The four main business structures in Australia are sole trader, partnership, company and trust. Each is taxed differently, offers different asset protection, and carries different setup and compliance costs. Most established business owners earning $500,000 or more use a combination, typically a trading company owned by a family trust with a bucket company, to legally lower tax and protect assets. The structure you choose matters just as much when buying a business in Australia as when starting one.

Choosing the right business structure is one of the most consequential decisions an Australian business owner makes, and one of the hardest to undo. The structure you operate under determines how much tax you pay, how your assets are protected if something goes wrong, who can share in the income, and what happens when you eventually want to sell or pass the business on. Mina Baselyous (CPA and Chartered Tax Advisor) has reviewed hundreds of structures for Melbourne business owners, and Pinnacle Accounting & Advisory holds 81 five-star Google reviews from owners who have restructured the right way.

Most business owners make this decision once, at the start, and never revisit it. But the structure that made sense when you were a sole trader turning over $150,000 is rarely the right structure when you are running a company with $2 million in revenue and real assets to protect. This is the pillar guide to business structures in Australia: the four main options, how they compare, how multi-entity structures work, and what the right structure actually looks like for an established owner who wants to pay less tax and protect what they have built. It links out to every detailed guide in the series so you can go deeper on each topic.

The Four Main Business Structures in Australia

The Australian Taxation Office recognises four primary business structures: sole trader, partnership, company and trust. Each has different tax treatment, liability exposure, setup costs and operational requirements. Here is what every business owner needs to understand about each one.

1. Sole Trader

A sole trader is the simplest and most common structure for small businesses in Australia. You operate under your own name (or a registered business name), you are personally responsible for all debts and liabilities, and all business income is treated as your personal income and taxed at your marginal rate.

The main advantage of the sole trader structure is simplicity: low setup costs, minimal compliance, and straightforward tax lodgement. The major disadvantage is unlimited personal liability. If the business is sued or cannot pay its debts, your personal assets, including your home, your savings and your car, are at risk. There is no separation between the business and the person.

From a tax perspective, sole traders pay income tax on every dollar of business profit at their marginal rate, up to 47% including the Medicare levy for the 2025-26 year. There is no ability to split income with a spouse or family member, no company tax rate of 25%, and no access to the family trust income distribution strategies that can significantly reduce your tax bill. The sole trader structure works well at low income levels, but as revenue grows it becomes increasingly expensive from a tax standpoint. When the numbers get large enough, moving from sole trader to a company is often the first restructure we recommend.

The ATO has full guidance on sole trader obligations and registration.

2. Partnership

A partnership exists when two or more people carry on a business together with a view to making profit. Partnerships are governed by a partnership agreement, which should always be in writing, and must lodge a partnership tax return each year, though the partnership itself does not pay tax. Instead, each partner includes their share of the partnership income in their own individual tax return and pays tax at their marginal rate.

Partnerships are common in professional services such as law firms, medical practices and accounting firms, and in family businesses where two spouses work together. Like a sole trader, each partner has unlimited personal liability for the debts of the partnership. This is a significant exposure: if your partner makes a decision that creates a liability, you are personally on the hook for it.

The main tax advantage of a partnership is the ability to split income between partners, which can be effective if one partner earns significantly less than the other. However, income splitting is constrained by what is commercially reasonable given each partner’s contribution to the business.

3. Company

A company is a separate legal entity incorporated under the Corporations Act 2001. It has its own Australian Company Number (ACN), can enter contracts, own property and be sued in its own name. The directors and shareholders of the company are generally protected from personal liability for the company’s debts. This is the limited liability that makes companies attractive for businesses with significant assets or risk exposure.

For tax purposes, a company pays corporate tax on its taxable income. For small businesses that qualify as base rate entities (aggregated turnover under $50 million and no more than 80% passive income), the corporate tax rate is 25% for the 2025-26 year, compared with the standard 30% rate. That is significantly lower than the top marginal rate of 47%, and the difference creates a real incentive to retain earnings inside a company rather than distributing them immediately. We explain the detail in our guide to the company tax rate in Australia.

However, retained earnings in the company are not free money. When profits are eventually distributed to shareholders as dividends, those dividends may attract additional personal income tax, though the franking credit system prevents double taxation by crediting shareholders for the tax already paid at the company level. The key point is that a company structure lets you control when you pay the higher marginal rate, by timing distributions to years when your personal income is lower. If you draw money out of your company incorrectly, Division 7A can treat it as a deemed dividend, so the loan account needs careful management.

Running a company involves more compliance than a sole trader: annual ASIC fees, more detailed financial record-keeping, company tax returns, and obligations around director duties. The way you set up the ownership matters too, so it is worth understanding the different classes of shares a company can issue. For an established business with genuine asset protection needs or significant taxable income, the benefits almost always outweigh the compliance cost.

4. Trust

A trust is a legal arrangement where a trustee holds and manages assets on behalf of beneficiaries. In a business context, the most common type is a discretionary trust, also called a family trust, where the trustee has discretion each year to decide how to distribute the trust’s income among the eligible beneficiaries. Trusts are a large topic in their own right, so we cover them in depth in our companion pillar, the complete guide to trusts in Australia.

This discretion is the core tax advantage of a family trust. Each year the trustee can distribute income to the beneficiaries with the lowest marginal tax rates, such as a spouse, adult children, or a bucket company that pays tax at 25%. Over time this can produce very significant tax savings compared with all income being taxed at the primary business owner’s marginal rate. The trust distribution strategies you use each year, and documenting them before 30 June, are what make the difference.

Trusts also provide a degree of asset protection. Assets held in a trust are generally not available to the personal creditors of the beneficiaries, though this protection has limits and depends on how the trust is structured. One critical point: a trust does not retain earnings at a lower tax rate. All trust income must be distributed each year or it is taxed at 47% in the hands of the trustee. This is why trusts are often paired with a bucket company or a holding company to capture undistributed or surplus income at the company tax rate.

Comparing Business Structures: A Practical Summary

Every business is different, and the right structure depends on income level, family circumstances, the nature of the business risk, and long-term goals. That said, here is how the four structures compare across the dimensions that matter most to an established small business owner.

Using Multiple Entities: The Trust and Company Structure

For established business owners, the most powerful structuring approach is rarely a single entity. It is a combination of entities working together. The most common setup for Melbourne and Australian SMEs earning above $300,000 is a family trust with a corporate trustee, paired with a bucket company.

Here is how it works in practice:

• The trading entity earns the business income. This might be the trust itself operating the business, or a separate trading company.
• The family trust receives profits and distributes them each year at the trustee’s discretion. The trustee distributes to whoever in the family unit has the lowest taxable income that year, such as a spouse, adult children, or related entities.
• The bucket company receives any portion of trust income that cannot be distributed tax-effectively to individuals. Because a company pays tax at 25%, the bucket company catches excess income at a much lower rate than the owner’s marginal rate. The retained funds can then be used for investment, future distributions, or reinvestment into the business.
• A holding company or holding trust can sit above the operating entity to hold valuable assets such as property, equipment and goodwill, separate from the trading risk, providing an additional layer of asset protection.

This kind of structure is not a loophole. It is a legal, well-established approach that is explicitly contemplated by Australian tax law. It requires careful setup, and it needs to be reviewed annually to ensure distributions are optimal and that trust distributions are documented correctly. For a business owner with significant taxable income and real assets to protect, the combined tax savings and liability reduction can be substantial, often many times the cost of the structure itself. Getting this right, or restructuring correctly when you outgrow a simpler structure, is one of the most valuable things a proactive accountant can do for you. See our tax planning service for how we approach structuring for established business owners.

Which Business Structure Is Right for You?

There is no universal answer. The right structure depends on a combination of factors specific to your situation. That said, here is how Mina approaches the question with clients.

If you are a sole trader turning over less than $150,000 with low risk and no family members who could benefit from income splitting, staying as a sole trader may be perfectly reasonable. The simplicity and low compliance cost are genuine advantages at this level.

If you are turning over $300,000 to $500,000 as a sole trader, you are almost certainly paying more tax than you need to. A family trust structure, or a company, will typically produce meaningful tax savings that far exceed the annual compliance cost. At this income level a review is not optional, it is essential.

If you are turning over $500,000 or more with a family and real assets, a multi-entity structure is almost always worth the investment. The combination of income splitting, retained earnings at 25%, and asset separation produces compounding benefits that grow as the business grows.

If you run a trades or service business with employee liability exposure, a corporate structure provides protection that a sole trader or partnership cannot. A judgment against your company does not automatically expose your home.

If you are planning to bring in investors or eventually sell, a company structure is generally essential. Investors expect to hold shares, and buyers expect to acquire shares or assets from a structured entity. A sole trader business is very hard to sell in a clean, tax-effective way. For the two most commonly debated options, see our direct company vs trust comparison.

Changing Your Business Structure Without Triggering Tax

You can change your business structure, but doing it the wrong way can trigger capital gains tax and stamp duty. The good news is that specific rollovers exist to defer that tax when the conditions are met, most notably the small business restructure rollover. In our experience, the mistake we see most is owners restructuring reactively after a problem, rather than planning the move in advance.

The small business restructure rollover can let you move assets from one structure to another without an immediate CGT bill, provided there is no change in ultimate economic ownership and the other conditions are satisfied. Personal services income rules can also limit how much income you can shift into a company or trust, so it is worth understanding whether your income is caught by the personal services income rules before you restructure. Timing matters: reviewing the structure before a major transaction, such as buying property, bringing in a partner, or selling, produces far better outcomes than cleaning up a messy structure later.

One change on the horizon is directly relevant to trust-based structures. In the 2026-27 Federal Budget, announced on 12 May 2026, the Government proposed a 30% minimum tax on the taxable income of discretionary trusts from 1 July 2028, paired with a time-limited three-year restructure rollover to move assets out of discretionary trusts. This measure is not yet law, and fixed trusts, complying super funds, charitable trusts and deceased estates are proposed to be excluded, but it is a reason for every trust-based business to have its structure reviewed now rather than later. You can read the ATO summary of the proposed minimum tax on discretionary trusts.

Common Mistakes When Choosing a Business Structure

These are the mistakes Mina sees most often when reviewing the structures of new clients who have come to Pinnacle after years with a reactive accountant.

• Never reviewing the structure as income grows. The most common mistake. A sole trader at $80,000 might still be a sole trader at $800,000 simply because nobody asked the question, paying tax at 47% on income that could be taxed at 25% in a company, or distributed to family members at much lower rates.
• Setting up a company without proper advice on how to use it. A company is not just a tax rate. It is a legal entity with its own rules around director duties, dividend payments, loan accounts and Division 7A. Owners who set up a company without understanding these rules can end up with unexpected tax on director loans.
• Using the wrong trustee. A family trust should almost always have a corporate trustee rather than an individual. A corporate trustee provides continuity, better liability protection, and cleaner separation between the trust and its controller.
• Not documenting trust resolutions. A family trust distribution must be documented in a trustee resolution before 30 June each year. Failing to do this can result in undistributed income being taxed at 47% in the hands of the trustee, or ATO audit risk.
• Ignoring Division 7A when running a company. If you take money out of your company for personal use and it is not structured correctly as a salary, dividend, or complying loan, Division 7A can treat the amount as a taxable dividend. This is one of the most common and costly mistakes made by owners operating through companies.
• Not reviewing the structure before a major transaction. Buying property, bringing in a business partner, or selling a business interest can have very different tax outcomes depending on which entity owns the asset. Reviewing the structure before the transaction, not after, is essential.

