There's no line in the tax law that says "incorporate at $120,000". But there is a point where a sole trader's marginal rate pulls far enough away from the company rate that keeping profit in a company starts to pay for the company's costs. For most tradies we see, that point shows up somewhere between $120,000 and $150,000 of profit you don't need to live on.
The question behind the question
When a tradie asks whether to switch to a company, they're usually asking one of three different questions:
- Am I paying too much tax?
- Am I exposed if something goes wrong on a job?
- Do I look serious enough to win the work I want?
Those have different answers, and only the first one is about rates. Getting clear on which one is driving the question usually settles the decision faster than a spreadsheet does.
What the rates actually do
As a sole trader, business profit is your income and is taxed at individual marginal rates. For 2025–26 those are:
| Taxable income | Tax on this income |
|---|---|
| $0 – $18,200 | Nil |
| $18,201 – $45,000 | 16c for each $1 over $18,200 |
| $45,001 – $135,000 | $4,288 plus 30c for each $1 over $45,000 |
| $135,001 – $190,000 | $31,288 plus 37c for each $1 over $135,000 |
| $190,001 and over | $51,638 plus 45c for each $1 over $190,000 |
These don't include the 2% Medicare levy. From 2026–27 the second bracket drops to 15c and the figures shift slightly in your favour, but the shape is the same.
A company is different. Most small businesses are base rate entities, which means a 25% company tax rate. You're a base rate entity if your aggregated turnover is under $50 million and no more than 80% of your assessable income is passive income. Companies that don't qualify pay 30%.
So the comparison that matters isn't 25% versus your average rate. It's 25% versus your marginal rate on the last dollars of profit. Once you're into the $135,001–$190,000 bracket, that marginal rate is 37% plus 2% Medicare. Against 25%, that's a meaningful gap on every dollar you leave in the business.
The catch that undoes the maths
Here is what gets missed: the 25% only helps on profit you keep in the company.
If you earn $160,000 through a company and then pay all of it out to yourself as wages or dividends, you end up taxed at your personal rates anyway. Australia's imputation system is designed to prevent double taxation, and it also prevents the company rate being a free discount. The saving is a deferral on retained profit, not a discount on money you spend.
This is why the honest test isn't "how much do I earn". It's "how much do I earn that I don't need to take out". A tradie on $200,000 who spends $195,000 of it gets very little from incorporating. A tradie on $150,000 who lives on $90,000 and wants to build up working capital, buy a second vehicle and hire an apprentice has a real case.
And if you do take money out informally — paying personal expenses from the company account, or "borrowing" from the company — Division 7A rules can treat that as a deemed dividend and tax it. A company is a separate legal person with its own bank account and its own rules. Treating its money as your money is the most common and most expensive mistake we see in the first year after incorporating.
The reasons that aren't about tax
Asset protection. As a sole trader you and the business are the same legal entity. A claim against the business is a claim against you, and your personal assets sit behind it. A company creates separation. That separation isn't absolute — directors carry personal duties, and directors can be personally liable for unpaid PAYG withholding, GST and super through the director penalty regime — but for ordinary trading risk it's real. If you've moved from small domestic jobs to commercial work, or you've taken on staff, this reason often outweighs the tax one.
Who you can work for. Some builders, principal contractors and government panels simply won't engage a sole trader, or require levels of insurance that are easier to arrange through a company. If the work you want next requires it, the decision is made for you.
Bringing someone in. Shares are much easier to share than a sole trader business is. If a partner, spouse or key employee is going to take a stake, a company is the cleaner structure.
What it costs
A company isn't free. There's an ASIC registration fee to set it up and an annual review fee to keep it. There's a separate company tax return each year on top of your personal one, so accounting fees go up. There's a separate bank account, separate records, and director obligations including a director ID. Budget for a genuine increase in compliance cost and time.
That's the real reason the rule of thumb sits where it does. Below roughly $120,000 of retained profit, the tax saving often doesn't cover the extra cost and admin. Above it, it starts to.
So when should you switch?
Our short version. Look seriously at a company when at least two of these are true:
- You're consistently leaving more than about $120,000 of profit in the business rather than drawing it out.
- Your risk profile has changed — commercial work, employees, subcontractors, bigger sites.
- Clients or contracts you want require it.
- Someone else is coming into the business.
One good year is not a reason. Structure changes cost money to make and money to unwind, and switching back is harder than switching across. We'd rather see two consistent years than one big one.
Frequently asked questions
Is a company always better for tax?
No. It helps on profit retained in the business. If you draw out everything you earn, you'll generally land close to the same personal tax either way, having paid more in compliance costs to get there.
Can I move my ABN across to a company?
No. The company is a new legal entity, so it needs its own ABN, its own TFN, its own GST registration and its own bank account. Contracts, licences and insurances need to be reissued in the company's name — that last part catches people out.
What is a base rate entity?
A company with aggregated turnover under $50 million where no more than 80% of assessable income is passive income. Base rate entities pay 25%; other companies pay 30%.
What's the risk if I just use the company account for personal spending?
Division 7A can treat payments, loans or forgiven debts to shareholders and their associates as deemed dividends, taxable in your hands. Keep the accounts separate and pay yourself deliberately, through wages or dividends.
When is the best time of year to change?
Usually 1 July, so the old and new structures line up with financial years rather than splitting one. Mid-year changes are possible but create two sets of accounts for the same year.
This article is general information only and doesn't take your particular circumstances into account. Rates and thresholds are current at the time of writing and can change. Structure decisions have long tails — talk to us about your situation before you act.
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