Company, Trust, or Hybrid? How to Choose the Best Business Structure Under the New Budget Rules

One of the biggest mistakes we see is business owners asking, “Which structure is best?” There is no universal answer. The right structure depends entirely on what you are trying to achieve. Choosing the right business structure has never been a purely administrative decision, but the latest Federal Budget reforms have made it one of the most important tax planning decisions a business owner can make.

For many advisers, discretionary trusts became the default structure because they offered flexibility, asset protection and tax-effective income distribution. However, with the proposed changes to discretionary trusts, alongside new measures such as the loss carry-back rules and startup loss refunds for companies, the landscape is changing.

Does this mean companies have become the preferred structure? Has the traditional family trust lost its appeal? Or is a hybrid approach now the smartest long-term strategy?

Whether you are starting a new business or reviewing an existing structure, understanding how companies, discretionary trusts and hybrid structures fit within the new Budget framework could have a significant impact on your tax, asset protection and long-term wealth creation strategy.

The Biggest Mistake Business Owners Make

One of the most common questions we receive is, “Should I operate through a company or a trust?”

Unfortunately, that is the wrong question.

A business structure should never be selected simply because it produces the lowest tax bill today. It should be designed around where you want the business to be in five, ten or twenty years. Your structure will influence how you reinvest profits, protect assets, admit business partners, pass wealth to your children and eventually sell or exit the business.

The latest Federal Budget has reinforced an important lesson for every business owner: no business structure should ever be viewed as a permanent tax solution. Governments have the power to fundamentally reshape the tax landscape, even for structures that have been used successfully for decades. The objective is not to find a structure that will remain perfect forever—it is to choose the structure that best suits your circumstances today, while remaining flexible enough to adapt as legislation evolves. Those who regularly review their structures and respond to change will almost always be better positioned than those who assume yesterday’s tax strategy will continue to work indefinitely.

Has the Traditional Family Trust Lost Its Appeal?

For more than two decades, the discretionary family trust has been one of the most popular structures used by Australian business owners. Its popularity was never just about tax—a discretionary trust provides excellent asset protection, flexibility when introducing family members, succession planning opportunities, and long-term wealth preservation.

However, the proposed 30% minimum trustee tax fundamentally changes one of its biggest historical advantages: streaming income to beneficiaries on lower marginal tax rates. Because tax credits for trustee tax paid will be non-refundable, distributions made to low-income family members or adult children will effectively be locked to a 30% bottom tax floor. 

Furthermore, with corporate beneficiaries specifically excluded from these credits and temporary 3-year rollover relief introduced to help businesses shift out of trusts, the rules clearly favour corporate setups. 

That does not mean discretionary trusts are obsolete. It simply means tax savings alone may no longer justify using one—unless there are broader commercial, flexibility, or asset protection reasons for doing so.

How does this expanded version feel? Let me know if you like this wording or if you’d prefer to adjust anything before moving to the next section.

Why Companies Are Suddenly Looking More Attractive

Interestingly, the same Budget that tightens the rules around discretionary trusts also introduces several measures that may make proprietary limited (Pty Ltd) companies a more attractive structure for certain businesses.

Businesses operating through companies may benefit from:

The Startup Loss Refund: Eligible startup companies may be able to convert qualifying early-stage tax losses into a cash tax refund linked to PAYG withholding remitted on behalf of Australian employees. This could provide a valuable cash flow boost during the critical startup phase.

The Expanded Loss Carry-Back Regime: Eligible companies can carry back current tax losses to offset income tax paid in prior profitable years, allowing previously paid tax to be refunded and improving business cash flow during difficult trading periods.

Greater Certainty Around Retained Earnings: Companies can retain after-tax profits at the corporate tax rate (currently 25% for eligible base rate entities), allowing working capital to accumulate within the business without immediately exposing those profits to higher individual marginal tax rates.

Reinvestment Flexibility: Retaining profits within a company provides a cleaner and more predictable platform for funding future expansion, acquiring new assets or investing in business growth.

For businesses expecting significant startup losses or planning aggressive expansion, these measures could materially improve cash flow and provide greater certainty when funding long-term growth.

Of course, retaining profits inside a company only defers the personal tax decision. Eventually, those profits will usually need to be extracted, and that is where careful planning becomes critical.