Explore the Business Structures Series

This guide is the hub for our business structuring content. Use these detailed guides to go deeper on the topic that matters most to you right now:

• Company vs trust: which structure is right for you
• Sole trader to company: when to make the switch
• Small business restructure rollover: change structure without triggering tax
• Trusts in Australia: the complete guide
• What is a holding company and do you need one
• Classes of shares explained
• Company tax rate in Australia: 25% or 30%
• Personal services income and what it means for your structure
• How to start a business in Australia
• How to get an ABN in Australia

For business owners focused on using their structure to actively build long-term wealth, not just reduce tax in the short term, our business structuring services page explains how we approach this for Melbourne business owners.

Frequently Asked Questions

If part of your structuring decision involves property, read our guide to buying an investment property in a trust, which covers asset protection, land tax and the 2026 Budget changes.

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Xero payroll lets Australian businesses pay staff, calculate PAYG withholding and super, and report to the ATO through Single Touch Payroll. Setting it up correctly, with the right pay items, super funds and STP registration, keeps you compliant and saves hours each pay run compared with manual processing.

Xero Payroll: A Complete Guide for Australian Business Owners

Getting payroll right is one of the most important â and most stressful â responsibilities you take on as a business owner. Pay your team late, underpay their super, or lodge your Single Touch Payroll data incorrectly, and you’re not just dealing with unhappy employees. You’re dealing with the ATO.

The good news is that Xero Payroll is built specifically for Australian compliance requirements. When it’s set up correctly and used consistently, it handles STP Phase 2 reporting, super calculations, leave accruals, and payslips automatically â removing most of the manual work and a great deal of the risk.

This guide walks you through everything you need to know: what Xero Payroll includes, how to set it up properly, how to run a pay run, and where business owners most commonly go wrong. If you want the short version â book a no-obligation consultation with our team and we’ll handle the entire setup for you.

What Xero Payroll Includes for Australian Businesses

Xero Payroll is a fully integrated payroll module built into your Xero subscription (available on the Business or Payroll plans). It is designed around Australian workplace laws, ATO requirements, and superannuation obligations. Here is what it covers.

Single Touch Payroll (STP) Phase 2 Compliance

Single Touch Payroll is the ATO’s real-time payroll reporting system. Every time you process a pay run, Xero sends a report directly to the ATO â including salary and wages, PAYG withholding, and super liability information. You no longer need to issue payment summaries at the end of the financial year; instead, employees access their income statement through myGov.

STP Phase 2, which became mandatory for most employers from 1 January 2022, expanded the data you report each pay event. This includes disaggregated gross income (separating out allowances, bonuses, and overtime), country of tax residency for employees, and child support garnishee amounts where applicable. Xero is an ATO-approved STP Phase 2 solution, meaning it captures and transmits all required data fields automatically.

You can read the ATO’s full STP Phase 2 guidance at ato.gov.au.

Leave Management

Xero tracks and accrues leave balances for each employee based on their employment type and pay frequency. Standard leave categories â annual leave, personal/carer’s leave, long service leave, and compassionate leave â are pre-configured, and you can add custom leave types to match your awards or agreements. Employees can submit leave requests through the Xero Me app, which you can approve directly from the payroll dashboard.

Super Contributions

Xero calculates the superannuation guarantee (SG) contribution for each employee based on their ordinary time earnings. From 1 July 2025, the SG rate is 12 per cent. Xero updates these rates when legislated increases take effect, so you are always calculating on the correct percentage. You can pay super directly through Xero via its integration with clearing houses, including the ATO’s Small Business Superannuation Clearing House.

See the ATO’s super guarantee employer obligations at ato.gov.au.

Pay Runs

A pay run in Xero processes wages, salaries, allowances, deductions, and super for all employees in a single workflow. You can schedule pay runs weekly, fortnightly, or monthly, and Xero will pre-populate each run with standard earnings ready for your review. Once posted, the journal entries are automatically recorded in your accounts, and payslips are emailed directly to employees.

How to Set Up Payroll in Xero

Setup is the most critical phase. Errors made here â wrong pay calendars, incorrect award rates, missing super details â compound with every pay run and can be time-consuming to unwind. Here is the correct sequence.

Step 1: Configure Your Payroll Settings

Navigate to Payroll > Payroll Settings in Xero. You will set your:

• Organisation details â your ABN and registered business name, which appear on payslips and STP submissions
• Pay calendars â the frequency (weekly, fortnightly, monthly) and the start date of your first pay period
• Payroll accounts â map payroll expense accounts (wages, super, PAYG withholding payable) to your chart of accounts so journal entries post correctly

Step 2: Connect Your Bank Account

Link your business bank account in Xero so that payroll payments can be processed and bank feeds reconciled accurately. If you use Xero’s batch payment feature, your bank file is generated automatically at the end of each pay run and can be uploaded directly to your online banking portal.

Step 3: Add Your Employees

Go to Payroll > Employees and add each team member. For each employee you will enter:

• Personal details â full legal name, date of birth, address
• Tax file number and tax details (including any HECS-HELP debt and tax offsets)
• Employment type â full-time, part-time, or casual
• Start date
• Pay template â their base salary or hourly rate, and any recurring allowances
• Leave entitlements â aligned to the National Employment Standards or the applicable Modern Award
• Superannuation details â their chosen fund’s Unique Superannuation Identifier (USI) and their member number
• Bank account for salary payments

New employees are required to complete a Tax File Number Declaration, and many will also submit a Superannuation Standard Choice form. Keep digital copies on file. From 1 November 2021, most new employees are subject to stapled super fund rules, where you may need to request their existing fund details from the ATO before assigning a default fund.

Step 4: Set Up Pay Items and Leave

Pay items control how earnings and deductions are categorised and reported through STP. Under STP Phase 2, each pay component must be assigned the correct ATO-defined income type (such as Salary and Wages, Closely Held Payees, or Working Holiday Makers) and the correct gross income disaggregation category (gross, bonuses, commissions, overtime, etc.).

Xero includes default pay items that cover most situations, but if you pay shift allowances, tool allowances, or industry-specific entitlements, you will need to create custom pay items mapped to the correct STP categories. Getting this wrong leads to incorrect STP reporting, which the ATO can identify and query.

Step 5: Connect to the ATO for STP

Before your first pay run, you must connect Xero to the ATO’s STP system. In Xero, go to Payroll > Single Touch Payroll and follow the prompts. You will need to confirm your ABN and authorise Xero as your STP-enabled software. Once connected, every pay run will automatically transmit a payroll event to the ATO. The first submission acts as your STP registration â you do not need to separately notify the ATO that you are using STP.

If you are unsure whether your setup is correct before your first submission, this is exactly the kind of thing our team at Pinnacle Accounting & Advisory reviews during a Xero health check.

How to Run a Pay Run in Xero

Once payroll is set up, processing a pay run follows a straightforward workflow. Here is what happens each pay period.

1. Create the pay run. Go to Payroll > Pay Runs and select New Pay Run. Choose your pay calendar and the pay period end date. Xero will create a draft pay run pre-populated with each employee’s standard earnings.
2. Review and adjust earnings. Check each employee’s pay for that period. Add overtime, bonuses, commission, or allowances as required. If an employee took leave, ensure the leave has been recorded and approved so it appears correctly. Verify that super has calculated correctly â it should be 12 per cent of ordinary time earnings for most employees, though some allowances and irregular payments are excluded.
3. Check PAYG withholding. Xero calculates the tax to withhold from each employee’s gross pay based on their TFN declaration and tax scales. Review the PAYG withholding total for reasonableness. Large fluctuations from the previous period warrant a closer look before posting.
4. Post the pay run. Once satisfied, click Post. Xero will lock the pay run, record the journal entries in your accounts, and queue the STP submission to the ATO. Payslips are emailed to employees automatically at this point.
5. Pay your employees. Use Xero’s batch payment export to generate a bank file and upload it to your internet banking, or process payments manually using the payslip totals as a reference.
6. Pay your super. Super payments must be made at least quarterly, but many accountants recommend monthly payments to reduce end-of-quarter liability. Use Xero’s super payment feature or a clearing house to batch and remit super contributions. Remember that super must be received by the fund by the quarterly due date â not just sent by you.

Xero Payroll and Single Touch Payroll â What You Need to Know

STP has fundamentally changed how Australian businesses interact with the ATO on payroll matters. Under the old system, you reconciled everything at year end and issued payment summaries. Under STP, the ATO sees your payroll data in near real time â which means errors are visible faster, and consistency matters more than ever.

Key points every business owner using Xero Payroll should understand:

• Every pay run is a declaration. When you post a pay run in Xero, the STP submission includes a statutory declaration that the information is true and correct. Posting incorrect data â even accidentally â can create compliance issues.
• Amendments are possible but visible. If you make an error in a pay run, you can submit an update event through Xero to correct it. The ATO can see both the original and the amendment, so it is better to get it right first than to correct repeatedly.
• Finalisation is required annually. At the end of each financial year, you must submit a Finalisation Declaration through Xero to confirm that all payroll data for the year is complete and accurate. This replaces the old payment summary annual report. The deadline is 14 July for most employers.
• STP Phase 2 disaggregation matters. If your pay items are not correctly categorised under Phase 2 rules, the ATO’s pre-fill data for employees’ tax returns will be wrong. This can trigger queries from both the ATO and your employees.

Full ATO guidance on STP reporting requirements is available at ato.gov.au.

Super Guarantee in Xero â How It Works

Superannuation is non-negotiable. Employers who fail to pay the correct super guarantee on time face the Superannuation Guarantee Charge (SGC), which includes the unpaid super, an interest component, and an administration fee â and, critically, is not tax deductible.

Here is how Xero handles super guarantee obligations:

Calculation

Xero calculates super automatically on each pay run based on the employee’s ordinary time earnings (OTE). Not all payments form part of OTE â overtime pay, for example, is generally excluded. Xero’s default configuration handles most standard scenarios, but if you pay complex allowances or irregular earnings, it is worth having a specialist confirm your OTE calculations are correct.

Quarterly Due Dates

Super contributions must be received by the employee’s fund by the following quarterly deadlines:

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

Allow processing time â clearing houses can take several business days to pass payments through to funds. Submitting on the due date is risky. We recommend processing super payments at least five business days before each deadline.

Sending Super Through Xero

Xero integrates with superannuation clearing houses to batch and submit contributions electronically. You can pay multiple employees across multiple funds in a single transaction. Once submitted, Xero marks the contributions as paid and records the payment in your accounts. You can also use the ATO’s Small Business Superannuation Clearing House (SBSCH), which is free for businesses with fewer than 20 employees or an annual turnover below $10 million.

The ATO’s super guarantee employer guide is at ato.gov.au.

Common Xero Payroll Mistakes â and How to Avoid Them

After working with dozens of Melbourne businesses on their Xero setups, these are the payroll mistakes we see most often.

1. Incorrect Pay Item Categorisation Under STP Phase 2

Many businesses set up pay items before Phase 2 came into effect and never updated them. If your allowances, bonuses, or leave loading are categorised under the wrong income type or gross disaggregation code, your STP reports will be inaccurate. The fix requires updating each pay item’s settings and, in some cases, submitting an update event for prior pay runs.

2. Including Overtime in Super Calculations

Overtime is generally not part of ordinary time earnings, meaning super guarantee does not apply to it. Xero’s default overtime pay item excludes super, but if you have created custom pay items for shift penalties or overtime loading and checked the super box by mistake, you will be over-paying super â and misreporting to the ATO.

3. Not Reconciling STP Reports to Payroll Totals

At year end, the total wages, PAYG withholding, and super reported via STP should match your payroll expense accounts in Xero. Many business owners skip this reconciliation and only discover discrepancies when the ATO raises a query or an employee’s income statement looks wrong. Run a payroll activity summary report in Xero at the end of each quarter to catch issues early.

