"Should I operate as a sole trader, a company, or through a trust?" is one of the most common questions small business owners bring to their accountant or bookkeeper. The honest answer — it depends — is not very satisfying, but understanding what it depends on is genuinely useful. Bookkeepers who have a working knowledge of how structures affect tax obligations, compliance costs, and risk are better placed to advise clients appropriately and, critically, to recognise when a question goes beyond bookkeeping and needs a registered tax agent or solicitor.
Sole Trader: Simplicity at a Price
The sole trader structure is the simplest and cheapest to operate. There's no separate legal entity: the individual and the business are the same person at law. Income is reported on the owner's individual tax return, taxed at marginal rates — which rise to 45% (plus the 2% Medicare Levy) for income above $180,000. There's no option to retain profits in the business at a lower rate.
From a bookkeeping perspective, the main issues are separating business and personal transactions (which is more a discipline than a legal requirement, but essential for accurate record-keeping), and ensuring that the individual's Personal Services Income (PSI) rules don't further restrict deductibility. If a sole trader earns more than 50% of their income from services performed personally (rather than through a business structure), the PSI rules apply and many deductions are disallowed. The ATO has a PSI decision tool that's worth walking clients through if there's any doubt.
Superannuation for sole traders is voluntary in structure but compulsory in spirit: contributions are deductible, and the ATO increasingly scrutinises whether self-employed people are adequately saving for retirement. Sole traders who pay themselves a wage (they can't, technically — drawings are not wages) confuse their bookkeeper; it's worth clarifying that sole traders pay themselves from profit, not salary, and that super contributions are personal contributions, not employer SG.
Company Structure: Lower Rate, Higher Compliance
A private company pays tax at 25% for base rate entities (companies with aggregated turnover below $50 million that derive 80% or less of income from passive sources). This is significantly lower than the top individual marginal rate, making a company structure attractive for businesses generating consistent profit.
The catch is that profits retained in the company are taxed, but shareholders only receive the economic benefit when dividends are paid or the company is sold. Dividends carry franking credits equal to the tax already paid, so the overall tax outcome for a shareholder who is also an individual taxpayer depends on their marginal rate. For a shareholder on 45%, a fully franked dividend from a 25% company still results in top-up tax — the company structure defers tax rather than eliminating it.
Division 7A is the compliance landmine for company clients. It applies when a private company makes a loan, payment, or debt forgiveness to a shareholder (or their associate) without appropriate documentation. If a business owner draws money from the company account for personal use and it's not a properly documented loan or a declared dividend, the ATO deems it an unfranked dividend — taxable with no offset. Division 7A loans must be on ATO benchmark terms (currently fixed at the RBA indicator lending rate at the start of the year) with a signed loan agreement and annual minimum repayments. Bookkeepers managing a company client's accounts should have a Division 7A checklist and raise any unexplained owner drawings immediately.
Trusts: Flexibility With Complexity
Discretionary (family) trusts allow the trustee to distribute income to beneficiaries in proportions that minimise overall tax — directing income to lower-earning family members, for example. This flexibility is powerful, but it comes with administrative obligations: a valid trust deed, annual trustee resolutions made before 30 June, and distribution minutes that are dated and properly documented.
The ATO has hardened its position on trusts in recent years. Unpaid present entitlements — distributions owed to beneficiaries but held in the trust as a loan back — attract Division 7A treatment if the beneficiary is a company. Trust distributions to adult children who don't genuinely work in the business can be challenged under section 100A if the arrangement is considered to lack genuine commercial purpose. These are not obscure technical risks; they're active ATO compliance focus areas.
For bookkeepers, the practical implication is that trust accounts require more end-of-year care than other structures. The trust's tax return cannot be lodged without knowing how income will be distributed, and the distributions must be consistent with the trust deed's terms. If the deed permits only certain beneficiaries or limits trustee discretion, those constraints must be reflected in the bookkeeping.
Tax Planning Versus Tax Evasion: A Critical Line
When clients ask about ways to reduce their tax, the distinction between legitimate tax planning and tax evasion or avoidance is not just semantic — it's the difference between a legal strategy and a criminal offence.
Tax planning involves using the provisions of the law as intended: choosing an appropriate structure, timing income and deductions, making concessional super contributions, claiming legitimate deductions. Tax avoidance involves arrangements that technically comply with the law but whose purpose is to exploit it in a way parliament did not intend — schemes caught by the general anti-avoidance provisions in Part IVA. Tax evasion involves hiding income or fabricating deductions — it is fraud.
Bookkeepers who are not registered tax agents should be cautious about providing structural or tax planning advice. The Tax Practitioners Board is clear that advice about tax minimisation strategies constitutes a tax agent service and requires registration. Know your lane: explain the compliance implications of different structures, flag issues for the supervising tax agent, and refer structural questions to a qualified adviser.
When to Recommend a Restructure
The trigger for a restructure conversation is usually a sustained increase in profit, a significant change in the client's personal circumstances (marriage, children, business partnership), or an asset protection concern (a sole trader in a professional role with litigation risk, for example). These conversations should begin with the client's tax agent or accountant, not the bookkeeper — but bookkeepers who flag the right indicators at the right time are providing genuine value.
Watch for: a sole trader consistently reporting taxable income above $120,000; a company accumulating retained profits that are never distributed; a trust missing resolution deadlines; or an owner making personal payments from the company account without documentation. Each of these is a signal worth raising — professionally, clearly, and with an appropriate referral in place.