"Companies only pay 25% tax" is a common reason sole traders think about setting up a Pty Ltd. The rate is real, but it's half the story. The profit still has to reach you, and when it does, it's taxed at your personal rates.
This article works through the 2026-27 numbers at three profit levels to show where a company saves tax and where it doesn't. Every figure was computed with the same tested logic as Quillroo's free sole trader vs company tax calculator, which reproduces the ATO's franking credit examples, so you can check them and then run your own profit.
How each structure is taxed
Sole trader. Your profit is your income. You pay income tax at the 2026-27 resident rates (15% from $18,201, 30% from $45,001, 37% from $135,001 and 45% from $190,001), less the low income tax offset (LITO) if your income is low enough, less the small business income tax offset, plus the 2% Medicare levy. The small business offset is 16% of the tax on your net small business income, capped at $1,000 a year, for businesses with aggregated turnover under $5 million. It's for sole traders and for shares of small business income from partnerships and trusts, so a company's shareholders don't get it. (ATO: Tax rates, Australian resident; Small business income tax offset.)
Company. A base rate entity pays 25% on its taxable profit: aggregated turnover under $50 million and no more than 80% of assessable income from passive sources such as rent and interest. Other companies pay 30%. (ATO: Changes to company tax rates.) A salary paid to you as director is a deduction for the company and taxable income for you. What's left after company tax can be paid to you as a franked dividend.
Franking credits. The company tax already paid comes with the dividend as a credit: at 25%, one third of the cash dividend, so a $75 dividend carries a $25 credit. You include both in your taxable income, then the credit comes off your tax. Eligible resident individuals get any excess refunded. (ATO: Franking tax offsets; Refunding excess franking credits.)
The 2026-27 Medicare levy low-income thresholds haven't been published yet. The latest single thresholds the ATO lists ($28,011 and $35,013) are labelled 2025-26, and the calculator uses them for both years. No example below is near them, so the figures aren't affected. (ATO: Medicare levy reduction for low-income earners.)
The three scenarios
Each example compares three set-ups for one resident owner with no other income:
- Sole trader: all profit taxed in your hands.
- Company, pay it all out: the company pays you a salary, then pays everything left after company tax as a fully franked dividend.
- Company, keep the rest: same salary, but the after-tax profit stays in the company.
"Total tax" adds company tax and your personal tax. Super on the salary isn't included (see below).
Example 1: $60,000 profit, $45,000 salary
| Sole trader | Company, pay it all out | Company, keep the rest | |
|---|---|---|---|
| Company tax (25% of profit after salary) | – | $3,750 | $3,750 |
| Salary to you | – | $45,000 | $45,000 |
| Fully franked dividend to you | – | $11,250 | $0 |
| Franking credit | – | $3,750 | $0 |
| Your taxable income | $60,000 | $60,000 | $45,000 |
| Income tax | $8,520 | $8,520 | $4,020 |
| Low income tax offset | −$100 | −$100 | −$325 |
| Small business income tax offset | −$1,000 | – | – |
| Medicare levy | $1,200 | $1,200 | $900 |
| Franking credit offset | – | −$3,750 | – |
| Your personal tax | $8,620 | $5,870 | $4,595 |
| Total tax (you + company) | $8,620 | $9,620 | $8,345 |
| Cash in your hands after tax | $51,380 | $50,380 | $40,405 |
| Left in the company | – | – | $11,250 |
At this profit a company doesn't help. Paying everything out costs $1,000 more than being a sole trader, and keeping $11,250 in the company saves just $275, before ASIC fees and extra accounting.
Example 2: $120,000 profit, $60,000 salary
| Sole trader | Company, pay it all out | Company, keep the rest | |
|---|---|---|---|
| Company tax (25% of profit after salary) | – | $15,000 | $15,000 |
| Salary to you | – | $60,000 | $60,000 |
| Fully franked dividend to you | – | $45,000 | $0 |
| Franking credit | – | $15,000 | $0 |
| Your taxable income | $120,000 | $120,000 | $60,000 |
| Income tax | $26,520 | $26,520 | $8,520 |
| Low income tax offset | $0 | $0 | −$100 |
| Small business income tax offset | −$1,000 | – | – |
| Medicare levy | $2,400 | $2,400 | $1,200 |
| Franking credit offset | – | −$15,000 | – |
| Your personal tax | $27,920 | $13,920 | $9,620 |
| Total tax (you + company) | $27,920 | $28,920 | $24,620 |
| Cash in your hands after tax | $92,080 | $91,080 | $50,380 |
| Left in the company | – | – | $45,000 |
Keeping $45,000 in the company cuts this year's tax by $3,300, but you're living on $50,380 instead of $92,080.