4. Late or Missing Super Payments

Processing super late â even by a day â triggers the SGC. Many businesses get caught in the last week of each quarter when cash flow is tight. Planning your super payments to land several days before the due date, and building the obligation into your cash flow forecast, is a simple discipline that avoids a costly and non-deductible penalty.

5. Not Completing the Annual Finalisation

The STP finalisation declaration is required by 14 July each year. Without it, employees cannot access verified income statements on myGov, which may delay their tax returns. If you are working with a registered tax or BAS agent, they have an extended deadline â but it still needs to be done. Our team at Pinnacle manages finalisation for all of our bookkeeping clients as part of year-end process.

6. Setting Up the Wrong Pay Calendar

Starting a payroll with an incorrect pay period start date or the wrong pay frequency means every subsequent pay run aligns to the wrong dates. This is particularly problematic for accrual-based leave calculations. If you notice your pay periods do not match your actual pay dates, fix this before running more pay events â it gets harder to correct over time.

When Should You Outsource Payroll to Your Accountant?

Xero makes payroll significantly more manageable for small business owners, but there are situations where handling it yourself carries more risk than it is worth.

You should consider outsourcing payroll if you employ staff across multiple awards or agreements with complex structures, have had ATO queries, are growing quickly, have not completed an STP Phase 2 review, are behind on super, or are setting up payroll for the first time.

At Pinnacle Accounting & Advisory, we run payroll for Melbourne businesses of all sizes. Our bookkeeping and payroll service covers the full cycle: setup, weekly or fortnightly pay runs, super payments, STP submissions, and year-end finalisation.

If you are not sure whether your current payroll setup is compliant, a payroll health check is a good starting point. Book a consultation and we will take a look.

Frequently Asked Questions

Is Xero Payroll included in my Xero subscription?

Xero Payroll is included in Xero’s Business and Payroll plan tiers for a defined number of employees. If you are on a starter plan or need to pay more employees than your plan allows, you may need to upgrade. The number of employees included varies by plan â check Xero’s current pricing for the detail relevant to your business size.

Do I need to notify the ATO separately that I am using STP?

No. When you connect Xero to the ATO’s STP system and submit your first pay event, this acts as your registration. You do not need to complete a separate STP notification form. However, if you are switching from another STP-enabled software to Xero, you should ensure the previous software’s STP connection is deactivated to avoid duplicate reporting.

How do I correct a mistake in a pay run I have already posted?

In Xero, you cannot edit a posted pay run directly. Instead, you create an unscheduled pay run to make a correction, which Xero then reports to the ATO as an update event. For significant errors â particularly those affecting PAYG withholding or super â it is worth speaking to your accountant before submitting a correction.

What happens if I miss a super payment deadline?

If super contributions are not received by the employee’s fund by the quarterly due date, you must lodge a Superannuation Guarantee Charge (SGC) statement with the ATO and pay the SGC, which includes the unpaid super, a nominal interest charge of 10 per cent per annum, and a $20 per employee per quarter administration fee. The SGC is not tax deductible.

Final Thoughts

Xero Payroll is one of the most capable payroll tools available to Australian small businesses. When it is set up correctly â with the right pay items, accurate employee details, proper STP Phase 2 categorisation, and a consistent pay run process â it handles the vast majority of your payroll compliance automatically.

At Pinnacle Accounting & Advisory, we work with Melbourne businesses every day to get Xero Payroll set up correctly, keep it compliant, and take the whole thing off the owner’s plate. Whether you need a one-off setup review or an ongoing payroll management service, we can help.

Book a consultation today and let’s make sure your payroll is working the way it should â for your team, your business, and the ATO.

Frequently Asked Questions

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

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Running a business as a sole trader is simple and inexpensive — and for many business owners starting out, it makes complete sense. But as revenue grows, the tax and risk profile of a sole trader structure becomes increasingly costly. At some point, incorporating becomes not just a tax planning option but a genuine commercial necessity.

This guide covers the key triggers that tell you it’s time to incorporate, how to make the transition from sole trader to company correctly, and the tax and legal steps you need to take to do it without creating new problems in the process.

Why Sole Traders Outgrow Their Structure

The sole trader structure works well at lower income levels. Your income is taxed at your marginal personal rate, you file a single tax return, and there’s no corporate administration. But three structural limitations become problematic as income grows:

• Unlimited personal liability. As a sole trader, your personal assets — your home, savings, superannuation — are exposed to business creditors. There is no legal separation between you and your business.
• Tax rate inefficiency. Once you earn above $135,000 (from the 2026–27 financial year), the marginal personal tax rate is 45 cents in the dollar plus Medicare levy. A company pays a flat 25% on profits up to $50 million in active business income.
• Limited flexibility. Sole traders cannot split income with a spouse (legitimately), cannot retain profits in the business at a lower tax rate, and have fewer options for structuring remuneration, super, and ownership.

These three limitations combine to make incorporation attractive for most business owners earning more than $100,000–$150,000 per year in net profit, or for those who face genuine liability exposure in their industry.

When Should You Make the Switch?

There’s no single threshold, but the following signals typically indicate that incorporation is worth examining:

• Net profit consistently above $100,000–$120,000 per year
• You are paying more than $35,000–$40,000 in personal income tax annually
• You operate in an industry with significant liability risk (construction, professional services, healthcare)
• You want to bring in business partners or investors in future
• You want to separate your personal assets from business risk
• You are planning to sell the business in future and want to access the small business CGT concessions

The CGT concessions are particularly important for business owners planning to exit. To access the small business 15-year exemption and retirement exemption, you (or the entity you operate through) typically need to have been carrying on an active business — and a company structure is often cleaner for satisfying the conditions.

The Tax Advantage of a Company Structure

A company that qualifies as a base rate entity (annual turnover under $50 million, with 80% or less of its income as passive income) pays corporate tax at 25%. This creates a significant rate differential when compared to the top personal tax rate of 47% (including Medicare levy).

The key benefit is the ability to retain profits inside the company at 25% and only pay the top-up personal tax when you draw those profits as dividends. This is not tax elimination — it’s deferral. But deferral has real value: retained profits can be reinvested in the business, used to pay down debt, or timed to years when your personal income is lower.

Be aware that companies cannot access the 50% general CGT discount that individuals and trusts can access on assets held for more than 12 months. This is a meaningful consideration if the company will hold appreciating assets. For business owners where capital gains are likely on exit, structuring advice upfront matters significantly.

How to Transfer Your Business Without Triggering CGT

When you incorporate, you transfer your business assets — goodwill, plant, equipment, contracts — from yourself as sole trader to the new company. This transfer is a CGT event. Without careful structuring, it triggers capital gains tax on the market value of your business assets at the time of transfer.

Two rollover provisions can prevent this:

1. The Small Business Restructure Rollover (Subdivision 328-G)

The small business restructure rollover allows you to transfer active business assets to a new company at cost base, deferring the capital gain. The business must have turnover under $10 million, and the restructure must be a genuine commercial restructure — not primarily a tax-driven transaction.

If you pass the three-year safe harbour — continuing to operate in the company structure without selling — the ATO accepts the restructure as genuine without further scrutiny. This is typically the cleanest option for most sole traders incorporating for commercial reasons.

2. The Sole Trader Rollover (Subdivision 122-A)

If you transfer all the assets of a sole trader business to a company wholly owned by you in exchange for shares in that company, you can access the rollover under Subdivision 122-A. This is an older, simpler provision that applies specifically to the incorporation scenario. It has different conditions than the SBRR but achieves a similar outcome: the CGT gain on the transferred assets is deferred until the shares in the new company are eventually sold.

Your tax adviser will determine which rollover is more appropriate based on your specific facts — some situations call for one, some for the other, and occasionally both can be considered.

Practical Steps in the Transition

Transitioning from sole trader to company is not just a tax exercise — it involves a range of legal, commercial, and operational steps. Here is what the process typically involves:

1. Incorporate the company. Register a new company with ASIC, obtain an ACN, and set up the company constitution and share structure. You will be the sole shareholder and director in most cases.
2. Obtain a new ABN and TFN for the company. The company is a separate legal entity and needs its own tax file number and ABN.
3. Register for GST under the company’s ABN (if applicable) and cancel your sole trader GST registration.
4. Transfer active assets. Document the transfer of all business assets — goodwill, equipment, contracts, IP — from yourself to the company. Apply the appropriate rollover to defer CGT.
5. Transfer contracts and client agreements. Notify clients and counterparties that the business is now operated by the company. Assignment of contracts may require client consent, depending on the contract terms.
6. Update bank accounts, insurance, and licences. Operating accounts should be in the company name. Professional indemnity, public liability, and other insurances must be reissued in the company’s name.
7. Set up payroll. As a company director receiving salary, you are now an employee of the company. Set up payroll, PAYG withholding, and super guarantee obligations from day one.

Personal Services Income After Incorporation

One important caveat: incorporation does not automatically fix your tax position if you earn personal services income. If the income you earn is predominantly a reward for your own skills and effort, and you fail the PSI tests, the ATO will attribute your company’s income back to you personally — and tax it at your marginal rate regardless of what the company does with it.

See our detailed guide to personal services income rules if you are a contractor, consultant, or professional who provides services primarily through your own skills. The PSI rules interact directly with the incorporation question and must be understood before you restructure.

Division 7A — The Risk That Comes With the Company

Once you operate through a company, Division 7A of the Income Tax Assessment Act 1936 becomes relevant. Division 7A applies when a company makes a loan to, or pays an expense for, a shareholder (or their associate) without a complying loan agreement. Such payments are treated as unfranked dividends — fully taxable at your marginal rate, with no franking credits to offset the tax.

This is one of the most common compliance issues for small business company directors. Using the company account for personal expenses, drawing more than your salary without formal loan documentation, or taking out loans without proper terms all create Division 7A exposure. See our guide on Division 7A to understand the rules and how to avoid them. Also review our comparison of company vs trust structures if you are weighing both options.

Frequently Asked Questions

Do I need a lawyer to incorporate?

You don’t legally need a lawyer, but you do need professional advice. The tax and structuring decisions involved in incorporation — particularly around rollovers, company constitution, and share structure — have long-term consequences. Getting it wrong creates problems that are expensive to fix. Engage both an accountant and a commercial lawyer before incorporating.

Can I just stop trading as a sole trader and start fresh as a company?

You can, but this approach typically triggers CGT on the goodwill of the sole trader business (since you’re ceasing one business and the company is starting fresh). It’s almost always more tax-efficient to use a rollover provision to transfer the business, rather than ceasing and restarting. Take advice before choosing this approach.

How long does incorporation take?

The company can be registered with ASIC within a day or two. But the full transition — transferring contracts, updating insurances, notifying clients, setting up payroll — takes weeks. Plan the transition for a quiet period in your business cycle, and allow at least 4–6 weeks to complete all operational steps properly.

Should I incorporate into a company or a trust?

Both structures have advantages. A company offers the flat 25% rate and clear creditor separation. A discretionary trust offers income-splitting flexibility — the ability to distribute different amounts to different beneficiaries each year — but doesn’t have the same asset protection or flat-rate benefit. See our guide to trust distribution strategies to understand how income splitting works in practice. Many established businesses use a combination — a discretionary trust as the holding entity with the operating business run through a company. The right choice depends on your income level, family situation, asset base, and long-term plans. For a full breakdown of all four main structures, see our guide to business structures in Australia.

Frequently Asked Questions

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

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Restructuring a business always carries a hidden cost: tax. Any time you move assets — goodwill, plant and equipment, intellectual property — between entities, you can trigger capital gains tax and stamp duty. For small business owners looking to change their structure for genuine commercial reasons, this tax cost can make an otherwise sensible restructure unviable.

