight figures, they need to be on your radar and in your forecasts. The current thresholds and rates are published by the State Revenue Office.

How to plan for payroll tax as you grow

Payroll tax rewards the businesses that see it coming. A few practical steps:

• Forecast your wage bill. Know roughly when you will cross $1 million so it is a planned event, not a shock.
• Build it into your pricing. Once you are over the threshold, every new hire carries an extra 4.85% on their wages, so factor that into quotes and margins.
• Check your grouping position early. If you run multiple entities, confirm whether they are grouped before you assume separate thresholds.
• Register on time. You must register once you go over the monthly threshold, and late registration can mean back-payments and penalties.

This is the kind of forward-looking work a good advisor should be doing alongside your income tax planning. If payroll tax has crept up on you, or you can see it coming, it is far cheaper to plan for it now than to unwind a surprise assessment later.

Frequently Asked Questions

• Facebook
• Instagram
• LinkedIn
• YouTube
• TikTok
• X

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

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

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

What is capital gains tax?

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

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

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

How is capital gains tax calculated?

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

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

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

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

The 50% CGT discount

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

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

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

The small business CGT concessions

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

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

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

Capital gains tax on property and shares

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

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

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

How to legally reduce your capital gains tax

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

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

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

Frequently Asked Questions

If you have moved out of your home and rented it out, the CGT 6 year rule can keep that property exempt for up to six years, and it changes the calculation above significantly.

• Facebook
• Instagram
• LinkedIn
• YouTube
• TikTok
• X

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

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

Why the leniency is ending

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

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

What firmer action actually looks like now

Director Penalty Notices

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

Disclosure of business tax debts to credit bureaus

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

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

Garnishee notices

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

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

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

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

Payment plans and why engaging early matters

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

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

Watch: the ATO is coming after directors in 2026

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

What business owners must do now

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

Frequently Asked Questions

Is the ATO really chasing tax debts harder in 2026?

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

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

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

Is interest on ATO debt still tax deductible?

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

Can I still get a payment plan with the ATO?

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

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

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

Frequently Asked Questions

• Facebook
• Instagram
• LinkedIn
• YouTube
• TikTok
• X

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

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

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

What Is a Holding Company?

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

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

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

The holding company may also own other assets directly, such as an investment property, a share portfolio, or intellectual property licensed to the operating company. Who holds the shares in the holding company matters too, and our guide to classes of shares covers the mechanics.

Why Business Owners Set Up a Holding Company

There are several compelling reasons:

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

Asset Protection: Separating IP and Assets

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

Under a holding company structure:

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

For businesses in professional services, construction, retail, or any field with litigation or insolvency risk, this separation is genuinely valuable. One word of warning on royalties: royalty income is passive income for company tax rate purposes, so charging a large royalty up to the holdco can be the very thing that pushes it from 25% to 30%. That interaction is worked through further down this page.

Dividend Flow to a Holding Company

When the trading company pays a franked dividend up to the holding company, the dividend is included in the holding company’s assessable income, grossed up by the franking credit, and the franking credit is then allowed to the holding company as a tax offset. Where both companies are on the same rate, the offset cancels the tax and no further company tax is payable at that level.

That is the mechanism people are describing when they say inter-company dividends are “tax-free”. It is more precise to say the profit is taxed once, in the company that earned it, and the imputation system stops it being taxed again on the way up. An unfranked dividend is different: it carries no credit, so it is taxed in full in the holding company at 25% or 30%.

This means profits can move from the operating company to the holding company without triggering a second layer of tax, which is an enormous advantage for asset protection. The funds sit in the holding company and can be reinvested in shares, property, or other assets. Our guide to retained earnings explains what that accumulated profit looks like on the balance sheet.

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

How a Holding Company Works Between a Trading Company and a Family Trust

In the structure we build most often, the family trust owns the shares in the holding company, the holding company owns 100% of the trading company, and profit moves up as dividends. The trust sits at the top for distribution flexibility and asset protection; the holding company sits in the middle to hold cash and assets away from trading risk.

Read from the bottom up, the three layers each do one job:

• Trading company (bottom). Carries the customers, the staff, the contracts and all of the commercial risk. It is deliberately kept lean, with profit swept upward rather than accumulating.
• Holding company (middle). Owns 100% of the trading company’s shares, plus any cash, investments or intellectual property the group has built up. Because it holds the shares directly, dividends it receives from the trading company are non-portfolio dividends.
• Family trust (top). Owns the shares in the holding company. When the group eventually wants profit in the owners’ hands, the holding company pays a franked dividend to the trust, and the trustee decides which beneficiaries receive it.

