Sole Trader vs Company: How Each Is Taxed in 2026-27
The two most common structures for small business in Australia are taxed very differently. A sole trader's profit is simply added to their personal income; a company pays a flat rate on its profits and is a separate legal entity.
The headline difference
| Sole trader | Company | |
|---|---|---|
| Tax rate | Personal marginal rates (0–45%) | 25% (base rate entity) or 30% |
| Tax-free threshold | Yes — $18,200 | No — taxed from the first dollar |
| Medicare Levy | Yes (2%) | No |
| Low Income Tax Offset | Yes — up to $700 | No |
| 50% CGT discount | Yes | No |
| Losses | Can offset other income (rules apply) | Stay inside the company |
| Admin cost | Low | ASIC fees, separate return, bookkeeping |
The 25% rate applies to base rate entities — companies with aggregated turnover under $50 million and no more than 80% passive income. Others pay 30%.
Where the crossover sits
At low profits a sole trader usually pays less tax than a company, because of the tax-free threshold and LITO. As profit grows, personal marginal rates (30–45% plus Medicare) overtake the flat 25% company rate. But remember: company profits aren't yours until paid out as salary or dividends, which are then taxed in your hands (with franking credits for tax the company already paid). The company advantage is mostly about deferring tax on profits retained in the business.
Other obligations that don't change with structure
- GST: registration is required once turnover exceeds $75,000, whatever the structure. You then remit 1/11th of GST-inclusive sales (less credits) through your BAS.
- Super: employers must pay 12% super guarantee for employees. Sole traders aren't required to pay their own super, but personal contributions are generally deductible.
- PAYG instalments: both structures typically pay tax quarterly once the ATO issues instalments.
Common reasons people incorporate
- Profit consistently above what they need to live on (retained profits taxed at 25%).
- Limited liability and contracting requirements.
- Bringing in partners or investors.
Structure choice affects tax, liability, super, CGT, and payroll obligations — and anti-avoidance rules (like personal services income) can unwind the benefits. Get advice from a registered tax agent or accountant before changing structure.