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

The small business restructure rollover, contained in Subdivision 328-G of the Income Tax Assessment Act 1997, is designed to remove this barrier. It allows eligible small businesses to change their legal structure without triggering immediate capital gains tax. This guide explains exactly how it works, who qualifies, and what conditions must be met.

What Is the Small Business Restructure Rollover?

The small business restructure rollover (SBRR) is a CGT rollover relief provision that defers — rather than eliminates — the capital gain that would otherwise arise when business assets are transferred between entities as part of a genuine restructure.

When the rollover applies, the asset is transferred at its cost base (not its market value), so no CGT event arises at the time of transfer. Instead, the cost base “rolls over” to the new entity, which will eventually realise any gain when the asset is subsequently sold.

Critically, the rollover is not a CGT exemption. The tax is deferred — the receiving entity inherits the original cost base of the asset, and will pay CGT when it eventually disposes of the asset. The benefit is timing: you restructure now without a tax bill, and deal with the eventual CGT when and if the asset is sold in the future (at which point the small business CGT concessions may further reduce or eliminate the gain).

Who Is Eligible for the Rollover?

To access the SBRR, the taxpayer must be a “small business entity” — meaning the entity (or its affiliate or connected entity) has an annual turnover of less than $10 million. Both the transferor and the transferee must be small business entities or individuals who are affiliates of small business entities.

The transfer must be between entities that are “connected” — meaning there is continuity of ultimate economic ownership. The same individuals must ultimately own the same interests in the business after the restructure as before. The ATO will not grant rollover relief for a restructure that shifts economic ownership between unrelated parties.

Eligible Entities

The rollover can apply to transfers between any combination of the following:

• Sole trader to company
• Sole trader to trust
• Partnership to company
• Partnership to trust
• Trust to company
• Company to trust
• Restructures within groups (e.g., company to related company)

The “Genuine Restructure” Requirement

This is the most important — and most scrutinised — condition for the rollover. The transfer must be a “genuine restructure of an ongoing business.” The ATO has issued guidance (Tax Ruling TR 2016/3) clarifying what this means.

A genuine restructure is one driven by real commercial reasons — not by a desire to avoid tax. Legitimate examples include:

• Incorporating a sole trader business for asset protection and creditor separation
• Restructuring ahead of a new business partner joining
• Separating an operating business from assets for succession planning purposes
• Changing structure to access corporate tax benefits such as the 25% small business tax rate

A restructure that has no purpose other than tax reduction — or that is followed immediately by a sale of the business — is unlikely to be treated as genuine. The ATO specifically flags situations where assets are transferred into a structure shortly before an external sale.

The Three-Year Safe Harbour

The ATO provides a practical safe harbour: if the same ultimate economic owners continue to own the transferred assets for at least three years after the rollover, the ATO accepts that the restructure was genuine — without requiring further substantiation.

If the restructured business or its assets are sold or disposed of within three years, the ATO will scrutinise whether the restructure was genuinely commercial or was primarily a tax minimisation device. This doesn’t mean you can’t sell within three years — but it means the burden of proving commercial purpose falls on you.

What Assets Can Be Transferred?

The rollover applies to “active assets” of the business — assets used, or held ready for use, in carrying on the business. This includes:

• Goodwill
• Plant and equipment
• Intellectual property
• Business premises (land and buildings used in the business)
• Customer lists and contracts

Passive assets — such as cash, investments, or rental properties held separate from the active business — are generally not eligible for the SBRR. Liabilities can also be assumed by the receiving entity as part of the restructure, but the liability assumption must be proportionate to the assets transferred.

How the Rollover Interacts with Other Tax Concessions

The SBRR is designed to work alongside the small business CGT concessions. The typical planning sequence is:

• Use the SBRR to restructure without triggering CGT now
• Continue operating in the new structure for the long term
• When you eventually sell, apply the small business CGT concessions to reduce or eliminate any remaining gain

This combination — SBRR now, CGT concessions on sale — is one of the most powerful tax planning sequences available to small business owners in Australia.

The rollover also interacts with stamp duty — but this is state-based, and the availability of duty concessions on restructures varies significantly between states. In Victoria, for example, restructures may still attract stamp duty on dutiable property even if the CGT rollover applies. Always obtain state-specific stamp duty advice when restructuring.

Choosing the Right New Structure

The SBRR opens the door to restructuring — but choosing which structure to restructure into is a separate question entirely. Companies, discretionary trusts, and unit trusts each have different tax, asset protection, and succession implications. See our guide on business structures in Australia for a comprehensive comparison.

For many sole traders considering incorporation, the transition to a company is the most common destination. This is covered in detail in our guide on moving from sole trader to company.

What the ATO Looks for in SBRR Claims

The ATO has audited SBRR claims with increasing frequency, particularly where the rollover is followed by a business sale. In conducting reviews, the ATO looks at:

• Whether there were documented commercial reasons for the restructure at the time (not constructed retrospectively)
• Whether economic ownership genuinely remained the same before and after
• Whether the business continued operating in the new structure or was sold shortly after
• Whether consideration was paid at market value — or if assets were underpriced to shift value

Contemporary documentation is critical. The ATO expects to see board resolutions, legal advice, restructure plans, and valuation reports prepared at the time of the restructure — not documents reconstructed months later during an audit.

Common Mistakes That Disqualify the SBRR

• Transferring passive assets (cash, investment property) alongside active business assets
• Using the restructure as an opportunity to change ownership (e.g., buying out a partner)
• Winding up or materially restructuring the new entity within three years
• Failing to manage GST and stamp duty consequences separately
• Inadequate documentation of the business rationale and asset values

Frequently Asked Questions

Does the rollover eliminate CGT or just defer it?

It defers CGT. The transferred assets take on the original cost base, so when the new entity sells them, the gain will be calculated from the original cost — not the market value at the time of transfer. The CGT concessions available at that future sale may significantly reduce or eliminate the gain.

Can I use the rollover if I’m planning to sell in two years?

You can still use it, but be aware that a sale within three years removes the three-year safe harbour and subjects the rollover to scrutiny. If you have clear commercial reasons for the restructure that are independent of the planned sale, you may still qualify — but you should obtain specific tax advice and document the commercial rationale thoroughly.

Does the SBRR apply to stamp duty?

No. The SBRR is a Commonwealth income tax provision and does not affect state stamp duty. Stamp duty concessions on restructures are state-specific and must be assessed separately. Some states offer concessions on related-party restructures; others do not. In Victoria, dutiable property transfers in a restructure typically still attract duty unless a specific exemption applies.

Do I need to notify the ATO that I’ve used the rollover?

There is no specific SBRR election form to lodge, but you must correctly report the rollover in your tax return and maintain documentation to support the claim. You should retain all evidence of the genuine commercial purpose of the restructure, including resolutions, legal advice, and restructure plans.

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

Frequently Asked Questions

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The super guarantee rate increased to 12% on 1 July 2025 — the final step in a legislated schedule that has been running since 2021. For Australian employers, this means higher super obligations on every dollar of ordinary time earnings paid to eligible employees. For business owners who haven’t updated their payroll, it means a compliance gap that can quickly compound into penalties.

This guide explains the super guarantee rate for 2025–26, what earnings it applies to, who qualifies as an employee for SG purposes, and what the consequences of underpayment look like under Australia’s super guarantee charge regime.

What Is the Super Guarantee Rate for 2025–26?

The super guarantee (SG) rate for the 2025–26 financial year is 12%. This applies to ordinary time earnings (OTE) paid to eligible employees from 1 July 2025 onwards.

This is the final rate under the legislated schedule introduced in the Treasury Laws Amendment (Your Future, Your Super) Act 2021. No further increases to the rate are legislated after 2025.

What Does Ordinary Time Earnings Mean?

Super guarantee is calculated on ordinary time earnings — not total earnings. OTE includes your regular pay for ordinary hours of work, including paid leave, commissions, allowances, and bonuses that are paid regularly.

OTE does not include:

• Overtime pay (for hours worked beyond the ordinary work pattern)
• Expense reimbursements
• Certain fringe benefits
• Payments that are genuine compensation rather than wages

The distinction between OTE and overtime matters because many employers incorrectly calculate super on total gross pay inclusive of overtime, or alternatively exclude certain allowances they should include. Either error creates a compliance issue.

Who Must Receive Super Guarantee?

Super guarantee obligations apply to all employees aged 18 and over, regardless of how many hours they work. Since 1 July 2022, the $450 per month minimum earnings threshold was removed — meaning employees earning any amount are eligible from day one.

Employees under 18 are entitled to super if they work more than 30 hours per week.

Super also applies to some contractors. If a contractor is engaged wholly or principally for their labour — even if they hold an ABN — they may be classified as an employee for super purposes. This is one of the most common compliance traps for small business owners. See our detailed guide on super obligations for contractors and subcontractors for a full breakdown. Note also that contractors who earn most of their income from their own skills may also be subject to the personal services income (PSI) rules, which have additional implications for how their income is taxed.

When Must Super Be Paid?

Super contributions must be received by the employee’s chosen fund by the quarterly SG due dates:

• Q1 (Jul–Sep): 28 October
• Q2 (Oct–Dec): 28 January
• Q3 (Jan–Mar): 28 April
• Q4 (Apr–Jun): 28 July

Importantly, the obligation is for the contribution to be received by the fund — not merely processed by you. Super clearing house delays, banking lead times, and public holidays can all cause payments to arrive after the due date even when lodged in good faith. Many employers allow insufficient buffer time.

Looking ahead, the Federal Government has legislated payday super, which will require super to be paid within seven days of each pay cycle from 1 July 2026. This will fundamentally change payroll processes for most businesses. Our guide on payday super changes for 2026 explains what to prepare for now.

What Happens If You Don’t Pay on Time?

Missing the quarterly due date triggers the super guarantee charge (SGC). The SGC is not merely interest on late payment — it is a punitive regime that is significantly more expensive than the original super obligation.

Under the SGC, you must lodge a super guarantee charge statement with the ATO and pay:

• The shortfall amount (calculated on salary and wages, not just OTE — a broader base)
• Nominal interest of 10% per annum on the shortfall from the start of the relevant quarter
• An administration charge of $20 per employee per quarter

The SGC is also not tax-deductible. Regular employer super contributions paid on time are deductible — the SGC is not. This creates a substantial effective cost difference between on-time and late payment.

See our detailed guide on the super guarantee charge for a full breakdown of how it’s calculated and how to manage an SGC situation if you’re already in arrears.

Super and the Maximum Contributions Base

You are not required to pay super on earnings above the maximum super contributions base. For 2025–26, this is $65,070 per quarter (up from $62,270 in 2024–25). If an employee earns more than this per quarter, your SG obligation is capped at 12% of $65,070 — regardless of their actual earnings above that threshold.

For high-income employees on salaries of $260,000 or more per year, this cap is material and can meaningfully reduce your payroll super costs relative to what 12% of full salary would produce.

Super for Company Directors

Directors who receive director’s fees are entitled to super guarantee on those payments. If you are a working director who receives salary and wages, you must receive super on your ordinary time earnings — even if you are the sole director and sole shareholder of the company.

Many small business owners structure their remuneration primarily as dividends rather than salary to minimise payroll costs including super. While this is a legitimate structuring choice, it must be done deliberately and correctly — and it interacts with a range of other tax rules. Seek advice before restructuring director remuneration.

Super Guarantee and Salary Sacrifice

If your employees make salary sacrifice contributions into super, be careful about how this interacts with your SG obligation. Since 1 January 2020, salary sacrifice contributions cannot reduce the SG base amount — employers must pay super on the pre-sacrifice wage.

This means if an employee earns $80,000 and salary sacrifices $10,000 to super, your SG obligation is still calculated on the full $80,000 — not the $70,000 take-home equivalent. Some payroll software handles this incorrectly.

