Sole Trader vs Pty Ltd for Tradies: Which Structure and When

Somebody on site has told you that going Pty Ltd will save you tax. The number behind that advice is usually 25%, set against the 47c in the dollar a high-earning sole trader pays at the top, and on the face of it that is a saving of more than 20 cents on everything you earn.

It is not. The 25% company rate applies to profit the company keeps. Money you take out to live on is taxed at your own marginal rates whether it arrives as a wage or as a franked dividend. So the sole trader vs Pty Ltd question for a tradie is not really about what you earn. It is about how much of it you leave behind.

This guide covers what changes when you incorporate, what it costs, the rule that can cancel the tax advantage entirely, and when the switch is genuinely worth making.

What actually changes, and what does not

As a sole trader you are the business. Its profit is your income, it goes in your personal return, and its debts are yours. A Pty Ltd is a separate legal person: it earns its own income, owns its own assets, lodges its own tax return and pays its own tax, and you lodge a personal return on top of it.

Most of the rest carries across unchanged, which is the part the comparison articles skip:

• The GST registration threshold is tested on the enterprise, not the structure. $75,000 of turnover puts you in, whichever way you are set up, as the GST registration threshold works through.
• The $20,000 instant asset write-off applies to both. A ute or a bundle of tools is deducted the same way.
• Your trade licence, your public liability cover and your workers compensation obligations do not change because the ABN belongs to a company.
• You still lodge, and there is still no threshold below which business income escapes a return.

Both setups are priced the same way here, and our accountant for tradies page has the fee for each. What follows is about which one you should be in, not who does the paperwork.

The tax comparison, with both sets of rates on the table

A sole trader pays individual marginal rates on the whole profit. For 2025-26 that is nothing up to $18,200, 16c from there to $45,000, 30c from $45,001, 37c from $135,001 and 45c above $190,001, with the 2% Medicare levy on top. The top rate a tradie faces is 47c in the dollar.

A company pays a flat rate. It is 25% for a base rate entity, which means aggregated turnover under $50 million and no more than 80% of its assessable income being passive. A trade business meets both conditions without trying, so 25% is the rate that matters here. The 30% rate applies to companies that fail the test.

The gap between 25% and 47% is where the advice comes from, and it only exists on profit that stays in the company. Take the money as a wage and it lands in your personal return at your marginal rates, with the company claiming a deduction for paying it. Take it as a franked dividend and the franking credit tops the tax up to your rate as well. The money you live on is taxed the same either way.

Here is what that looks like with numbers. A tradie makes $160,000 of business profit and needs $110,000 of it to live on.

As a sole trader, the whole $160,000 is his taxable income. The top $50,000, the part he is not spending, sits across the 30c and 37c brackets: $25,000 at 32c with the levy, then $25,000 at 39c. Through a company, the $110,000 wage is taxed exactly as it would have been, and the $50,000 the company keeps is taxed at 25%.

The difference on that retained slice is $5,250, and it is a deferral rather than a saving. When he eventually takes the $50,000 out as a dividend, the franking credit brings the total back to his own rate. What the company buys him is $5,250 of tax he does not pay this year, which stays in the business as working capital for plant, materials or an apprentice.

PSI, the rule that can cancel the whole advantage

If your income is mainly a reward for your own labour, it is personal services income, and if you cannot pass one of the personal services business tests, the profit is attributed straight back to you. The company reports it and pays no company tax on it. The 25% rate never applies.

PSI is income produced mainly, meaning more than 50%, from your skills or efforts as an individual. The ATO’s own plumbing example makes the scale of it clear: a job invoiced at $330, being $80 of materials and $250 of labour, is entirely PSI, because it is mainly a reward for personal effort. Materials that are a minor part of the service do not change the answer, and the ATO uses an electrician’s wiring as the example of a minor part.

There are four ways a tradie ends up outside the PSI rules, and the ATO’s guidance on income that is not PSI carries a trade example for each one.

Route out	What it turns on	The ATO’s own example
Selling goods	Income comes mainly from the goods, not the labour	A carpenter making and selling bespoke furniture
An income-producing asset	Plant is essential, high value and more than half the contract price	A backhoe operator supplying a truck and backhoe to a roads department
A business structure	Employees, assets, goodwill and a business that does not depend on one person	An electrician with three employees, two equipped vans and around 150 regular clients
Passing a PSB test	Self-assessment against the results test or the other three	Below

Most working tradies get there through the results test, which has three conditions and needs all of them met for at least 75% of your PSI. You have to be paid to produce a specific result, required to provide your own tools, and liable to fix mistakes at your own cost. The ATO’s air-conditioning installer, working to a contract price against a set of plans, bringing his own hammer, snips, drill and ladder, and carrying the cost of defects, passes on all three.

The tradie who does not pass is the one on an hourly or daily rate to a single builder, using their gear, invoicing for the time it takes to fix his own mistakes. The ATO says directly that payment by the hour or the day makes the first condition unlikely to be met. The other route out is to pass one of the remaining three tests and take less than 80% of your PSI from one client and its associates.

Being caught by PSI is not the disaster it sounds like. It does not make you an employee, it does not touch your ABN or your GST registration, and it does not stop you running a business. What it does is remove the reason for incorporating, because the profit lands on your marginal rates regardless.

Liability, and what limited actually means

The separation is real, and for most tradies it is the strongest argument for incorporating. A company’s debts are the company’s. If a job goes wrong, a supplier is not paid or a claim lands, the creditors are chasing the company’s assets, and generally they cannot come after your house, your savings or the car in your own name. If the house is the main thing you own, that separation is usually worth more than any tax outcome in this post.

