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

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

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

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

GST Registration Attaches to the Entity, Not the Business Activity

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

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

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

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

The Threshold Is Aggregated Across Everything You Do

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

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

Here is a concrete example:

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

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

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

What Happens If You Miss the Registration Deadline?

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

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

What Changes on the Day You Register for GST

You Charge GST on Every Taxable Supply, Across Both Activities

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

You Can Claim Input Tax Credits on Both Activities Too

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

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

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

Everything Reports on One BAS

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

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

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

Two Genuine Exceptions Worth Knowing

Registration Does Not Turn a Supply Into a Taxable Supply

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

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

On Cakes Specifically, the Food Concession Does Not Help

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

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

Is the Second Activity Even an Enterprise?

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

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

When Two Activities Should Sit in Separate Entities

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

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

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

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

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

Frequently Asked Questions

Can I have two businesses under one ABN in Australia?

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

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

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

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

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

Do I charge GST on cake sales in Australia?

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

What happens if I register for GST late?

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

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

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

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

Frequently Asked Questions

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

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

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

What Is Residential Rent for GST Purposes?

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

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

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

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

The GST Registration Threshold and Rental Income

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

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

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

When a Family Trust Does Need to Register for GST

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

The Trust Has Other Business Income

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

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

The Trust Sells a New Residential Property

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

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

Commercial Residential Property

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

Short-Term Holiday Letting

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

Watch: Rental Property in a Family Trust

What Happens If Your Trust Is Registered for GST?

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

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

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

Should You Voluntarily Register for GST?

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

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

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

How This Interacts With Negative Gearing

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

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

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

Frequently Asked Questions

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

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

Why Most Business Owners Overpay Tax

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

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

Strategy 1: Operate Through the Right Business Structure

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

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

Strategy 2: Income Splitting Through a Family Trust

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

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

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

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

When all family members are already fully utilising their lower tax brackets, the next dollar of trust income faces the top marginal rate. The solution is a bucket company — a corporate beneficiary that receives excess trust distributions and pays company tax at 25% instead of the 47% that would otherwise apply. That 25% rate applies where the company is a base rate entity: a bucket company fed by a trading business normally qualifies, while one whose income is mainly rent, dividends or capital gains is taxed at 30% instead.

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

Strategy 4: Maximise Superannuation Contributions

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

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

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

Strategy 5: Instant Asset Write-Off and Accelerated Depreciation

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

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

Strategy 6: Pre-Year-End Tax Planning

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

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

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

Strategy 7: Income Splitting With a Spouse or Family Member

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

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

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

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

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

A proactive tax advisor will:

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

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

How Pinnacle Approaches This With Business Owners

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

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

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

Frequently Asked Questions

Is it legal to minimise tax in Australia?

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

How much can I realistically save?

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

When is the best time to start tax planning?

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

What is the difference between tax minimisation and tax evasion?

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

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Frequently Asked Questions

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

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

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

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

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

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

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

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

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

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

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

Who Needs to Lodge a BAS in Australia?

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

The GST Registration Threshold

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

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

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

Quarterly vs Monthly BAS Lodgement

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

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

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

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

How Xero Helps With Your BAS

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

GST Coding in Xero

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

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

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

How Xero Tracks GST Automatically

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

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

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

Connecting to the ATO

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

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

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

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

Step 1: Review and Reconcile Your Accounts

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

Step 2: Open the BAS in Xero

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

Step 3: Check Your GST Amounts

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

Step 4: Finalise and Lodge

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

Common BAS Mistakes Business Owners Make in Xero

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

Using the Wrong GST Codes

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

Not Reconciling Before Lodging

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

Missing or Incorrect PAYG Withholding

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

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

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

BAS Due Dates — When Do You Need to Lodge?

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

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

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

Should You Use a BAS Agent?

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

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

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

Frequently Asked Questions

Can I lodge my BAS directly from Xero?

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

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

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

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

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

How far back can the ATO audit my BAS?

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

Ready to Take the Stress Out of Your BAS?

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

Frequently Asked Questions

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

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

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

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

If you are still deciding whether a family trust is the right structure for your business, our complete guide to business structures in Australia covers all four main options and helps you determine which suits your stage of growth. Before you optimise the distributions, it is worth being clear on what the structure itself is buying you: our guide to family trust benefits and the traps nobody mentions sets out both sides.

