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

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

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

The ATO does not run one account, it runs several

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

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

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

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

What offsetting actually means

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

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

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

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

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

The refund you were counting on may never hit your bank

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

When the ATO does not have to offset

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

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

What offsetting looks like on your accounts

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

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

How offsetting works when you are on a payment plan

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

A credit does not replace your instalment

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

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

Income tax and activity statement accounts need separate plans

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

Miss a payment and the plan can default

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

Should you change your payment plan when a credit lands?

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

Why I usually tell clients to keep paying

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

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

If cash flow is genuinely tight

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

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

Do not forget the General Interest Charge

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

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

The bottom line

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

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

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

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

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

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

Does a credit reduce my payment plan instalments?

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

Can I pause or change my ATO payment plan?

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

Is the General Interest Charge still tax deductible?

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

Frequently Asked Questions

Frequently Asked Questions

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

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

What is a TPAR (Taxable Payments Annual Report)?

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

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

Who has to lodge a TPAR?

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

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

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

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

The 10% rule: when mixed services trigger a TPAR

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

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

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

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

What you actually have to report

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

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

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

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

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

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

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

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

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

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

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

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

TPAR deadlines and penalties

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

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

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

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

How to get your TPAR right

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

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

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

Frequently asked questions

When is the TPAR due?

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

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

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

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

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

What happens if I lodge my TPAR late?

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

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

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

Frequently Asked Questions

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

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

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

What Is a Chart of Accounts?

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

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

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

How the Chart of Accounts Works in Xero

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

Assets

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

Liabilities

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

Equity

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

Revenue

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

Expenses

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

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

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

Xero’s defaults typically include:

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

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

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

How to Customise Your Chart of Accounts in Xero

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

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

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

Common customisation decisions for Australian businesses include:

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

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

Common Chart of Accounts Mistakes (and Their Tax Consequences)

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

Using the wrong tax codes

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

Lumping everything into one or two accounts

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

Mixing personal and business expenses

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

Not setting up accounts to match your entity type

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

Renaming accounts without understanding the downstream effect

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

How Your Chart of Accounts Affects Your BAS and Tax Returns

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

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

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

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

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

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

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

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

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

Frequently Asked Questions

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

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

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

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

Does the chart of accounts in Xero affect my BAS?

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

Get Your Xero File Set Up to Work for Your Business

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

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

Frequently Asked Questions

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

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

What is the cents per kilometre method?

The cents per kilometre method lets you claim a set rate for every business or work kilometre you drive in your own car, up to a yearly cap. The single rate is designed to cover all of your car running costs rolled into one number, so you do not add fuel, servicing or anything else on top. The car does not have to be registered in your name either: see our guide on claiming motor vehicle expenses when the registration is not in your name.

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

The ATO cents per km rate for 2026-27

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

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

How much can you claim?

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

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

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

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

What the 91 cent rate actually covers

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

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

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

Cents per km vs the logbook method

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

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

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

Record-keeping: what the ATO expects

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

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

Common mistakes business owners make

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

Which method is right for your business?

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

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

Frequently asked questions

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

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

How much car expense can I claim without a logbook?

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

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

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

Does the cents per km rate include fuel and depreciation?

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

Can I claim the drive between home and work?

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

Frequently Asked Questions

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

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

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

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

What Is a Share Class?

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

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

The Main Classes of Shares in an Australian Company

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

Ordinary Shares

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

Preference Shares

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

Redeemable Preference Shares

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

Dividend Access Shares

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

Non-Voting and Deferred Shares

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

Ordinary vs Preference Shares: The Practical Difference

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

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

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

Why Share Classes Matter for Business Owners

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

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

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

The Risk of Getting Your Share Structure Wrong

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

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

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

Getting the Entity and Share Structure Right From the Start

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

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

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

Frequently Asked Questions

The ATO explains how dividends and franking work on the ATO dividends page.

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

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

Australian Income Tax Rates 2026-27 (Individual Residents)

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

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

What Changed from 2025-26 to 2026-27?

