A discretionary trust and a company are taxed in completely different ways. A trust passes its income to beneficiaries, who pay tax at their own rates. A company pays a flat rate and can keep what is left.
This guide compares the two for the 2025-26 and 2026-27 income years: company tax rates, how trust distributions work, Division 7A, unpaid present entitlements and the general asset protection picture. Figures were checked against ATO company tax rate guidance, ATO Division 7A pages and ASIC.
It is written for business owners and investors choosing a structure or reviewing an old one. If you are still a sole trader, start with our sole trader to company guide. For how a trust is set up and run, see our family trust guide.
Key takeaways
- Companies pay 25% if they are base rate entities and 30% otherwise.
- A base rate entity needs aggregated turnover under $50 million and 80% or less passive income.
- Trust income is taxed to beneficiaries; if nobody is presently entitled by 30 June, the trustee can be taxed at the top rate.
- Trusts can use the 50% CGT discount; companies cannot.
- A UPE owed to a company can be a Division 7A loan; the benchmark rate is 8.37% for 2025-26 and 8.77% for 2026-27.
- From 1 July 2026 a company costs $636 to register and $342 a year to review.
Discretionary trust vs company at a glance
| Feature | Discretionary trust | Company |
|---|---|---|
| Who pays tax on profit | Beneficiaries at their own rates (or trustee if no one is entitled) | The company at 25% or 30% |
| Keeping profits | Possible, but someone is still taxed each year | Can retain after-tax profit |
| CGT discount | 50% if held 12 months or more | Not available |
| Losses | Stay in the trust, carried forward | Stay in the company, carried forward subject to tests |
| Paying owners | Distributions by resolution | Wages, directors’ fees or franked dividends |
| ASIC costs | None unless a corporate trustee is used | $636 registration, $342 annual review (from 1 July 2026) |
Source: ATO company tax rates 2025-26, ATO base rate entity rules, ATO trust income, ATO CGT discount, business.gov.au, checked 9 October 2026.
How is a discretionary trust taxed?
A trust is not a separate taxpayer in the way a company is. Under the ATO trust income rules, its net income is taxed to beneficiaries in proportion to their entitlement, whether or not they receive the cash. Trust losses cannot be passed out; they are carried forward.
The trustee decides each year who gets what, and the ATO resolutions checklist says the resolution must be made by 30 June. If no beneficiary is presently entitled, the trustee is assessed, and the ATO says that can be at the top rate.
Distributions to beneficiaries under 18 are taxed at penalty rates, so trusts work best where there are adult family members on lower incomes.
How is a company taxed?
A company pays tax on its taxable income at a flat rate. The ATO says base rate entities pay 25% and all other companies pay 30%. To be a base rate entity, aggregated turnover must be under $50 million and no more than 80% of assessable income can be base rate entity passive income.
After-tax profit can be kept for growth or paid as franked dividends. Shareholders then include the dividend and franking credits in their own returns, so the company rate is not always the final tax. Companies cannot use the 50% CGT discount, according to the ATO CGT discount page.
Where do Division 7A and UPEs come in?
Division 7A stops company profits reaching shareholders and their associates tax free as loans, payments or forgiven debts. It matters most when a trust distributes to a company beneficiary, often called a bucket company.
The ATO trust entitlements guidance says that where a private company knows of its entitlement but does not demand payment, it is treated as having lent the money to the trust. To avoid a deemed unfranked dividend, the trustee must act before the company’s return is lodged or due, whichever is first: pay the entitlement, put it on a complying loan, or hold it on a sub-trust for the company. Our Division 7A and UPE guide explains the case law.
| Division 7A loan rule | Requirement |
|---|---|
| Written agreement | In place before the company’s lodgment day |
| Benchmark interest rate | 8.37% for 2025-26; 8.77% for 2026-27 |
| Maximum term (unsecured) | 7 years |
| Maximum term (secured) | 25 years, with a registered mortgage over real property worth at least 110% of the loan |
| Repayments | Minimum yearly repayment each year after the loan year |
Source: ATO Division 7A loans and ATO benchmark interest rate. The ATO notes the loans page is under review following a High Court decision.
Which gives better asset protection?