What Is a Trust Distribution?

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

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

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

Who Can Receive Distributions From a Family Trust?

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

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

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

How to Minimise Tax Through Strategic Distributions

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

Income Splitting

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

Waterfall Distributions

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

Practical Example

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

With strategic distributions:

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

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

The 30 June Deadline — Why It Matters

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

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

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

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

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

Using a Bucket Company to Reduce Trust Tax

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

Here is how it works:

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

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

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

ATO Rules and Compliance Traps

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

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

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

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

Unpaid Present Entitlements (UPEs), Subdivision EA and Section 100A

When trust income is distributed to a corporate beneficiary but the funds are not physically transferred, the beneficiary holds an unpaid present entitlement (UPE). How a UPE is taxed changed in 2026. In Commissioner of Taxation v Bendel [2026] HCA 18, decided 10 June 2026, the High Court held that a private company which simply does nothing about its entitlement does not provide financial accommodation under section 109D(3)(b). A bare UPE is therefore not a Division 7A loan, and does not by itself create a deemed dividend. The ATO accepted that outcome in its Bendel Decision Impact Statement, published 26 June 2026.

The exposure has moved rather than disappeared, and bucket company arrangements still need annual attention. As at September 2026, Subdivision EA can still produce a deemed dividend where the trust pays money to, lends to, or forgives a debt of a shareholder of the corporate beneficiary or their associate while the entitlement remains outstanding. Section 100A continues to apply where the entitlement arises from a reimbursement agreement, taxing the trustee at the top marginal rate. And any UPE that has already been converted into a complying section 109N loan remains a loan and must keep being serviced. Our guide to family trust distributions covers the treatment of UPEs in more detail.

Personal Services Income (PSI)

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

How Pinnacle Structures Trust Distributions for Clients

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

Our process typically involves:

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

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

Frequently Asked Questions

Can I change my trust distribution strategy each year?

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

What happens if I miss the 30 June distribution deadline?

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

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

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

Is distributing to a bucket company always the best strategy?

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

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

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

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

Frequently Asked Questions

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

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

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

The Four Main Business Structures in Australia

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

1. Sole Trader

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

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

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

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

2. Partnership

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

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

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

3. Company

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

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

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

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

4. Trust

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

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

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

Comparing Business Structures: A Practical Summary

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

Using Multiple Entities: The Trust and Company Structure

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

Here is how it works in practice:

• The trading entity earns the business income. This might be the trust itself operating the business, or a separate trading company.
• The family trust receives profits and distributes them each year at the trustee’s discretion. The trustee distributes to whoever in the family unit has the lowest taxable income that year, such as a spouse, adult children, or related entities.
• The bucket company receives any portion of trust income that cannot be distributed tax-effectively to individuals. Because a company pays tax at 25% where it is a base rate entity, the bucket company catches excess income at a much lower rate than the owner’s marginal rate. A distribution from a trading trust keeps its trading character, so the company normally qualifies; where the trust’s income is mainly rent, dividends or capital gains, the rate is 30% instead. The retained funds can then be used for investment, future distributions, or reinvestment into the business.
• A holding company or holding trust can sit above the operating entity to hold valuable assets such as property, equipment and goodwill, separate from the trading risk, providing an additional layer of asset protection.

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

Which Business Structure Is Right for You?

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

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

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

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

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

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

Changing Your Business Structure Without Triggering Tax

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

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

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

Common Mistakes When Choosing a Business Structure

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

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

Explore the Business Structures Series

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

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

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

Frequently Asked Questions

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

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

Xero Payroll: A Complete Guide for Australian Business Owners

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

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

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

What Xero Payroll Includes for Australian Businesses

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

Single Touch Payroll (STP) Phase 2 Compliance

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

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

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

Leave Management

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

Super Contributions

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

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

Pay Runs

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

How to Set Up Payroll in Xero

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

Step 1: Configure Your Payroll Settings

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

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

Step 2: Connect Your Bank Account

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

Step 3: Add Your Employees

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

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

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

Step 4: Set Up Pay Items and Leave

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

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

Step 5: Connect to the ATO for STP

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

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

How to Run a Pay Run in Xero

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

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

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

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

Key points every business owner using Xero Payroll should understand:

