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

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

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

What Is a Holding Company?

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

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

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

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

Why Business Owners Set Up a Holding Company

There are several compelling reasons:

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

Asset Protection: Separating IP and Assets

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

Under a holding company structure:

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

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

Dividend Flow to a Holding Company

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

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

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

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

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

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

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

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

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

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

What Is a Non-Portfolio Dividend?

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

Three things have to line up:

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

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

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

What about the franking credit attached to it?

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

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

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

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

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

Example A: the dividend is a non-portfolio dividend

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

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

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

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

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

The aggregated turnover trap

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

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

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

CGT and the 50% Discount Issue

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

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

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

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

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

When Does a Holding Company Make Sense?

A holding company structure tends to make sense when:

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

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

Cost vs Benefit Analysis

Running a holding company adds complexity and cost:

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

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

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

How Pinnacle Approaches This With Business Owners

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

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

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

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

Frequently Asked Questions

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