Practical Compliance Checklist for 2025–26

• Confirm your payroll software is calculating SG at 12% from 1 July 2025
• Review which workers are classified as employees vs contractors — the SG test is broader than the common law employment test
• Confirm that super is being paid on ordinary time earnings, not total gross pay inclusive of overtime
• Build in lead time before quarterly due dates to account for clearing house and banking delays
• Review your salary sacrifice arrangements to confirm super is calculated on pre-sacrifice wages
• Start planning for payday super from 1 July 2026 — the operational change is significant

Frequently Asked Questions

Is the 12% super rate going up further after 2025–26?

No. The legislated schedule ends at 12%. There is no currently legislated increase beyond 12%, though future governments could legislate further changes. For planning purposes, 12% is the current permanent rate.

Do I have to pay super for casual employees?

Yes. Casual employees are entitled to super guarantee. The only exemption for under-18 employees — who must work more than 30 hours per week — applies equally to casual workers. There is no minimum hours threshold for employees 18 and over.

Can I count salary sacrifice contributions toward my SG obligation?

No. Since January 2020, salary sacrifice contributions cannot reduce your SG obligation. You must pay SG calculated on the pre-sacrifice wage, in addition to any salary sacrifice amounts the employee contributes.

What if I can’t afford to pay super on time?

If you genuinely cannot pay, contact the ATO proactively. Voluntary disclosure before an ATO audit significantly reduces penalties. You should still lodge the SGC statement even if you can’t pay the full amount — the failure to lodge compounds the issue. Speak with a tax adviser immediately if you are facing SG arrears.

Frequently Asked Questions

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

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If you operate through a company or trust, or work as a contractor providing services primarily through your own skills, you’ve probably heard the term “personal services income.” But many business owners — even those who’ve been operating for years — aren’t certain how the rules apply to them or what the consequences of getting it wrong can be.

This guide explains exactly what personal services income (PSI) is, how the ATO determines whether your income is PSI, and what it means for your tax position and ability to claim deductions.

What Is Personal Services Income?

Personal services income is income that is mainly a reward for your personal efforts or skills. The concept exists because some taxpayers use companies, trusts, or partnerships to reduce their tax obligations in ways that wouldn’t be available to an employee doing equivalent work.

Under the Tax Assessment Act 1997, your income is classified as PSI if more than 50% of it is earned from providing services where that income is mainly a reward for your personal skills, knowledge, or efforts — rather than from the use of assets, the sale of goods, or the efforts of other people you employ.

Common examples of PSI earners include IT contractors, consultants, engineers, lawyers working as sole practitioners, bookkeepers, and financial advisers who provide services under their own name or through their own entity.

When Do the PSI Rules Apply?

The PSI rules don’t apply to every contractor or self-employed person. They only apply when your income qualifies as PSI and you fail the “results test.” If you pass the results test, you are classified as a Personal Services Business (PSB), and the PSI rules don’t restrict your deductions or require attribution of income.

There are four tests in total. The first — and most important — is the results test. If you pass that, you stop. If you fail it, you can then look at three more tests to see whether you can still qualify as a PSB.

The Results Test

You pass the results test if all three of the following are true for at least 75% of your PSI income in an income year:

• You are paid to produce a specific result or outcome
• You supply the tools and equipment needed to do the work
• You would be liable to fix defects in your work at your own cost

This test distinguishes genuine contractors from those who operate more like employees. If your engagement looks like employment in all but name — fixed rate per hour, tools supplied by client, no liability for errors — you’re unlikely to pass.

The Unrelated Clients Test

If you fail the results test, you can still qualify as a PSB if at least 75% of your PSI comes from two or more unrelated clients, and you genuinely offer your services to the public. Working through a labour hire firm or recruiter typically doesn’t satisfy this test, because the end client is engaged by the agency — not directly by you.

The Employment Test

This test is satisfied if you hire employees who perform at least 20% of your principal work — not administrative tasks, but the actual service delivery work. One valid employee generating 20% of the work output is enough to pass.

The Business Premises Test

Finally, you can pass this test if you maintain business premises that you own or lease, use exclusively for your business, and that are physically separate from both your home and any client’s premises. A home office typically does not satisfy this requirement.

What Deductions Are Restricted Under PSI Rules?

If your income is classified as PSI and you fail all four tests, the ATO imposes strict limits on what you can claim as deductions. Costs that would ordinarily be deductible to a business are denied under the PSI regime when they exceed what an employee could claim under the same circumstances.

Specifically, deductions are denied for:

• Rent, mortgage interest, and rates on your home or home office (beyond what an employee could claim)
• Payments to associates (such as a spouse or child) for services that aren’t genuine arm’s-length work
• Super contributions for associates who perform work in the business
• Capital allowances on items that produce income but aren’t assets used to produce the PSI

Normal business expenses — including tools, professional memberships, software, and direct work-related expenses — remain deductible even when PSI rules apply.

PSI and Income Attribution Through a Company or Trust

One of the most important consequences of the PSI rules is income attribution. If your income is PSI and it flows through a company or trust, the ATO requires that income to be attributed (i.e., taxed) to the individual who earned it — regardless of what the trust deed or company structure says about distributions.

This means you cannot use a trust to split PSI between family members at lower tax rates, or retain PSI in a company to take advantage of the lower corporate rate. The income is treated as if it were earned directly by you personally, and taxed at your marginal rate.

This is a key reason why many business owners who think they’re saving tax through a trust or company structure are actually creating a compliance risk. If you’re operating a service-based business and channelling income through an entity, the PSI tests should be reviewed annually — ideally before year end. See our guide on company vs trust structures for a broader comparison of how each entity type is taxed. If you are a sole trader weighing up incorporation, our guide on moving from sole trader to company covers the triggers, rollovers, and practical steps involved.

PSI vs. Alienation of Personal Services Income

The PSI regime targets what the ATO calls “alienation of personal services income” — the practice of diverting income earned by an individual through an associated entity to reduce tax. The rules have been in place since 2000, and the ATO has consistently taken an aggressive compliance stance toward arrangements that look like alienation.

The risk isn’t just tax adjustments. If the ATO determines you’ve incorrectly applied the PSI rules — and in particular, if it finds the structure has no legitimate commercial purpose — you may face penalties and interest on top of the unpaid tax. In serious cases, the general anti-avoidance provisions in Part IVA of the Tax Assessment Act may also apply.

If you’ve been operating through a company or trust and generating most of your income from your own skills, it’s worth having your structure reviewed. This is especially true if your super contributions or associate payments are being run through the entity. See also our explainer on Division 7A, which often intersects with PSI arrangements involving companies.

Super Contributions and PSI

If you are subject to the PSI rules, your superannuation position changes. You can still make deductible personal super contributions (subject to the concessional contributions cap), but your ability to claim super contributions made on behalf of associates through your company or trust is restricted.

For sole traders earning PSI, super contributions are straightforward — you claim them personally. For those operating through an entity, the rules are more complex, particularly if the entity is also paying wages to associates. Our guide to superannuation strategies for business owners covers the interaction between business structures and super in more detail.

Practical Steps to Stay Compliant

The best protection against PSI issues is maintaining contemporaneous records that demonstrate your business genuinely operates as a PSB — or that PSI isn’t the dominant income type.

Steps worth taking:

• Review your contracts: Do they specify deliverables, not just hours? Do you bear liability for defects? Do you supply equipment?
• Diversify your client base: If 90% of your income comes from one client, the unrelated clients test is off the table. Actively acquiring multiple clients matters.
• Document your employees’ work: If you rely on the employment test, keep records of how much of the principal work your employees actually perform.
• Review associate payments: Any salary or super paid to a spouse or family member must be at market rates for genuine services — not a mechanism to split income.
• Run a PSI test before year end: Don’t wait until your tax return is prepared. If you’re close to the 75% threshold on any test, planning before 30 June can make a material difference.

Frequently Asked Questions

Can I still operate through a company if my income is PSI?

Yes, you can. But if your income is PSI, the tax advantages of operating through a company — such as retaining profits at the lower corporate tax rate — are neutralised. The income is attributed back to you personally regardless of how it’s distributed.

Does PSI apply to all service businesses?

No. PSI rules only apply where more than 50% of income is a reward for your personal efforts or skills. If your business generates income from a team of employees, from assets, or from a genuine product — rather than primarily your own labour — PSI is less likely to apply. A businesses with genuine employees doing the work typically fails the PSI threshold.

What happens if I get the PSI assessment wrong?

If the ATO reviews your return and determines that PSI applied but you didn’t apply the rules, you’ll face a tax adjustment plus interest (currently around 11–12% per annum). If there was a lack of reasonable care, shortfall penalties of 25% on top of the additional tax also apply. Voluntary disclosure significantly reduces penalties.

Can I get a PSB determination from the ATO?

Yes. If you don’t pass any of the four standard tests but believe you’re genuinely running a personal services business, you can apply to the Commissioner for a PSB determination. These are granted case-by-case and provide certainty for that income year. They don’t automatically carry forward to future years.

Frequently Asked Questions

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

Getting PSI right protects the tax minimisation strategies that a well-designed structure makes possible.

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If you earn $180,000 as a business owner and pay that to yourself as salary, you’re taxed at 47 cents in the dollar on income above $135,000. If you redirect $30,000 of that into superannuation as a concessional contribution, it’s taxed at just 15 cents. That’s a $9,600 difference — legal, ATO-endorsed, and available to every business owner in Australia. Yet most business owners under-utilise their super contribution cap significantly, leaving thousands of dollars in unnecessary tax every single year.

Superannuation is not just a retirement savings vehicle. For business owners, it is the most powerful tax minimisation tool available under Australian law — combining a tax deduction at entry, low tax on earnings, and complete tax exemption in retirement. In this guide, we cover the strategies that matter most in 2026–27: concessional contributions, how to claim a superannuation contributions tax deduction, catch-up contributions, spouse strategies, SMSF property, and Division 293.

Why Super Is the Most Tax-Effective Structure in Australia

Three numbers explain the super advantage:

• Concessional contributions tax: 15%. Compare this to a personal marginal rate of up to 47%. On a $30,000 concessional contribution, the tax saving is up to $9,600 in a single year.
• Earnings tax inside super: 15% (10% for capital gains on assets held more than 12 months). Money growing inside super compounds at a significantly lower tax rate than in personal name or in a company.
• Pension phase: 0%. Once you are over 60 and have commenced a pension from your super fund, both earnings and withdrawals are completely tax-free (within the transfer balance cap).

These three advantages compound over decades. A business owner who consistently maximises their super contributions throughout their working life — rather than leaving money in their personal name or company — can generate dramatically better after-tax wealth at retirement. Super is also protected from most creditors under the ATO’s superannuation rules, which matters enormously for business owners who carry personal risk.

Concessional Contributions: The $30,000 Cap (2026–27)

Concessional contributions are pre-tax (before-tax) contributions to superannuation, taxed at 15% inside the fund rather than at your personal marginal rate. For 2026–27, the concessional contributions cap is $30,000 per person per year. This includes:

• Employer Superannuation Guarantee contributions (currently 12% of ordinary time earnings — see our Super Guarantee rate guide for the full schedule and compliance details)
• Salary sacrifice contributions
• Personal deductible contributions (if you are self-employed or meet the 10% test)

Exceeding the cap results in the excess being included in your assessable income and taxed at your marginal rate, with an excess concessional contributions charge. Tracking contributions across all funds is essential, especially if you have multiple super accounts.