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

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

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

How to Calculate Your 2026-27 Income Tax

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

Example 1: Taxable income of $60,000

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

Example 2: Taxable income of $120,000

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

Example 3: Taxable income of $200,000

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

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

Low Income Tax Offset (LITO) 2026-27

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

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

Medicare Levy 2026-27

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

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

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

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

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

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

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

What Is Coming in 2027-28?

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

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

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

Non-Resident Income Tax Rates 2026-27

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

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

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

Tax Planning Strategies for Business Owners in 2026-27

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

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

1. Distribute income through a family trust

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

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

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

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

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

3. Maximise concessional superannuation contributions

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

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

4. Time your income and deductions

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

5. Review your structure annually

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

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

Frequently Asked Questions: Australian Income Tax Rates 2026-27

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

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

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

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

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

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

Will the tax rates change again in 2027-28?

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

Does the Medicare levy apply on top of these rates?

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

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

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

Frequently Asked Questions

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

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

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

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

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

What Is the Proposed 30% Minimum Trust Tax?

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

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

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

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

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

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

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

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

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

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

The Income-Splitting Benefit Disappears at the Top

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

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

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

The Asset Protection Case: This Was Never Really About Tax

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

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

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

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

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

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

Does This Mean Family Trusts Are No Longer Worth It?

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

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

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

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

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

What Should Business Owners Do Now?

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

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

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

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

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

Frequently Asked Questions

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

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

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

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

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

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

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

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

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

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

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

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

Frequently Asked Questions

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

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

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

The Golden Rule of Business Deductions

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

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

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

Operating Expenses

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

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

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

Vehicle and Travel Expenses

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

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

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

Travel expenses:

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

Home Office Expenses

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

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

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

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

Staff and Superannuation

Employment costs are fully deductible:

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

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

Asset Write-Offs and Depreciation

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

Eligible assets include:

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

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

Professional Fees and Advisor Costs

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

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

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

Marketing and Advertising

Expenses incurred to promote your business are deductible:

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

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

Training and Professional Development

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

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

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

What You Cannot Claim

This is where many small business owners get into trouble:

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

Mistakes to Avoid

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

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

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

How Pinnacle Approaches This With Small Business Clients

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

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

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

Frequently Asked Questions

Do I need receipts for every deduction?

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

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

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

Are client gifts tax deductible?

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

Can I claim my mobile phone as a business expense?

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

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

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

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Frequently Asked Questions

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

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

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

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

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

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

What Is a Family Trust Election?

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

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

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

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

What are the benefits of making a family trust election?

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

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

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

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

What Is an Interposed Entity Election?

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

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

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

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

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

When Is a Family Trust Election Required?

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

1. The trust wants to use prior year losses

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

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

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

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

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

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

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

When Is an Interposed Entity Election Required?

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

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

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

Common entities that need IEEs:

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

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

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

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

Real-World Scenarios: How These Elections Apply

Scenario 1: The trading trust with a loss year

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

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

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

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

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

Scenario 3: Two discretionary trusts — one distributing to another

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

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

What Happens If You Never Make These Elections?

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

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

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

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

Frequently Asked Questions

Frequently Asked Questions

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

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

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

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

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

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

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

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

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

What Does Xero Cost for Sole Traders?

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

The Starter plan covers:

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

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

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

What Can Sole Traders Use Xero For?

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

Invoicing

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

Expense Tracking

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

Bank Feeds

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

BAS Preparation

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

Tax Time Reporting

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

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

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

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

Individual Income Tax

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

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

PAYG Instalments

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

GST Registration

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

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

Is Xero Worth It for Sole Traders? An Honest Assessment

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

Where Xero Earns Its Keep

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

Where Xero Has Limits

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

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

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

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

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

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

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

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

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

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

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

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

Frequently Asked Questions

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

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

Does Xero lodge my BAS for me?

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

Is Xero the same as having a bookkeeper?

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

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

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

The Bottom Line

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

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

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

Frequently Asked Questions

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