It matters most to the people least likely to be thinking about it. Public liability cover and a company do different jobs: insurance answers a claim, the company limits what is exposed if a claim, a debt or a dispute gets past it. Carry neither and you are personally on the hook for all of it. Carry too little cover, which is common, and the company is the only thing standing between a shortfall and your own assets.

The protection is not absolute, and it leaks in two places that are both common in trades. Suppliers, equipment financiers and landlords routinely ask a director for a personal guarantee, which puts your own assets behind that debt whatever the company structure says. The trade account you opened in five minutes at the counter almost certainly has one in it.

The other is director duties. Directors have a legal obligation to prevent insolvent trading, and can be personally liable for certain company debts. Trading on while you cannot pay the bills is where the protection stops working.

A company is also not insurance. Public liability cover answers a claim from a customer or an incident on site, and every commercial client will still want the certificate.

What being a director actually signs you up for

A company brings a second regulator. Alongside everything the ATO wants, ASIC sets out what an officeholder has to do:

• Pay the ASIC fees.
• Check and respond to the annual company review statement.
• Tell ASIC about changes to the company.
• Pass an annual solvency resolution.
• Deregister the company when it closes.

The general duties sit behind those: be honest and careful, understand the company’s financial position, make sure it can pay its debts on time, keep proper records, and act if it is in financial difficulty. Penalties are not limited to deliberate breaches. Record keeping gets longer too, because the ATO’s general rule is five years and ASIC requires companies to keep records for seven.

What a company actually costs to run

A company costs money to keep alive whether or not it trades, and the bill has three parts.

ASIC charges a $342 annual review fee for a proprietary company from 1 July 2026, and indexes it each July. The company lodges its own tax return, which is a fixed $440 here for a simple trade company. You still lodge your own personal return on top of that. A sole trader pays no ASIC fee and lodges one return, $330 with the personal return included.

So the structure costs you roughly the ASIC fee plus a second return, every year, forever. Set that against the $5,250 of deferred tax in the example above and the decision becomes arithmetic rather than folklore. At $50,000 of retained profit it is clearly worth it. At $5,000 of retained profit it is not.

Setting the company up costs an ASIC registration fee, which is also indexed each July, plus whatever your accountant or an online service charges to register it and set up the shareholding.

Bookkeeping is the cost nobody quotes. A company’s books have to be good enough to produce financial statements, so the shoebox that a sole trader can get away with does not carry across. Our company tax return is a fixed fee with the financial statements included, but the records have to be there to work from. What you can claim does not change with the structure, and the tradie tax deductions that matter apply on both sides of this decision.

The ute stops being an apportionment and becomes an FBT question

As a sole trader you claim the business-use share of the ute and keep something to prove it. Once the company owns the vehicle and you drive it as its director-employee, private use is a fringe benefit, and the question changes from what percentage to whether an exemption applies.

The exemption has two conditions and needs both. The vehicle has to be an eligible one, which covers a single cab ute, a panel van or goods van, and a dual cab designed to carry a tonne or more. And private use has to stay limited to travel between home and work, travel incidental to work, and non-work use that is minor, infrequent and irregular.

The ATO has said plainly that there is a common myth that dual cab utes are automatically exempt from FBT. The occasional run to the tip is fine. Using it as the family car on weekends is not, and once the exemption fails the company has an FBT return, an FBT bill, and a reportable amount through single touch payroll where the aggregated taxable value passes $2,000.

The practical version is that the company ute needs its private use kept genuinely incidental, and odometer readings that show it.

Getting the money out, and Division 7A

There are three legitimate ways money leaves a company, and taking it any other way creates a tax problem rather than solving one.

1. A wagePuts you on your own company's payroll, and brings PAYG withholding and superannuation obligations with it.
2. A franked dividendDeclared properly out of taxed profits, carrying a credit for the tax the company has already paid.
3. A loanAnything else you take during the year, and the one where tradies get caught.

Money drawn during the year that is not wages and not a declared dividend is a loan from the company to you. Division 7A treats an unpaid loan as an unfranked dividend in your hands, taxed at your marginal rates with no franking credit attached, unless it is on a complying written loan agreement with minimum repayments made each year.

The practical version is short. The company’s bank account is not your bank account. Paying your own mortgage out of it in March is a Division 7A problem by June, and fixing it after year end is harder than setting up a wage in July.

Switching later is not free

You can move from sole trader to company at any time, and most tradies who incorporate do exactly that once the business has proved itself. It is not a costless administrative step.

Transferring your business assets into the company is a capital gains tax event, in the ATO’s own words, and a capital gain or loss can arise. The ute, the trailer, the plant and the goodwill are all assets, so a transfer can trigger tax even though nothing really left the family. The small business restructure roll-over can defer that liability across CGT assets, trading stock, revenue assets and depreciating assets where the conditions are met, and it is a choice you make in the return rather than a form you lodge.

Goodwill is taxable on any capital gain unless the small business active asset concessions apply, and trading stock disposed of outside the ordinary course of business comes in at market value rather than whatever price you assign it.

Stamp duty is state-based, and the ATO points you at your state revenue office rather than stating a rate, so treat it as a cost to check before you commit. Then the unglamorous rest: a new ABN and TFN, trade licences to transfer or reissue, contracts and supplier accounts to move across, and bank accounts and insurance in the company’s name.

So when does it actually make sense?

If neither structure quite fits, the answer is usually a different one entirely, and how business structures in Australia are taxed covers trusts and partnerships alongside these two.

The structure follows the business rather than the other way round. It is a decision worth putting in front of your accountant with your actual profit, your actual drawings and your actual contracts, rather than a number somebody quoted on site.