How to Claim Super Contributions as a Tax Deduction

One of the most effective — and under-used — strategies for business owners is making personal super contributions and claiming them as a tax deduction. If you are self-employed, a sole trader, or a partner in a partnership (or if less than 10% of your income comes from employment), you can contribute to super personally and claim the full amount as a deduction in your tax return.

The process is straightforward:

• Contribute to your super fund (any complying superannuation fund or SMSF)
• Lodge a Notice of Intent to Claim a Deduction with your super fund before lodging your tax return (or before 30 June of the following financial year, whichever is earlier)
• Your fund will acknowledge the notice and classify the contribution as concessional — taxed at 15% inside the fund
• You claim the contribution as a personal tax deduction in your income tax return

A practical example: A self-employed architect earns $200,000 and contributes $25,000 to super in 2026–27. The $25,000 is claimed as a deduction at a marginal rate of 47%. Tax saving: $11,750. Tax paid inside the fund: $3,750 (15%). Net benefit: $8,000 — from a single contribution before 30 June. For more detail on personal super contributions, see the ATO’s guidance.

Catch-Up Contributions: Accessing Unused Cap Amounts

Since 1 July 2019, individuals with a total super balance below $500,000 can carry forward unused concessional contributions cap amounts from the previous five years. This is one of the most powerful strategies available to business owners who had lower-income years during start-up phases, family leave, or years of heavy business reinvestment.

Example: Your total super balance is $380,000. Over the past three financial years, you contributed less than the annual cap and have $42,000 in unused cap carried forward. In the current year, you can contribute up to $72,000 as concessional contributions ($30,000 current cap + $42,000 carried forward). At a 47% marginal rate, that’s a potential tax saving of $33,840 in a single year — far exceeding anything available through most other deductions.

Check your available carry-forward balance through myGov (ATO linked services) or ask your accountant to check via the ATO Tax Agent Portal. This balance is updated annually after super funds report.

Spouse Contributions and Super Splitting

Spouse Contribution Tax Offset

If your spouse earns less than $37,000 per year, you can make after-tax (non-concessional) contributions to their super fund and receive a tax offset of up to $540 per year. The offset phases out between $37,000 and $40,000 of spouse income. Contributing $3,000 to your spouse’s super generates the full $540 offset — a small but straightforward win that requires minimal effort.

Superannuation Splitting

Super splitting allows you to transfer up to 85% of your annual concessional contributions to your spouse’s super fund. This doesn’t reduce your tax bill directly, but it equalises super balances between spouses — which becomes critically important as you approach retirement. When both spouses can maximise the tax-free pension phase (currently $1.9 million per person), the combined benefit is $3.8 million in tax-free pension assets, rather than one spouse being capped while the other has a small balance. Evening balances between spouses is also a key defence against the new Division 296 tax on super balances over $3 million.

Using an SMSF to Hold Your Business Premises

One of the most powerful strategies for business owners is purchasing their commercial premises through a self-managed super fund (SMSF). Here is how the structure works: One powerful option is buying your business premises through your SMSF and leasing it back to your business at market rent.

• Your SMSF acquires the commercial property (it can borrow to do so using a limited recourse borrowing arrangement — LRBA)
• Your business leases the property from the SMSF at arm’s length commercial market rent
• Lease payments flow into the SMSF — taxed at 15% in accumulation phase or 0% in pension phase
• Lease payments are fully deductible to your business
• When you eventually sell the property during pension phase, any capital gain may be completely tax-free
• The property is protected from business creditors within the SMSF

There are strict rules governing related-party transactions in SMSFs. The lease must be on arm’s length commercial terms, and the property must be “business real property.” An SMSF that breaches these rules can lose its complying status and be taxed at the top marginal rate — so specialist advice is essential. We walk through the full requirements in our SMSF setup guide.

Division 293 Tax: The Extra Super Tax for High Earners

If your income (including concessional super contributions) exceeds $250,000 in a financial year, you are liable for an additional 15% Division 293 tax on your concessional contributions — bringing the effective tax rate on those contributions to 30%. Even at 30%, concessional contributions remain more tax-effective than income at 47% — the benefit is reduced but not eliminated.

Division 293 tax is assessed by the ATO and either deducted from your super fund balance or paid personally, depending on your election. For more detail on how it works and who is affected, see our dedicated guide to Division 293 tax. For business owners approaching very large super balances, our Division 296 tax guide covers the proposed additional tax for balances over $3 million.

Non-Concessional Contributions: Parking After-Tax Money in Super

Non-concessional contributions are after-tax contributions to super — not deductible, but once inside, they grow in a low-tax environment and can be drawn out tax-free in pension phase. The non-concessional contributions cap for 2026–27 is $120,000 per year. If you are under 75 and your total super balance is below $1.66 million, the bring-forward rule allows you to contribute up to $360,000 in a single year.

This is particularly useful when you receive a windfall — business sale proceeds after applying the CGT retirement exemption, an insurance payment, or an inheritance — and want to shelter the money inside super’s low-tax environment quickly. For more on the relationship between CGT concessions and super contributions, see our CGT Small Business Concessions guide.

Frequently Asked Questions

Can I claim a tax deduction for my super contributions as a business owner?

Yes — if you are self-employed or derive less than 10% of your income from employment, you can make personal super contributions and claim them as a deduction. You must lodge a Notice of Intent to Claim a Deduction with your super fund before lodging your tax return. The contribution is then treated as concessional and taxed at 15% inside the fund. This is one of the most accessible and high-value deductions for business owners.

What happens if I exceed the concessional contributions cap?

Excess concessional contributions are included in your assessable income and taxed at your marginal rate, with an excess concessional contributions charge applying. You receive a 15% tax offset to avoid double-counting the tax already paid inside the fund. The ATO issues an excess contributions determination and you can elect to release the excess from super to pay the additional tax.

How do I check my unused concessional contributions carry-forward amount?

Log in to your myGov account and navigate to the ATO linked services. Your available carry-forward balance is listed under the super section. This reflects unused concessional cap amounts from the past five years, provided your total super balance was below $500,000 on 30 June of the prior year. Your accountant can also access this via the ATO Tax Agent Portal.

Can my company contribute to my super fund?

Yes. If you are a director-employee of your own company, the company can make concessional contributions to your super fund on your behalf. These are deductible to the company and taxed at 15% inside your fund — far better than paying you additional salary at up to 47%. Contributions must meet the work test if you are aged 67–74. Standard contribution forms or a super clearing house are used to make and report the contribution.

What is the transfer balance cap?

The transfer balance cap is $1.9 million per person (from 1 July 2023) — the maximum amount you can transfer into the tax-free pension phase. Any super balance above this must remain in accumulation phase (taxed at 15%) or be withdrawn. For couples, careful planning to equalise both spouses’ pension accounts — using super splitting and spouse contributions — maximises the combined tax-free retirement assets.

Frequently Asked Questions

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

Superannuation is one of the most effective tax minimisation strategies available to Australian business owners.

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For most business owners, the biggest tax bill they will ever face doesn’t arrive during a bumper profit year — it arrives when they sell. Capital gains tax on a business exit can easily run into hundreds of thousands of dollars, appearing at precisely the moment you expected to finally reap the reward for decades of hard work. Understanding how the capital gains tax discount works — and how to use it alongside the small business CGT concessions — is not optional planning. It is essential.

Australia’s CGT rules are genuinely generous compared to many other countries, but the concessions don’t apply automatically. You need to understand the rules, meet the eligibility conditions, and ideally structure your affairs well in advance of any planned sale. Get it right, and you could halve your tax — or eliminate it entirely. Get it wrong, and the ATO will collect every dollar.

In this guide, we walk through how the 50% CGT discount works, who qualifies, how it interacts with the small business concessions, and what you need to plan before selling your business or a major asset.

What Is Capital Gains Tax?

Capital gains tax (CGT) is not a separate tax in Australia — it is simply the inclusion of a capital gain in your assessable income. When you sell a CGT asset (which includes business assets, shares, real estate, intellectual property, and most other property) for more than its cost, the profit is a capital gain. This gain is added to your income and taxed at your marginal rate.

The starting point for any CGT calculation is the cost base of the asset. The cost base is not simply what you paid — it includes stamp duty and legal fees on acquisition, improvement costs, the costs of defending your title to the asset, and agent commissions on sale. Getting the cost base right matters: many business owners understate their cost base and therefore overstate their gain. A thorough review of the cost base before any sale is one of the first steps in any exit planning engagement at Pinnacle Accounting & Advisory.

Once you have the gross capital gain, the discount rules determine how much of that gain is actually included in your assessable income.

The 50% CGT Discount: How It Works and Who Qualifies

The general CGT discount under Division 115 of the Income Tax Assessment Act 1997 is one of the most valuable provisions in Australian tax law. If you hold a CGT asset for at least 12 months before disposing of it, you can reduce your capital gain by 50% before including it in your assessable income — provided you meet the eligibility conditions.

A practical example: You sell a business asset with a gross capital gain of $400,000. You have held it for more than 12 months. After applying the 50% discount, only $200,000 is assessable. At a 47% marginal rate, your CGT liability is $94,000 — not $188,000. The discount alone saves $94,000 in a single transaction.

Who Is Eligible for the CGT Discount?

• Individuals: Full 50% discount. The most common situation — a sole trader or trust beneficiary receiving a capital gain personally.
• Trusts (including family trusts): The trust applies the 50% discount and passes the discounted gain to individual beneficiaries. This is one of the key tax advantages of holding investment and business assets in a trust rather than a company.
• Self-managed super funds (SMSFs): A one-third discount (33.33%) is available, not the full 50%. Still highly valuable — and in pension phase, tax on earnings can drop to zero.
• Companies: No discount whatsoever. Companies are not eligible for the CGT discount under any circumstances. This is one of the most important structural differences between companies and trusts, and a major reason why investment assets are often better held in a trust or individual name rather than a company.

The 12-Month Holding Rule

The 12-month holding requirement is measured from the date of acquisition to the date of the CGT event (generally, the date you exchange contracts to sell, not the settlement date). A one-day shortfall eliminates the discount entirely — so timing the contract exchange date is important when you have flexibility on when to sign.

Assets acquired before 20 September 1985 are generally exempt from CGT entirely — known as “pre-CGT assets.” If you acquired business assets before that date, they may not attract any tax on sale. This is increasingly rare but still relevant for some long-standing business owners.

The Small Business CGT Concessions: Four Ways to Reduce CGT Further

On top of the general 50% discount, Australian small business owners may access four additional concessions under Division 152 of the ITAA 1997. These concessions are extraordinarily generous — in many cases, they can reduce a business owner’s CGT to zero. To access any of them, you must first satisfy the basic conditions:

• You are a small business entity with aggregated annual turnover under $2 million, or your net assets do not exceed $6 million (the maximum net asset value test)
• The asset satisfies the active asset test — used in your business for at least half of the period you owned it, or 7.5 years if held for more than 15 years

1. The 15-Year Exemption

This is the most generous concession in the Australian tax system. If you have owned a business asset continuously for at least 15 years, are aged 55 or over, and are retiring or permanently incapacitated, the entire capital gain is exempt. No CGT at all. The 15-year exemption takes precedence over all other concessions. See our dedicated guide to the CGT 15-year exemption for the full conditions.

2. The 50% Active Asset Reduction

If you don’t qualify for the 15-year exemption, the 50% active asset reduction applies next (after the general 50% discount). This reduces the remaining gain by a further 50%. The combined effect of both discounts is that only 25% of the original gross gain is assessable — a 75% total reduction.

3. The Retirement Exemption

The retirement exemption allows you to exclude up to $500,000 lifetime of capital gains from active business assets. If you’re under 55, the exempt amount must be contributed to superannuation. If you’re 55 or over, there’s no requirement to actually retire — you simply elect to apply the exemption. See our full guide to the CGT retirement exemption.