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

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

Super Guarantee in Xero â How It Works

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

Here is how Xero handles super guarantee obligations:

Calculation

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

Quarterly Due Dates

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

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

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

Sending Super Through Xero

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

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

Common Xero Payroll Mistakes â and How to Avoid Them

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

1. Incorrect Pay Item Categorisation Under STP Phase 2

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

2. Including Overtime in Super Calculations

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

3. Not Reconciling STP Reports to Payroll Totals

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

4. Late or Missing Super Payments

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

5. Not Completing the Annual Finalisation

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

6. Setting Up the Wrong Pay Calendar

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

When Should You Outsource Payroll to Your Accountant?

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

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

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

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

Frequently Asked Questions

Is Xero Payroll included in my Xero subscription?

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

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

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

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

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

What happens if I miss a super payment deadline?

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

Final Thoughts

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

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

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

Frequently Asked Questions

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

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

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

Why Sole Traders Outgrow Their Structure

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

• Unlimited personal liability. As a sole trader, your personal assets — your home, savings, superannuation — are exposed to business creditors. There is no legal separation between you and your business.
• Tax rate inefficiency. Once you earn above $135,000 (from the 2026–27 financial year), the marginal personal tax rate is 45 cents in the dollar plus Medicare levy. A company pays a flat 25% where it is a base rate entity, meaning aggregated turnover under $50 million and no more than 80% passive income, and 30% otherwise.
• Limited flexibility. Sole traders cannot split income with a spouse (legitimately), cannot retain profits in the business at a lower tax rate, and have fewer options for structuring remuneration, super, and ownership.

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

When Should You Make the Switch?

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

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

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

The Tax Advantage of a Company Structure

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

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

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

How to Transfer Your Business Without Triggering CGT

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

Two rollover provisions can prevent this:

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

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

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

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

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

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

Practical Steps in the Transition

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

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

Personal Services Income After Incorporation

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

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

Division 7A — The Risk That Comes With the Company

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

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

Frequently Asked Questions

Do I need a lawyer to incorporate?

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

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

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

How long does incorporation take?

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

Should I incorporate into a company or a trust?

Both structures have advantages. A company offers the flat 25% rate for a base rate entity, 30% otherwise, and clear creditor separation. A discretionary trust offers income-splitting flexibility — the ability to distribute different amounts to different beneficiaries each year — but doesn’t have the same asset protection or flat-rate benefit. See our guide to trust distribution strategies to understand how income splitting works in practice. Many established businesses use a combination — a discretionary trust as the holding entity with the operating business run through a company. The right choice depends on your income level, family situation, asset base, and long-term plans. For a full breakdown of all four main structures, see our guide to business structures in Australia.

Frequently Asked Questions

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

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

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

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

What Is the Small Business Restructure Rollover?

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

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

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

Who Is Eligible for the Rollover?

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

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

Eligible Entities

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

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

The “Genuine Restructure” Requirement

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

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

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

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

The Three-Year Safe Harbour

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

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

What Assets Can Be Transferred?

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

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

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

How the Rollover Interacts with Other Tax Concessions

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

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

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

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

Choosing the Right New Structure

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

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

What the ATO Looks for in SBRR Claims

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

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

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

Common Mistakes That Disqualify the SBRR

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

Frequently Asked Questions

Does the rollover eliminate CGT or just defer it?

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

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

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

Does the SBRR apply to stamp duty?

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

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

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

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

Frequently Asked Questions

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

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

What Is the Super Guarantee Rate for 2025–26?

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

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

What Does Ordinary Time Earnings Mean?

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

OTE does not include:

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

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

Who Must Receive Super Guarantee?

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

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

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

When Must Super Be Paid?

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

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

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

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

What Happens If You Don’t Pay on Time?

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

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

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

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

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

Super and the Maximum Contributions Base

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

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

Super for Company Directors

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

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

Super Guarantee and Salary Sacrifice

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

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

Practical Compliance Checklist for 2025–26

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

Frequently Asked Questions

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

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

Do I have to pay super for casual employees?

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

Can I count salary sacrifice contributions toward my SG obligation?

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

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

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

Frequently Asked Questions

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

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