Search this question and you will find the same comparison everywhere: a company pays 25%, an individual pays up to 47%, therefore incorporate. Some pages even run a worked example — $150,000 of profit, company pays $37,500, sole trader pays much more.
That comparison is not wrong so much as unfinished, and the missing half is the half that decides the answer.
So the real question is not “how much do I earn?” It is “how much can I genuinely leave in the business?” That reframing changes who should incorporate and who should not.
The rates, current for 2026-27
A company is a base rate entity — taxed at 25% — if its aggregated turnover is under $50 million and no more than 80% of its assessable income is passive (interest, rent, dividends, royalties, net capital gains). Both limbs must be satisfied; the second is routinely overlooked by businesses that have accumulated investments. Otherwise the rate is 30%.
Medicare levy of 2% sits on top. The lowest bracket fell from 16c to 15c on 1 July 2026, and a further cut to 14c is legislated for 1 July 2027 — which slightly narrows the gap that makes incorporating attractive.
What a company actually costs
The tax comparison is the part everyone models. The cost side is the part that decides it for most small businesses.
ASIC fees are indexed each 1 July. The figures above apply from 1 July 2026 — several accounting sites still quote $329 for the annual review.
Four traps that decide more cases than the tax rate
1. Division 7A — you cannot simply take the money
A company's money is not your money. Take it out as anything other than a wage, a director fee or a properly franked dividend and it is generally a Division 7A loan. To avoid it being treated as an unfranked dividend, you need a written agreement in place before the company's lodgement day, minimum yearly repayments, and interest at the benchmark rate — 8.77% for the year ending 30 June 2027. Loans run a maximum of seven years unsecured, or 25 years if properly secured by registered mortgage.
This is the single most common way an owner-operated company goes wrong, and it usually surfaces years later when the loan account has quietly grown.
2. Personal services income — incorporating does not dodge it
If your income comes mainly from your personal skills rather than from assets, staff or a genuine business structure, the PSI rules apply regardless of the entity you use. The income is attributed back to you and deductions are restricted. Consultants, contractors and one-person professional services businesses often discover the company achieves nothing for them.
You escape PSI by passing the results test, or another personal services business test combined with the 80% rule. Income generated mainly by a substantial income-producing asset — a truck, heavy machinery — is not PSI, which is why an owner-driver's position differs from a consultant's.
3. No 50% CGT discount in a company
Individuals and trusts get a 50% discount on capital gains for assets held over twelve months. Companies do not. If the business will one day be sold, or holds an appreciating asset, this single fact can outweigh every year of rate saving combined. The small business CGT concessions can help — the $6 million maximum net asset value test or the $2 million turnover test — but they are conditions to be met, not a given.
4. Losing the small business income tax offset
Sole traders with aggregated turnover under $5 million get a 16% offset on the tax attributable to business income, capped at $1,000 a year. There is no company equivalent, so incorporating gives it up.
Partially offsetting that, and unmentioned anywhere else we have seen: the new $1,000 standard deduction from 2026-27 applies to labour income — salary, wages and director fees — but expressly not to business income. A sole trader gets nothing from it; a director drawing a salary or fees can. The cash value is modest, perhaps $300 at a 30c marginal rate, but it points the opposite way to the offset above.
An honest side-by-side
When each one is genuinely right
Stay a sole trader if you draw most of the profit to live on, the business is early or lumpy, losses would be useful against other income, or you are caught by PSI anyway. Simplicity has real value, and it is cheap.
Incorporatewhen you can consistently retain profit you do not need personally, when liability exposure is genuine, when you want to bring in partners or employees properly, or when clients and insurers require it. Asset protection alone is often reason enough — the tax is secondary.
And note the third option most comparisons ignore: a discretionary trust, sometimes with a corporate trustee, keeps the CGT discount and allows distributions across beneficiaries. It is more complex again, and not a fit for everyone, but for family businesses it frequently beats both.
Talk it through
This decision turns on facts a blog post cannot see: what you draw, what you retain, whether PSI applies, what you own, and who else is in the family. We work through it with a projection over both structures, including the cost side, before anyone registers anything. Business returns from $1,490; sole trader from $349.
Related
Truck driver deductions covers the owner-driver version of this question, where supplying the vehicle changes the PSI answer.
Sources
Company tax rates and the base rate entity tests: ATO — Company tax rate changes. Individual rates: ATO — Tax rates for Australian residents.
Division 7A benchmark rate: ATO — Division 7A benchmark interest rate. Company fees: ASIC — Fees (indexed each 1 July).
Structure comparison: business.gov.au — Business structures.