Example 3: $200,000 profit, $100,000 salary
| Sole trader | Company, pay it all out | Company, keep the rest | |
|---|---|---|---|
| Company tax (25% of profit after salary) | – | $25,000 | $25,000 |
| Salary to you | – | $100,000 | $100,000 |
| Fully franked dividend to you | – | $75,000 | $0 |
| Franking credit | – | $25,000 | $0 |
| Your taxable income | $200,000 | $200,000 | $100,000 |
| Income tax | $55,870 | $55,870 | $20,520 |
| Low income tax offset | $0 | $0 | $0 |
| Small business income tax offset | −$1,000 | – | – |
| Medicare levy | $4,000 | $4,000 | $2,000 |
| Franking credit offset | – | −$25,000 | – |
| Your personal tax | $58,870 | $34,870 | $22,520 |
| Total tax (you + company) | $58,870 | $59,870 | $47,520 |
| Cash in your hands after tax | $141,130 | $140,130 | $77,480 |
| Left in the company | – | – | $75,000 |
Here the gap is real: $11,350 less tax this year, with $75,000 kept in the company. As a sole trader, the top slice of this profit is taxed at 37% and 45%; the company pays 25% on it instead.
The pattern: the saving is on profit you leave in the company
| Profit | Sole trader | Company, pay it all out | Company, keep the rest | Saving this year | Top-up tax when paid out later* |
|---|---|---|---|---|---|
| $60,000 | $8,620 | $9,620 | $8,345 | $275 | $1,275 |
| $120,000 | $27,920 | $28,920 | $24,620 | $3,300 | $4,300 |
| $200,000 | $58,870 | $59,870 | $47,520 | $11,350 | $12,350 |
*If the kept profit is later paid as a fully franked dividend in a year when your salary and the tax rates are the same.
Three things stand out.
- Paying it all out never wins on tax here. Franking credits make the 25% company tax a prepayment of your own tax. If everything comes out to you, the total equals a sole trader's tax without the small business offset, which is why that column is exactly $1,000 higher every time. The salary/dividend split doesn't change it.
- The saving comes from profit kept in the company. It has only had 25% tax paid. That helps if your personal rate is higher and you genuinely don't need the money this year, for example to fund equipment, stock or a buffer.
- Most of it is a deferral. When that profit comes out as a dividend, you pay the gap between 25% and your rate that year. In the examples, the later top-up is $1,000 more than the first-year saving. It only becomes a lasting saving if you take the dividends in a year when your income, and so your rate, is lower.
The non-tax costs of a company
- ASIC fees. From 1 July 2026, registering a proprietary company with share capital costs $636 and the annual review fee for a proprietary company is $342. Late payment adds a fee. (ASIC: Fee indexation; Fees for commonly lodged documents.)
- Accounting and compliance. The company keeps its own books and lodges its own tax return, alongside yours, and directors have legal duties. Expect a bigger accountant's bill.
- The money belongs to the company. You can't just move it to your personal account. It comes out as salary, a declared dividend or a properly documented loan.
- Division 7A. Loans, payments or forgiven debts from a private company to a shareholder or their associate can be treated as an unfranked dividend, unless repaid or put under a complying loan agreement by the company's lodgment day. Paying private bills from the company account is the classic way this goes wrong. (ATO: Private company benefits – Division 7A dividends.)
- Personal services income (PSI) rules. If your income is mainly a reward for your personal skills or effort (more than 50%), and you don't pass a personal services business test such as the results test, the PSI rules can attribute the company's income to you. It's taxed at your personal rates, so the company doesn't lower your tax. Contractors earning most of their income from one client are the usual case. (ATO: Personal services income; Self-assessing as a PSB.)
- Super on your director salary. A director paid for their duties counts as an employee for super guarantee. Under Payday Super, from 1 July 2026 the company pays 12% of your qualifying earnings for each payday, and it must reach the fund within 7 business days (unless a longer period applies). On a $60,000 salary that's $7,200 a year: deductible to the company and yours in super, but still cash out of the business. (ATO: About Payday Super; Super guarantee.) The super guarantee calculator works out the amount.
So should you set up a company?
A company is most likely to save tax when much of your profit would otherwise be taxed at 37% or 45% (the saving is thin at 30%), you can leave a meaningful amount in the business, the PSI rules don't catch your income, and you'll keep company and personal money strictly separate. If you'd take out every dollar anyway, these numbers favour staying a sole trader: you keep the $1,000 small business offset and skip the extra costs. Trusts, asset protection and selling the business are separate questions for a registered tax agent.
If you stay a sole trader, the sole trader tax calculator shows how much to set aside, and Quillroo's paid AU GST & BAS Workbook keeps income, expenses and GST in one place.
What these figures leave out
One year, one resident owner, no other income, 25% company rate. No super, payroll tax, company running costs, Medicare levy surcharge, HELP repayments, trusts, capital gains or dividend holding period rule. The company is assumed to be new or a base rate entity last year, so it franks at 25%. (ATO: Changes to company tax rates.)
Run your own numbers: Sole trader vs company tax calculator. It runs in your browser, and nothing you type is sent anywhere.
General information, not tax advice. Your situation may differ, so check with the ATO or a registered tax agent before you change your business structure. Rates, thresholds and fees checked against ATO and ASIC pages on 17 Oct 2026. Quillroo makes the tools linked here, including the paid workbook.
Published by Quillroo, a small Australian automation studio. Questions: ledgerlinetools@proton.me
