The short answer
Understand the key differences between a trust and a company, including tax treatment, distributions, and compliance.
Trusts and companies can both run a business with their own ABN and tax return, but they pay out profits differently. A trust distributes its profit to beneficiaries each year, who pay tax at their own rates, which gives flexibility. A company pays its own company tax, then pays owners through wages or dividends. The right choice depends on your family, risk and growth plans.
How does a trust work?
A discretionary (family) trust is run by a trustee, often a company, for a group of beneficiaries such as family members. Each year the trustee decides how to distribute the trust’s profit. Beneficiaries then include their share in their own tax returns.
That flexibility is the main attraction. Profit can be directed to family members on lower tax rates, or to a “bucket” company, depending on the year. Any profit not distributed is generally taxed at the top marginal rate, so trusts usually distribute everything each year.
How does a company work?
A company is its own legal entity owned by shareholders and run by directors. It pays company tax on its profit, currently 25% for most small businesses that qualify as base rate entities. Owners then take money out through:
Wages or director’s fees, taxed in their personal return
Dividends, which often carry franking credits for the company tax already paid
Profits can also be kept in the company to fund growth, taxed at the company rate in the meantime.
What are the key differences?
Profit flexibility: trusts can vary distributions each year; companies pay dividends by share ownership.
Retaining profits: companies can hold profits at the company tax rate; trusts generally can’t hold profits without paying top-rate tax.
Losses: a trust’s losses stay in the trust; they can’t be distributed to beneficiaries.
Selling the business: individuals and trusts can usually access the CGT discount; companies can’t.
Cost and admin: both need their own tax returns and bookkeeping, and companies have ASIC obligations.
A typical Melbourne scenario
Priya and Dan run a profitable physio clinic in Glen Waverley. Through a family trust, they can split profit between themselves and a bucket company, depending on their incomes each year. Their friend Marco runs a growing software business he plans to reinvest in heavily. He uses a company so profits can be kept and taxed at the company rate while he grows, paying himself a set wage. Both structures suit different goals.
Can you use both?
Yes. Many growing businesses use a trust with a corporate trustee, sometimes alongside a bucket company. It is a common setup, but it adds cost, so it only makes sense once profit is high enough.
Key takeaways
Trusts offer flexibility to distribute profit to beneficiaries each year.
Companies pay company tax and suit retaining profits for growth.
Selling, losses and admin costs differ between the two.
Get advice before choosing, because changing structure later can trigger tax.
General information only. Talk to your accountant about your circumstances before choosing a structure.
Read when to move from sole trader to company, see our business structure review and company setup services, or talk to our business accountants.
Oz calls accounting "the great art", and his clients would agree. A CPA member and Xero specialist, he joined Elephant to provide a more holistic service that covers every base of building wealth. He believes long-term relationships are the only way to get clients real results. When he's not at his desk, he's at the gym, on his bike, or fishing - ideally all three.