Neither structure is a guarantee, so treat this as general information. Our asset protection service looks at the detail with your lawyer.
- Company: shareholders have limited liability, but ASIC says directors who let a company trade while insolvent can face compensation claims that are potentially unlimited. Personal guarantees to banks and suppliers also bypass limited liability.
- Trust: assets are legally owned by the trustee, not the beneficiaries. An individual trustee is personally liable for trust debts, which is why many trusts use a company as trustee.
Worked example: $150,000 profit in 2026-27
A business makes $150,000 profit in 2026-27. Compare a base rate entity company with a discretionary trust that splits the profit between two adults with no other income.
Company: $150,000 x 25% = $37,500 company tax, leaving $112,500 in the company. More tax may be payable when it is paid out as dividends.
Trust: $75,000 to each adult. Income tax each: $4,020 + 30% x ($75,000 – $45,000) = $4,020 + $9,000 = $13,020. Medicare levy at 2% = $1,500. Total each $14,520, so $29,040 for both.
The trust result is $8,460 less tax this year, but all $150,000 is taxed in the beneficiaries’ hands. The company result is not final until profits are paid out. Rates are from the ATO resident tax rates page.
How do you choose between a trust and a company?
- Profit plans: paying most profit out each year favours a trust; reinvesting favours a company.
- Family position: trusts only help if there are adult beneficiaries on lower incomes.
- Assets that grow: the 50% CGT discount is available to trusts, not companies. Note the legislated CGT changes from 1 July 2027 replace the discount with indexation and a 30% minimum tax for gains accruing after that date.
- Personal services income: neither structure gets around the PSI rules.
- Cost: see our company registration costs guide.
For a full review of your options, see our business structuring advice.
Rule of thumb: If the profit will be spent by the family each year, start by modelling a trust. If it will be reinvested in the business, start by modelling a company. Then check Division 7A before mixing the two.
Common mistakes when choosing a structure
- Assuming every company pays 25%: passive investment companies often pay 30%.
- Leaving UPEs unpaid: an unpaid entitlement owed to a company can become a deemed dividend.
- Using company money personally: loans to shareholders need a complying Division 7A agreement.
- Late trust resolutions: the trustee can be taxed at the top rate.
- Ignoring the exit: moving assets between structures later can trigger CGT and duty.
FAQ about discretionary trusts vs companies
Is a trust or a company better for a small business?
It depends on what happens to the profit. If most profit is paid out to family members each year, a discretionary trust can spread the tax across several marginal rates. If profit needs to stay in the business to fund growth, a company taxed at 25% or 30% is usually easier. Many families use both, with a company as a trust beneficiary.
What company tax rate applies in 2025-26 and 2026-27?
Base rate entities pay 25% and other companies pay 30%. A company is a base rate entity if its aggregated turnover is under $50 million and no more than 80% of its assessable income is base rate entity passive income, such as rent, interest and most dividends. A company that only holds investments often fails the passive income test.
What happens if a trust does not distribute all its income?
If no beneficiary is presently entitled to income by 30 June, the trustee is assessed on the net income, and the ATO says this can be at the top tax rate. That is why a valid resolution each year matters. A trust can still keep cash, but the tax on the income has to be dealt with by a beneficiary or the trustee.
What is an unpaid present entitlement?
It is income a beneficiary is entitled to but has not been paid. Where the beneficiary is a private company that knows of the entitlement and does not demand it, the ATO treats this as a loan to the trust. Unless it is paid out or put on a complying loan before the company lodges, it can be taxed as an unfranked dividend under Division 7A.
Does a trust or company give better asset protection?
Neither is absolute. A company limits shareholder liability, but directors can be personally liable for insolvent trading and personal guarantees. A discretionary trust separates legal ownership from beneficiaries, which can help if a beneficiary is sued, but a trustee is personally liable for trust debts unless a company acts as trustee. Get legal advice for your situation.
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This article is general information only and is not personal tax or legal advice. Figures and rules were checked against the ATO company tax, trust, Division 7A and CGT pages, ASIC, business.gov.au and Treasury on 9 October 2026. Rates and thresholds change, so confirm the current position before acting.