4. The Rollover Concession

The rollover concession defers a capital gain if you acquire a replacement active business asset within two years of the sale. The gain is rolled into the cost base of the new asset — you don’t pay tax now, but the deferred liability attaches to the replacement. This is useful when you’re selling one business to acquire another.

We cover all four concessions in detail — including the eligibility conditions and the order of application — in our companion guide: CGT Small Business Concessions Explained.

How the CGT Concessions Apply in Sequence

The order in which the CGT concessions are applied matters significantly. The ATO applies them in a fixed sequence, and understanding this order helps you model the tax outcome accurately:

• Step 1: Apply the general 50% CGT discount (if held for more than 12 months and you’re an individual, trust, or SMSF)
• Step 2: Test the 15-year exemption (if eligible, the remaining gain is completely eliminated — stop here)
• Step 3: Apply the 50% active asset reduction (reduces the remaining gain by half)
• Step 4: Apply the retirement exemption (up to $500,000 lifetime of the remaining gain)
• Step 5: Apply the rollover concession (defer any remaining gain if replacing the asset)

In the best-case scenario, an eligible individual who has held business assets for 12+ months could reduce a $1 million capital gain to zero: 50% discount reduces it to $500,000 — 50% active asset reduction brings it to $250,000 — $250,000 retirement exemption eliminates the rest. This level of planning is entirely legal, ATO-sanctioned, and is one of the primary reasons why exit planning years in advance makes a transformative financial difference.

How Business Structure Affects Your CGT Outcome

The structure in which you hold your business assets has a profound effect on your CGT outcome when you sell:

• Company: No 50% CGT discount. Capital gains inside a company are taxed at 25% or 30%. When you then distribute the after-tax proceeds as a dividend, shareholders may face further tax. However, the small business CGT concessions may still apply at the company level in some circumstances.
• Trust: The 50% discount is available and can be passed to individual beneficiaries, taxed at their personal rate. Family trusts are often the preferred structure for holding investment and business assets where CGT planning is a priority.
• Individual / sole trader: Full access to the 50% discount and all small business concessions. The simplest structure from a CGT perspective, but with no asset protection.
• SMSF: 33.33% discount in accumulation phase. Capital gains on assets sold in pension phase (after pension commencement) may be zero if the entire fund is in pension mode.

Restructuring your business into a more tax-efficient structure before a planned sale can unlock the CGT discount, but restructuring itself may trigger CGT events. This is one of the most complex areas of business tax planning. For more on structuring decisions, see our guide to business structures in Australia, and for overall tax planning approach, visit our tax planning services page.

Timing Your Sale for Maximum CGT Benefit

Getting the timing right on a business sale can save significant amounts of tax without changing the price you receive:

• Confirm the 12-month holding period: The CGT event occurs at exchange of contracts, not settlement. Even one day short costs you the 50% discount. Always verify the exact acquisition date before setting a contract date.
• Approaching 15 years: If you’re close to the 15-year mark, delaying a sale by a few months to qualify for the 15-year exemption may eliminate your CGT entirely.
• Income year selection: If your personal income is lower in a particular financial year (for example, the year you retire and cease drawing salary), completing the sale in that year reduces the marginal rate applying to any assessable gain.
• Instalment payments: Structuring the sale price as instalments across two or more financial years can spread the gain over multiple periods, reducing the marginal rate in each year.

How Pinnacle Approaches CGT Planning With Business Owners

Exit planning is one of the most financially significant services we provide at Pinnacle Accounting & Advisory. We typically begin working with business owners at least two to three years before a planned sale — because many of the most powerful strategies (holding period optimisation, restructuring, superannuation contributions funded by sale proceeds) require time to implement before any sale negotiations begin.

Our process: we review the existing structure and asset ownership, assess which CGT concessions are available and in what combination, model the after-tax outcomes under different sale scenarios, and build a pre-sale plan that maximises your net proceeds. We also advise on using sale proceeds to fund superannuation contributions under the retirement exemption — a strategy that simultaneously reduces CGT and builds your retirement savings.

Frequently Asked Questions

Do I get the 50% CGT discount if I sell shares in my company?

If you are an individual selling shares in a company that you have held for more than 12 months, yes — you can access the 50% CGT discount on any gain. If the company itself is selling its assets, no — companies are not eligible for the discount. This distinction is critical and depends on the ownership structure of your business.

Can I use the small business CGT concessions if my business is held in a company?

Yes. The small business CGT concessions under Division 152 apply to companies as well as individuals, trusts, and partnerships — provided the basic conditions are met. However, companies cannot also access the general 50% CGT discount. When sale proceeds are distributed to shareholders as a dividend, further tax may apply. The 15-year exemption and retirement exemption have specific requirements for companies that differ from individuals and trusts.

What is the maximum net asset value test?

To access the small business CGT concessions, your net assets (including those of connected entities and affiliates) must not exceed $6 million. Importantly, the asset being sold, your principal place of residence (up to a limit), and superannuation fund balances are generally excluded from this test. Many business owners with significant property portfolios still qualify once these exclusions are applied correctly.

Does CGT apply to goodwill when I sell my business?

Yes. Goodwill is a CGT asset, and any gain on goodwill is assessable. However, goodwill is also typically an “active asset” for small business CGT concession purposes, which means the concessions may significantly reduce or eliminate the tax on goodwill. This is often the single largest component of a business sale price — so getting the concession right is extremely valuable.

How far in advance should I start CGT exit planning?

At minimum, 12 months in advance — to ensure you qualify for the CGT discount. Ideally, two to three years in advance, so that strategies such as restructuring, superannuation contributions, and instalment payment arrangements can be properly implemented. Exit planning done a week before signing heads of agreement is almost always too late to capture the most valuable concessions.

Frequently Asked Questions

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

Getting the timing right on a sale is a core part of tax planning in Melbourne for business owners.

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If you have owned and run your business for 15 consecutive years, you may qualify for the most powerful capital gains tax concession in Australia — a complete exemption that means you could sell your business and pay zero CGT. Not a reduction. Not a partial relief. Zero.

The CGT 15-year exemption is the most valuable concession available under the small business CGT rules. Yet many business owners approaching retirement are unaware they qualify — or they inadvertently lose it through poor planning. This guide explains who qualifies, how the exemption works, and the key planning traps to avoid.

What Is the CGT 15-Year Exemption?

The CGT 15-year exemption is contained in Division 152-B of the Income Tax Assessment Act 1997 (ITAA 1997). It provides a complete exemption from capital gains tax on the sale of a qualifying business asset if you have continuously owned that asset for at least 15 years, and you meet the age and retirement conditions at the time of sale.

Unlike the other small business CGT concessions — which reduce or defer a capital gain — the 15-year exemption eliminates it entirely. If you qualify, the entire gain is disregarded for income tax purposes. You do not need to apply any other concession on top of it.

The Australian Taxation Office provides detailed guidance on the 15-year exemption on the ATO website.

Who Qualifies for the CGT 15-Year Exemption?

There are two sets of conditions you must satisfy: the basic conditions (shared by all small business CGT concessions) and the specific conditions unique to the 15-year exemption.

Basic Conditions

• Small business entity test: Your aggregated annual turnover must be less than $10 million, OR
• Net asset value test: The net value of your CGT assets (and those of associated entities) must be less than $6 million immediately before the CGT event.
• Active asset test: The asset being sold must be an “active asset” — that is, it must be used, or held ready for use, in carrying on a business.

Specific Conditions for the 15-Year Exemption

• 15 years of continuous ownership: You (or the entity) must have continuously owned the active asset for at least 15 years leading up to the CGT event.
• Age and retirement condition: At the time of the CGT event, you must be aged 55 or over AND be retiring, OR you must be permanently incapacitated (regardless of age).

For companies and trusts: Additional conditions apply. A “significant individual” — someone who held at least a 20% interest in the company or trust — must have had that interest for a total of at least 15 years. That individual must also satisfy the age and retirement (or permanent incapacity) condition at the time of the sale. This ensures the concession flows to the person who has genuinely built and owned the business over the long term.

What Counts as an “Active Asset”?

An active asset is one that you use, or hold ready for use, in the course of carrying on a business. Common examples include:

• Business goodwill
• Commercial real property used in your business operations
• Plant and equipment used in the business
• Shares in a company that carries on a business (subject to additional tests)
• Interests in a trust that carries on a business

What does not qualify: Residential property held as a passive investment does not meet the active asset definition, even if the rental income funds the business. Cash held in a bank account (above certain thresholds) and financial instruments held as investments are also excluded. If you are unsure whether a specific asset qualifies, seek professional advice before proceeding with a sale.

The 15-Year Continuous Ownership Test

The ownership must be continuous for at least 15 years. Brief periods where the asset was not actively used in the business — such as a short shutdown during a renovation — are generally not fatal to the exemption, provided the overall character of the asset as an active business asset is maintained. However, there are two critical risk areas:

Business Restructures Can Reset the Clock

This is the most common trap. If you restructure your business partway through the 15-year period — for example, if you operate as a sole trader for 10 years and then transfer the business assets into a company or trust — the new entity effectively starts its ownership clock from the date of the transfer. Your prior 10 years of individual ownership do not carry over to the new structure automatically.

This means a restructure at year 10 could push your qualifying date out another 15 years from the transfer. The ATO does provide small business restructure roll-over relief under Subdivision 328-G, but specific conditions apply and professional advice is essential before any restructure is undertaken.

Monitoring the 15-Year Anniversary

Many business owners do not track the date they first acquired their key business assets. Knowing your exact acquisition date matters — particularly if you are approaching the 15-year mark. Selling even a few months before the anniversary could cost you the entire exemption on what might be a million-dollar gain.

How the CGT 15-Year Exemption Works — Worked Example

To understand the real-world impact of this concession, consider the following example.

David’s situation: David has operated a plumbing business as a sole trader for 18 years. He is 61 years old and ready to retire. He sells the business goodwill and the commercial property from which he operated for a combined price of $1.6 million. His original cost base across both assets totals $400,000, giving him a total capital gain of $1.2 million.

Without the 15-Year Exemption

Under ordinary CGT rules, David would apply the 50% CGT discount available to individual taxpayers who have held assets for more than 12 months. This reduces his taxable gain to $600,000. Added to his other income, his marginal tax rate on a $600,000 gain could result in a tax bill of $270,000 or more, depending on his total assessable income for the year.

With the 15-Year Exemption

Because David has continuously owned the active business assets for 18 years, is aged 61, and is retiring, he qualifies for the 15-year exemption. The entire $1.2 million capital gain is disregarded. David pays zero CGT. Tax saved: $270,000 or more.

This is the power of the 15-year exemption. For business owners who have spent their careers building something, it can be the difference between a comfortable retirement and a substantial and unexpected tax liability.

What Happens to the Proceeds? The Super Contribution Opportunity

One of the most significant — and underutilised — aspects of the 15-year exemption is the ability to contribute the sale proceeds into superannuation under a special cap known as the CGT cap amount.

For the 2025–26 financial year, the CGT cap is $1.705 million. This is a lifetime cap that is entirely separate from your standard non-concessional contribution cap ($120,000 per year, or $360,000 under the bring-forward rule). Contributions made under the CGT cap do not count toward your annual non-concessional cap.

For business owners like David in the example above, this means that the $1.2 million gain — which is entirely tax-free under the 15-year exemption — can also be contributed directly into superannuation, where it will be sheltered from tax on future investment returns. Combined with the zero CGT on the sale, this is one of the most powerful wealth transfer mechanisms available to retiring business owners in Australia.

Important: The CGT cap contribution requires specific ATO forms (form NAT 71161) and must be structured correctly. Your superannuation fund must be notified before or when the contribution is made. Getting this wrong can result in the contribution being treated as a standard non-concessional contribution, which may trigger excess contribution penalties.