The order of those layers is not cosmetic, and this is the part most owners have never been told. If the family trust owned the trading company shares directly and streamed the franked dividend down to a bucket company, that dividend would not be a non-portfolio dividend in the company’s hands, because it was not paid to a company holding at least 10% of the voting power. The ATO says exactly this at paragraph 20 of Law Companion Ruling LCR 2019/5 (consolidated 20 October 2021). Same dollars, same family, different tax rate, purely because of who holds the shares.

If your group already holds the trading company inside a trust, the franking-credit consequences are worth understanding before you restructure: see our guide to a company held in a family trust and the 45-day rule, and our explanation of family trust and interposed entity elections, which is usually what makes the franking credits usable in the first place. For the wider menu of trust options, start with the types of trusts used in Australia.

What Is a Non-Portfolio Dividend?

A non-portfolio dividend is a dividend paid to a company that holds a voting interest of at least 10% of the voting power in the company paying it, as defined in section 317 of the Income Tax Assessment Act 1936. It is specifically excluded from base rate entity passive income, which is what keeps a holding company on the 25% rate.

Three things have to line up:

• The dividend is paid to a company. A dividend paid to a trust or to an individual can never be a non-portfolio dividend.
• That company holds a voting interest in the paying company, within the meaning of section 334A.
• The voting interest amounts to at least 10% of the voting power. Ten per cent exactly is enough; 9.9% is not.

Two narrow categories, eligible finance share dividends and widely distributed finance share dividends, are carved out of the definition. They are rarely relevant to a private group.

Why it matters: Section 23AB of the Income Tax Rates Act 1986 makes a distribution by a corporate tax entity passive income, other than a non-portfolio dividend. So an ordinary portfolio dividend counts against the 80% passive income ceiling; a non-portfolio dividend does not count at all.

What about the franking credit attached to it?

The franking credit follows the dividend. Paragraph (b) of section 23AB(1) makes passive income “an amount of a franking credit on such a distribution“, and “such a distribution” points back to paragraph (a), which is a distribution other than a non-portfolio dividend. A franking credit attached to a non-portfolio dividend is therefore not a credit on “such a distribution”, so on the plain words of the provision it is outside base rate entity passive income as well.

That reading matters, because the gross-up is large. A $500,000 dividend franked at 25% carries a $166,667 franking credit, and if the credit were passive while the dividend was not, a holding company with no other income would land at 25% passive income instead of zero. The ATO’s own plain-English summary on its company tax rate page (last updated 4 September 2026) describes passive income as “corporate distributions and franking credits on these distributions”, which reads the same way. LCR 2019/5 does not address the point head-on, so where the answer changes the rate for a large group we document the position rather than assume it.

Does Your Holding Company Pay 25% or 30%? Two Worked Examples

A holding company pays 25% if it is a base rate entity for the year and 30% if it is not. That means aggregated turnover under $50 million and passive income of no more than 80% of assessable income. The 10% shareholding test is usually what decides it, because it decides whether the dividends the company lives on are passive or not.

Holding company	Assessable income	Passive income	Passive %	Result
A. Owns 100% of the trading company	$666,667	$0	0%	PASSES, 25%
B. Owns 5% of an unrelated company	$100,000	$100,000	100%	FAILS, 30%

Example A: the dividend is a non-portfolio dividend

Holdco owns 100% of the shares in Tradingco and has no other income. Tradingco pays a $500,000 fully franked dividend, franked at 25%, which carries a franking credit of $166,667. Holdco’s assessable income is the $500,000 dividend plus the $166,667 credit, or $666,667.

Holdco holds well over 10% of the voting power in Tradingco, so the dividend is a non-portfolio dividend and is excluded from passive income, as is the franking credit on it. Passive income is $0 of $666,667, or 0%. PASSES. 25%. Tax of $166,667 is fully offset by the $166,667 franking credit, so no further company tax is payable and the credit is not wasted.

Example B: the dividend is not a non-portfolio dividend

The same Holdco holds a 5% parcel in an unrelated company and receives a $100,000 dividend, with no other income that year. Five per cent is below the 10% threshold, so this is not a non-portfolio dividend. It is an ordinary corporate distribution and is therefore passive income in full, along with any franking credit attached to it.

Passive income is $100,000 of $100,000, or 100%. FAILS. 30%. The company is taxed at the full rate for the entire year, on all of its income, not just the dividend. If the dividend is fully franked the credit may still cover the tax on that particular receipt, but the 30% rate now applies to every other dollar the company earns and sets the rate it can frank its own dividends at next year.

The aggregated turnover trap

Passing the passive income test is only half of it. Because Holdco owns 100% of Tradingco, the two are connected entities, and section 328-115 of the Income Tax Assessment Act 1997 requires Holdco to add the annual turnover of every connected entity and affiliate to its own when working out aggregated turnover.

