Trust vs Company: Tax

Every few weeks someone sits across from me and asks whether they should put the business in a trust or a company to save tax. It is the wrong first question. Neither structure is cheaper by default. They tax the same dollar in completely different ways, and the right one depends on what you plan to do with the money, not on a headline rate.

So here is how I actually think about it.

The one difference that matters most

A trust does not pay tax. It passes its income to the people you nominate, and each of them pays at their own rate. A company does pay tax, at a flat 25% for most small businesses, and then a second layer applies when you take the money out to yourself.

That single split explains almost everything else.

Figure 1: the same income, two completely different ways of being taxed.

If your income bounces around and you have adult family members on low incomes, a trust lets you spread it so less of it hits the top brackets. If your income is steady and high and you want to leave most of it in the business to reinvest, a company caps the rate at 25% while it stays in there.

“Company tax is only 25%, so it is cheaper.” No.

This is the line I correct most often. The 25% is not a saving. It is a deferral.

Money sitting inside a company is taxed at 25%. The moment you want it in your own bank account, you pay yourself a wage or a franked dividend, and the tax tops up to your personal marginal rate. The franking credit means you are not taxed twice on the same dollar, but you do end up at your rate in the end, not at 25%.

The only time 25% is a genuine, lasting advantage is when the profit stays in the company and gets reinvested. Pull it out the same year and you have added a layer of paperwork for no benefit. And if you borrow it from the company without declaring a dividend, you walk straight into Division 7A, which treats that loan as an unfranked deemed dividend.

The CGT discount is a permanent gap

Here is a difference that does not reverse. Individuals, including individuals who receive a capital gain through a trust, get the 50% CGT discount on assets held more than 12 months. A company gets nothing. How CGT works on property walks through that discount in detail.

If the plan is to buy an asset, hold it, and sell it years later for a gain, that 50% is real money the company structure throws away. For a business you will sell as a going concern, this is often the deciding factor on its own.

One thing to watch on the horizon: the 12 May 2026 Federal Budget proposed replacing the 50% discount with cost base indexation plus a 30% minimum tax. It is not yet law, and is intended to start 1 July 2027. Current rules still apply. I flag it because it changes the long-run maths, not today’s return.

Trusts have their own traps

A trust is not a free pass. Three things bite people.

Distribute to kids and Division 6AA caps it hard. A minor pays close to the top rate on anything over about $1,300 of trust income, so the old idea of splitting income to children is mostly dead.

Miss the 30 June resolution and the trustee is taxed on the lot at 47%, with no tax-free threshold. I have seen a missed signature cost a client five figures.

And the reimbursement-agreement rules in section 100A mean a distribution on paper to one person, with the cash enjoyed by another, can be unwound and taxed at the top rate. Family trust distributions have to be genuine.

What I tell clients. A couple came to me last year, both running a profitable consulting business through a company. They drew almost all of it out as salary every year and were proud of the 25% rate. They were not getting 25% on any of it. They were paying their own marginal rate, with extra accounting on top. We moved the operating side into a discretionary trust so the income could be split between them while one was on parental leave on a lower income, and parked the surplus they did not need in a bucket company at 25%. Same business, materially less tax, because the structure finally matched what they did with the money. The mechanics still had to be exactly right: the section 97 entitlements, the 30 June resolution, the Division 7A loan on the bucket company. That is the part that actually takes the work.

So which one?

Figure 2: lean one way or the other based on what happens to the profit.

Most of the time it is not either-or. A very common setup for a growing business is a trust that runs the operation and distributes surplus profit to a bucket company, capping tax on retained earnings at 25% while keeping the flexibility to spread the rest. That is also where a recent High Court decision matters. In Bendel, the Court held that an unpaid entitlement owed by a trust to its corporate beneficiary is not automatically a Division 7A loan. It does not make the structure risk-free, but it overturned a position the ATO had held for 16 years.

If you take one thing from this: pick the structure around what happens to the money, then get the compliance right. A structure that saves tax on paper but trips a Division 7A or 100A problem is not saving you anything.

The detail, for the record

Rates and figures below are for the 2025-26 income year unless stated. Anything announced but not yet enacted is marked.

Trust taxation

• Flow-through. A trust is generally not a taxpaying entity. Under section 97 ITAA 1936, a beneficiary presently entitled to trust income is taxed on their share at their own marginal rates.
• No present entitlement. Where no beneficiary is presently entitled, the trustee is assessed under section 99A ITAA 1936 at 47% (45% plus 2% Medicare levy), with no tax-free threshold. A valid distribution resolution must be in place by 30 June.
• Minors (Division 6AA ITAA 1936). For 2025-26 a resident minor’s eligible (unearned) income is taxed at nil up to $416; 66% on the slice from $417 to $1,307; and 45% on the whole amount once it exceeds $1,307 (plus Medicare levy). Excepted income, such as employment income or testamentary trust income, is taxed at ordinary rates.
• CGT discount. Under Subdivision 115-C, the 50% general discount (Division 115 ITAA 1997) flows through a trust to individual beneficiaries on assets held 12 months or more.
• Anti-avoidance. Section 100A (reimbursement agreements; see ATO PCG 2022/2 risk zones) and Part IVA can apply the top marginal rate to distributions that are not genuine. A family trust election brings family trust distribution tax (FTDT) at 47% on distributions outside the family group.

Company taxation

• Flat rate. 25% for a base rate entity (aggregated turnover under $50m and no more than 80% base rate entity passive income) for 2025-26, otherwise 30%. No tax-free threshold.
• No CGT discount. Companies cannot access the 50% CGT discount. This is a permanent difference against individuals and trusts.
• Getting profit out. Profit reaches shareholders as salary (PAYG withholding plus super guarantee) or as franked dividends under the imputation system (Division 207 ITAA 1997). Franking credits stop the same profit being taxed twice; the shareholder ultimately pays at their marginal rate.
• Division 7A. Loans, payments or forgiven debts to shareholders or their associates can be a deemed unfranked dividend under Division 7A (Part III, ITAA 1936) unless repaid or placed on a complying loan before the company’s lodgment day. The benchmark interest rate is 8.37% for 2025-26 and 8.77% for 2026-27.

Bendel (current as at June 2026)

• Commissioner of Taxation v Bendel [2026] HCA 18 (10 June 2026): the High Court held, by majority, that an unpaid present entitlement owed by a trust to a corporate beneficiary is not itself a loan under section 109D(3) ITAA 1936, overturning the ATO’s long-held view (TR 2010/3, TD 2022/11). Subdivision EA, section 100A and Part IVA may still apply. The ATO’s Decision Impact Statement is pending.

Budget reform (announced 12 May 2026, not yet law)

• The 2026-27 Federal Budget proposed replacing the individual and trust 50% CGT discount with cost base indexation plus a 30% minimum tax, intended from 1 July 2027 (Treasury Laws Amendment (Tax Reform No. 1) Bill 2026). Not enacted as at June 2026; current rules apply. The same Budget announced negative gearing changes, covered in what is negative gearing.

Common to both

• GST registration is required at $75,000 of turnover for either structure. Lodge through your BAS, and keep the records to back any distribution, dividend or wage you pay.

Getting the structure right is one job; running it cleanly all year is the other. Homepedia Tax Assistant keeps the distributions, dividends and lodgments in order so the structure you chose actually holds up.

This article is general information, not personal tax advice. Trust and company structuring depends on your full circumstances. Talk to a registered tax agent before acting.