Proprietorship vs Corporation Tax in Australia
Choosing the right business structure can significantly affect the amount of tax paid to the government. In Australia, many small business owners begin as sole proprietors because the structure is simple and inexpensive to operate. However, as profits increase, incorporating the business may create tax advantages through the lower corporate tax rate. According to Australian tax rules, resident individuals are taxed using progressive marginal tax rates, while eligible small companies may pay a flat corporate tax rate of 25%.
Example:
Mike operates a Construction Business in Australia. The business has been successful and now produces a taxable income of $110,000 per year after all “ordinary and necessary” expenses and depreciation have been deducted. At present the business is operated as a proprietorship; that is, he pays personal income tax on the entire $110,000. For tax purposes, it is as if she had a job that pays her a $110,000 salary per year. As an alternative, Mike is considering incorporating the business. If he does, he will pay herself a salary of $40,000 a year from the corporation. The corporation will then pay taxes of 25% on the remaining $70,000 and retain the balance of the money as a corporate asset. Thus, Mike's two alternatives are to operate the business as a proprietorship or as a corporation. Mike is single and has $5000 of itemized personal deductions. Which alternative will result in a smaller total payment of taxes to the government?
In this example, Mike operates a successful construction business that generates a taxable income of AUD 110,000 after deducting all allowable expenses and depreciation. If the business remains a proprietorship, the entire AUD 105,000 is treated as Mike’s personal taxable income. Under the 2025 Australian resident tax rates, the tax on AUD 105,000 is calculated progressively. To know about the tax rates, visit the ATO website regularly for more information. The first AUD 18,200 is tax-free, income between AUD 18,201 and AUD 45,000 is taxed at 16%, and the remaining amount up to AUD 105,000 is taxed at 30%. This results in approximately AUD 22,288 of personal income tax before Medicare levy considerations.
Alternatively, if Mike incorporates the business, he pays himself a salary of AUD 40,000. Reducing AUD 5000 as personal deduction, the taxable income becomes AUD 35000. Since this salary is now personal income, it is taxed at individual rates. Based on Australian tax brackets, the personal income tax on AUD 35,000 is approximately AUD 2,688. The corporation retains the remaining AUD 70,000 and pays corporate tax at 25%, resulting in AUD 17,500 of company tax. Therefore, the total combined tax becomes approximately AUD 20,188.
Comparing the two alternatives shows that operating as a corporation results in lower total taxes. Under the proprietorship structure, Mike pays approximately AUD 22,288 in tax, whereas incorporation reduces the combined tax burden to about AUD 20,188. This creates an estimated annual tax saving of AUD 2,100. The savings occur because a portion of the business income is taxed at the lower corporate rate instead of the higher personal marginal tax rate.
Overall, incorporation appears to be the more tax-efficient alternative for Mike’s construction business. Besides reducing taxes, a corporation may also provide benefits such as limited liability protection and easier business expansion. However, corporations also involve additional legal, accounting, and reporting responsibilities. Therefore, business owners should evaluate both tax savings and administrative costs before deciding on the most suitable business structure.
The calculations are done for both options here in an excel file. Find and Download the Excel file for this example.
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