So a holding company with almost no turnover of its own sitting above a trading company that turns over $52 million is not a base rate entity, and pays 30%, even though its passive income is zero. In a group with several trading entities, this is the limb that quietly fails first. We see it most often after an acquisition, when nobody re-runs the aggregation.

The full mechanics of the 25% and 30% rates, including six worked examples covering trust distributions, rent and capital gains, are set out in our companion guide to the company tax rate in Australia and the base rate entity test. The two articles are two halves of one story.

CGT and the 50% Discount Issue

One significant downside of a holding company structure is that companies do not get the 50% CGT discount. If the holding company sells an asset held for more than 12 months, it pays tax on the full gain at 30% (or 25% for base rate entities). By contrast, an individual or trust would be taxed on only 50% of the gain. Note also that a net capital gain is itself passive income, so a large gain in the holding company can push it from 25% to 30% in the very year it makes the gain.

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

Timing note. The capital gains tax discount rules for individuals, trusts and partnerships are being changed by the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 (Federal Register C2026A00049, assented 26 June 2026, in force). If you are making a structuring decision today that depends on the 50% discount applying to a sale several years from now, confirm the position that will actually apply at that time before you commit. As at September 2026 this is the single most common assumption we have to correct in older structuring advice.

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

Moving existing assets into a holding company is not free either. Transferring assets between entities typically triggers CGT and potentially stamp duty. Corporate restructure relief under Subdivision 122-A of the Income Tax Assessment Act 1997 can defer CGT in certain circumstances, but the conditions are strict. This is why getting the structure right from the start is so much better than restructuring later.

When Does a Holding Company Make Sense?

A holding company structure tends to make sense when:

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

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

Cost vs Benefit Analysis

Running a holding company adds complexity and cost:

• ASIC annual review fee for the additional company
• Preparation of a separate company tax return each year
• Maintaining separate financial records for the holding company
• Legal advice on structuring the dividend flows and any IP licences
• An annual check that the group still passes both limbs of the base rate entity test

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

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

How Pinnacle Approaches This With Business Owners

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

Every structure we recommend gets tested against the base rate entity rules before it is signed off, says Mina Baselyous (CPA, CTA, Registered Tax Agent). A holding company that pays 30% because nobody checked who holds the shares is a five-percentage-point leak that runs every year, quietly, until somebody looks.

If we recommend implementing a holding company, we manage the entire process: company incorporation, advice on the share structure, dividend payment strategy, and integration with any existing trust structures. We also advise on the Division 7A implications of any loans between entities in the group. Read our guide to Division 7A here, and if a bucket company in your group is carrying an unpaid present entitlement, read what the High Court’s decision in Bendel changed. Where a deemed dividend is in play, the distributable surplus calculation is usually what determines the damage.

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

Frequently Asked Questions

• Facebook
• Instagram
• LinkedIn
• YouTube
• TikTok
• X

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

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

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

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

What Is a Profit and Loss Report?

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

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

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

How to Run Your P&L Report in Xero

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

A few settings worth knowing:

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

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

Understanding Each Section of Your Xero P&L

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

Revenue

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

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

Cost of Sales

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

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

Gross Profit

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

Operating Expenses

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

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

Net Profit

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

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

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

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

Gross Margin

Gross margin = (Gross Profit ÷ Revenue) × 100

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

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

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

Net Profit Margin

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

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

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

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

Common P&L Mistakes in Xero That Distort Your Numbers

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

Incorrect tax coding

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

Personal expenses coded to business accounts

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

Transactions sitting in suspense or unreconciled

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

Owner wages coded incorrectly

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

Accrual vs cash confusion

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

How to Use Your P&L to Make Better Decisions

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

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

How Your Accountant Reads Your P&L Differently

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

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

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

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

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

Frequently Asked Questions

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

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

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

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

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

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

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

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

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

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

Frequently Asked Questions

• Facebook
• Instagram
• LinkedIn
• YouTube
• TikTok
• X

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

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

Why the ATO is escalating now

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

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

The three claims most likely to trigger scrutiny

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

1. Motor vehicle and car claims

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

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

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

2. Working from home

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

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

3. Mixed-use assets, money, and expenses

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

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

How the ATO actually catches you

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

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

The substantiation the ATO expects

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

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

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

How to claim safely in 2026

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

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

Frequently Asked Questions

What deductions is the ATO targeting in 2026?

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

Can the ATO really see my claims in real time?

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

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

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

Is a working from home estimate still acceptable?

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

What happens if I get a deduction wrong?

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

Frequently Asked Questions

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

• Facebook
• Instagram
• LinkedIn
• YouTube
• TikTok
• X