How the 15-Year Exemption Interacts With the Other CGT Concessions

The four small business CGT concessions apply in a specific order of priority:

1. The 15-year exemption
2. The 50% active asset reduction
3. The retirement exemption
4. The rollover concession

The 15-year exemption takes priority. If you qualify for it and your entire gain is exempt, you do not need — and cannot use — the other concessions on that same gain. The gain is simply gone.

If you do not qualify for the 15-year exemption (for example, if you have owned the business for only 12 years, or you are aged 52 and not permanently incapacitated), you may still be eligible for the other concessions. The CGT retirement exemption is particularly relevant for business owners who do not meet the 15-year threshold — it allows you to exempt up to $500,000 in lifetime capital gains, with proceeds contributed to super. Read our detailed guide on how the CGT retirement exemption works for business owners.

For a full overview of all four concessions and how they interact, see our guide to small business CGT concessions.

Planning Mistakes That Can Cost You the Exemption

In advising business owners on exits and retirement planning, the following mistakes come up repeatedly:

1. Not Monitoring the 15-Year Anniversary

If you are approaching your 15th anniversary of owning a key business asset, plan around it. Selling even a month before the anniversary date disqualifies you. A delay in settlement — even an unexpected one — could push the CGT event past the anniversary date in the wrong direction. Know your dates and build them into your exit timeline.

2. Restructuring Without Taking Advice First

A restructure from sole trader to company or trust can reset your ownership clock, potentially delaying your ability to access the exemption by 15 years. If you are within the 15-year window — say, in year 10 or 11 — always seek specialist tax advice before undertaking any structural change. The cost of advice is trivial compared to the potential tax exposure.

3. Not Seeking Advice Before Committing to a Sale

Many business owners first contact an accountant after signing a contract of sale. By then, the CGT event has been triggered and the options are limited. Tax structuring needs to happen before the sale, not after. If you are thinking about selling in the next one to three years, now is the time to get advice.

4. Confusing the CGT Cap With Standard Super Contributions

The CGT cap amount is a separate, special contribution type. If you inadvertently treat the proceeds as a regular non-concessional contribution, you may use up your annual cap and face excess contribution penalties. The paperwork must be completed correctly and in the right sequence.

5. Assuming the Exemption Is Automatic

The 15-year exemption is not applied automatically by the ATO. You must elect to apply it in your tax return and satisfy the conditions. Failing to elect — or failing to keep records that prove continuous ownership and active use — can result in the exemption being disallowed on audit.

Frequently Asked Questions

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

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If you’re planning to sell your business, the CGT retirement exemption could wipe out your capital gains tax — or at least dramatically reduce it — even if you haven’t owned the business for 15 years. Here’s how it works, who qualifies, and what planning steps you need to take before the sale settles.

Capital gains tax on a business sale can be a significant hit — potentially hundreds of thousands of dollars. The retirement exemption, under Division 152-D of the Income Tax Assessment Act 1997, is one of four small business CGT concessions specifically designed to reduce or eliminate that liability. It allows eligible business owners to exclude up to $500,000 of capital gains from their taxable income — over their lifetime — if certain conditions are met.

What Is the CGT Retirement Exemption?

The CGT retirement exemption is a concession under Division 152-D of the ITAA 1997 that permanently excludes up to $500,000 of capital gains from the sale of a qualifying active business asset from your assessable income. This is a lifetime limit — once you’ve used $500,000 of the exemption across all your business sales, it’s gone.

Unlike the CGT 15-year exemption — which requires continuous ownership for at least 15 years and a retirement or incapacity trigger — the retirement exemption has no minimum ownership period. You could have owned the business for two years and still qualify. However, age determines what you do with the exempt amount:

• Aged 55 or over at the time of the CGT event: the exempt amount is yours tax-free. No requirement to contribute to superannuation. You can receive it directly.
• Under 55: the exempt amount must be contributed to a complying superannuation fund or retirement savings account within 30 days of receiving the capital proceeds — or from the date of settlement if proceeds are received later. Miss this window and the exemption is forfeit.

The exemption is available whether you own the business directly as an individual, through a company, or through a trust — though the mechanics differ for each structure, and additional steps are required for entities.

Who Qualifies for the CGT Retirement Exemption?

Eligibility involves two layers: the basic conditions that apply to all four small business CGT concessions, plus conditions specific to the retirement exemption itself.

Basic Eligibility Conditions

You must be a small business entity — either an entity with aggregated annual turnover under $10 million, or one that satisfies the maximum net asset value test (the net value of your CGT assets, excluding your home and certain super assets, is under $6 million at the time of the CGT event).

The asset being sold must be an active asset: used, or held ready for use, in carrying on a business. Business goodwill, business real property you use in the business, and shares or trust interests where the underlying entity runs an active business can all qualify — though shares and trust interests come with additional “significant individual” tests (you generally need to hold at least 20% of the voting rights or distributable income).

The ATO’s guidance on basic conditions for the small business CGT concessions sets out these requirements in full.

Retirement Exemption-Specific Conditions

Once the basic conditions are met, the retirement exemption adds its own requirements:

• You must actively choose to apply the exemption — it is not automatic.
• You must not exceed your remaining lifetime limit. The combined amount you exempt across all CGT events using this concession cannot exceed $500,000.
• If you are under 55, the exempt amount must be contributed to super within 30 days of receiving the capital proceeds.
• If the CGT asset is held by a company or trust, the entity must make a cash payment to the individual equal to the exempt amount — the individual then contributes it to super if under 55. The payment from the entity is generally not assessable to the individual.

Importantly, you do not have to actually retire or stop working. The name of this concession is misleading — it applies to any qualifying business owner selling an active asset, regardless of their future employment or business plans.

How the Retirement Exemption Interacts with Other Concessions

The retirement exemption doesn’t operate in isolation. It sits within a layered system of concessions, and understanding the correct sequence matters — both for maximising the benefit and for avoiding mistakes.

In most cases, the 50% active asset reduction (Division 152-C) is applied first. This halves your capital gain if the asset has been an active asset for at least half of the period you’ve owned it. The retirement exemption is then applied to the reduced (post-50%) capital gain — meaning your $500,000 lifetime cap goes twice as far.

If the CGT 15-year exemption applies, it wipes the entire capital gain — so the retirement exemption isn’t needed for that sale. The 15-year exemption is the most powerful concession, but it requires 15 continuous years of ownership and an age or incapacity trigger. Many business owners won’t meet this test at the time they want to sell.

For business owners who’ve held their business for 8, 10, or 12 years — not yet 15 — the retirement exemption is the primary tool for eliminating capital gains tax on the sale. It works alongside proactive tax planning strategies to maximise your exit position.

The small business CGT rollover (Division 152-E) is also available, allowing you to defer a gain on one business asset if you acquire a replacement — but that’s a separate concession. The full overview is in our CGT small business concessions guide.

Worked Example: Under 55 — Jamie’s Consulting Business

Jamie is 48 and has operated a successful IT consulting business for nine years. He agrees to sell for a price that results in a capital gain of $400,000.

His accountant applies the 50% active asset reduction first: the $400,000 gain becomes $200,000.

Jamie has never used the retirement exemption before, so his full $500,000 lifetime cap is available. He chooses to apply the exemption to the remaining $200,000 gain. Because he is 48 (under 55), he must contribute $200,000 to his superannuation fund within 30 days of receiving the sale proceeds.

Result: Jamie pays $0 capital gains tax. The $200,000 is now inside superannuation — sheltered, invested, and growing towards retirement. For a 48-year-old with 17 years until preservation age, that’s a meaningful head start. And because this contribution is classified as a CGT cap amount, it doesn’t eat into Jamie’s regular concessional or non-concessional contribution caps.

Worked Example: 55 or Over — Maria’s Café

Maria is 62 and sells her café after 12 years of operation. The sale results in a capital gain of $700,000.

Her accountant applies the 50% active asset reduction: the gain is reduced to $350,000.

Maria has not previously used the retirement exemption, so her full $500,000 cap is available. She applies the exemption to all $350,000 of the remaining gain. Because she is 62 (over 55), she can receive this amount directly — no requirement to contribute to super.

Result: Maria pays $0 capital gains tax. She receives the proceeds tax-free and has complete flexibility — whether she boosts super voluntarily, funds retirement living expenses, or invests elsewhere. The entire $350,000 is hers to use as she chooses.

Understanding the $500,000 Lifetime Cap

The $500,000 lifetime limit is one of the most important details of the retirement exemption, and it’s easy to mismanage — particularly if you’ve sold business assets before.

The cap is per individual, not per business or per sale event. If you used $200,000 of the exemption on a previous business sale, you have $300,000 remaining. Apply the exemption to a $400,000 gain on a future sale (after the 50% active asset reduction), and $100,000 of that gain remains taxable — because you’ve exhausted the cap.

The $500,000 limit has also not been indexed for inflation. It’s the same figure it has been for many years. For business owners selling larger businesses where the capital gain — even after the 50% active asset reduction — exceeds $500,000, the retirement exemption alone won’t eliminate the entire taxable gain. Layering it with the active asset reduction and other tax planning strategies becomes critical.

If you’ve previously sold business assets and used part of this exemption, tracking the remaining cap is essential. Your accountant can determine how much you’ve used from prior tax returns and ATO records before you proceed with any new sale.

The Super Contribution Angle: A Planning Opportunity for Under-55s

For business owners under 55, the requirement to contribute to super isn’t just a condition to satisfy — it’s a genuine wealth-building opportunity.

The amount contributed under the retirement exemption is classified as a CGT cap amount. This sits within a separate lifetime cap for super contributions arising from small business CGT concessions — currently $1,780,000 (indexed annually). Critically, this contribution does not count towards your regular concessional or non-concessional contribution caps.

This means a 45-year-old selling a business can potentially contribute up to $500,000 directly into superannuation from the sale proceeds — completely outside the normal annual limits. For someone who hasn’t built a large super balance from regular contributions, this can fast-track their retirement savings in a way that wouldn’t otherwise be possible.

The combination of zero tax on the capital gain and the ability to shelter up to $500,000 into a low-tax superannuation environment has a profound impact on long-term wealth accumulation. But it requires coordinated planning with your accountant — ideally 12 to 24 months before the sale, not after settlement.

Common Mistakes That Cost Business Owners the Exemption

The retirement exemption is powerful, but its strict procedural requirements mean that a missed step — especially the 30-day contribution window — can turn a $0 tax bill into a very large one.

• Missing the 30-day super contribution window. For under-55 business owners, the exempt amount must be in super within 30 days of receiving the capital proceeds. The ATO does not grant extensions. Miss this deadline and the exemption is lost — permanently for that gain.
• Getting advice after the sale has settled. By the time settlement is complete, your options may be limited. Structuring a business exit correctly — choosing the right concessions, checking the 15-year and active asset tests, managing timing — should start 12 to 24 months before the intended sale date.
• Using the exemption when the 15-year exemption would have applied. If you’re approaching 15 years of continuous ownership and are over 55 (or will be), it may be worth deferring the sale. The 15-year exemption covers the entire gain without touching your $500,000 lifetime cap — preserving it for a future sale. Using the retirement exemption unnecessarily wastes that cap.
• Applying the retirement exemption before the active asset reduction. The correct sequence matters. Applying the retirement exemption to the full gain — rather than after the 50% active asset reduction — depletes the lifetime cap twice as fast for the same outcome.
• Assuming the exemption is applied automatically. It is not. You must actively make the choice, and it must be documented correctly in your tax return. If you don’t make the election, you don’t receive the exemption.

Frequently Asked Questions

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

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