Partnership vs Trust vs Company: Which Structure Delivers the Best Tax Outcome in Australia?

Choosing the right business structure is one of the most important decisions for Australian business owners. It affects tax obligations, asset protection, profit distribution, and long-term flexibility. Below, we compare Partnerships, Trusts, and Companies from a tax perspective.

Quick Summary

• Companies are ideal for businesses that want to retain profits for reinvestment, taxed at 25% or 30%, with franking credits on dividends.
• Trusts offer flexible income splitting and access to the 50% CGT discount, but undistributed income is taxed at the top marginal rate.
• Partnerships are simple and allow profits and losses to flow through to partners, but offer less flexibility and asset protection.

How Profits Are Taxed

Partnership

• The partnership itself does not pay tax.
• Each partner includes their share of net income in their personal tax return and pays tax at their marginal rate.

Trust

• Profits are generally distributed to beneficiaries, who pay tax at their own marginal rates.
• If income is not distributed by year-end, the trustee pays tax at the top marginal rate (47%).

Company

Profits are taxed at a flat corporate rate:

• 25% for base rate entities (turnover < \$50m and 80% or less passive income)
• 30% for other
• Dividends carry franking credits, reducing double taxation.

How Losses Are Treated

• Partnership: Losses flow through to partners and can offset other income (subject to non-commercial loss rules).
• Trust: Losses are trapped in the trust and can only be used against future trust income if trust loss rules are satisfied.
• Company: Losses are trapped in the company and can only be used in future years if continuity of ownership or business continuity tests are met.

Other Key Tax Considerations

Capital Gains Tax (CGT) Discount:

• Trusts & Partnerships: Eligible for 50% CGT discount if assets held > 12 months.
• Companies: No CGT discount.

Income Splitting:

• Trusts: High flexibility to distribute income to adult beneficiaries
• Partnerships: Fixed according to agreement.
• Companies: Limited flexibility; dividends must follow shareholding.

Retaining Profits:

• Companies: Can retain profits at 25%/30% tax rate for reinvestment.
• Trusts & Partnerships: Must distribute income or face high tax rates.

Division 7A:

• Applies to companies making loans to shareholders or associates.
• Trusts with unpaid present entitlements (UPEs) to companies may also trigger Division 7A.

Comparison Table

When Each Structure Works Best

• Partnership: Simple businesses with few owners and low risk.
• Trust: Family businesses wanting income splitting and CGT discount.
• Company: Businesses planning to retain profits for growth or reinvestment.