However, companies still come with important structural trade-offs:

• Less Flexible Profit Extraction: Unlike a discretionary trust, a company cannot simply distribute profits to different family members at year end. Extracting funds generally requires salaries, directors’ fees or franked dividends.
• Division 7A Risks: Unstructured loans or private use of company funds by shareholders or directors can trigger the Division 7A rules, potentially resulting in significant unintended tax consequences.
• Capital Gains Tax Limitations: Companies do not qualify for the general 50% CGT discount available to individuals and trusts. For businesses or investments expected to experience substantial long-term capital growth, this can make a company a less attractive long-term ownership vehicle.

Why Hybrid Structures May Become the New Favourite

Perhaps the biggest structural lesson from the latest Federal Budget is that no single entity is likely to remain the perfect solution for every business.

Rather than asking whether a company or a trust is “better”, sophisticated business owners are increasingly separating different commercial functions into different entities, allowing each structure to do what it does best.

For example:

• Business Operations: Conducted through a Proprietary Limited (Pty Ltd) company to access the corporate tax rate, startup loss refund, loss carry-back measures and operational liability protection.
• Commercial Property: Often held separately from the trading business to isolate valuable real estate from day-to-day trading risks.
• Intellectual Property: Trademarks, software, patents and other valuable intellectual property may be held in a separate entity to better protect these long-term assets.
• Family Ownership: Rather than operating the business directly through a discretionary trust, the trust may instead become the shareholder of the operating company, allowing the family to retain succession planning flexibility, asset protection and long-term ownership benefits.

This is perhaps the biggest mindset shift arising from the Budget. The role of the discretionary trust may not disappear—it may simply evolve.

Even if the proposed 30% minimum trustee tax becomes law, a discretionary trust can still deliver significant non-tax advantages, including asset protection, succession planning, estate planning and maintaining family control over business ownership. The trust may no longer be the primary operating vehicle, but it can still play an important role within a well-designed business group.

The objective is no longer to find one “perfect” entity. It is to ensure that every business function, asset and commercial risk sits in the structure best suited to its long-term purpose.

What Has Actually Changed Under the Budget?

Rather than looking at each tax announcement in isolation, it helps to step back and understand how they collectively affect different business structures.

Common Mistakes We Are Already Seeing

Following major Budget announcements, a predictable cycle of overreaction often follows. We are already seeing business owners considering drastic structural changes, including:

• Closing family trusts prematurely because of the proposed trust reforms.
• Rushing trading activities into company structures without first evaluating the potential capital gains tax, stamp duty or commercial implications.
• Treating business structures as a “set-and-forget” exercise rather than reviewing them regularly as tax laws, business objectives and family circumstances evolve.

In our view, both extremes are premature. The proposed trust reforms are not scheduled to commence until 1 July 2028, key legislative details are still to be released, and the proposed three-year restructuring relief window is intended to give eligible businesses time to properly evaluate and model their options.

Rushing into a restructure today could trigger unnecessary tax liabilities, state transfer duty or commercial consequences that may prove costly and difficult to reverse.

Final Thoughts: The Best Structure Today May Not Be the Best Structure Tomorrow

If there is one lesson business owners should take away from this Budget, it is this: don’t become emotionally attached to any business structure.

For many years, discretionary trusts were the structure of choice. The latest Budget shows that Governments can change the rules at any time, even for structures that have been used successfully for decades. There is every chance that future governments could also change the rules for companies, superannuation or other investment vehicles.

The objective is not to find the “perfect” structure. The objective is to choose the right structure for where your business is today and be prepared to adapt as your business grows and tax laws evolve.

If you’re wondering whether your current structure is still the right fit, or you’re starting a new business and want to get it right from day one, we’d be happy to help. Contact Investax Sydney or Camden Professionals Perth to arrange a Strategic Tax Consultation (STC).

Book a Tax Strategic Consultation with Investax to understand how the right tax structure, planning, and long-term strategy can help you minimise tax, protect your assets, and make smarter financial decisions before costly mistakes are made. Whether you are investing in property, growing a business, or planning your next financial move, getting advice upfront can make a significant difference.

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Frequently Asked Questions (FAQs)

Q1: How does the new 30% minimum trust tax work under the Budget proposals?

Under the proposed rules, from 1 July 2028, trustees of discretionary trusts will be subject to a minimum 30% trustee tax on taxable trust income. Individual beneficiaries (other than corporate beneficiaries) will generally receive a non-refundable tax credit for the tax paid by the trustee. As a result, the traditional tax advantages of distributing income to family members on lower marginal tax rates are expected to be significantly reduced.

Q2: Should I close or restructure my discretionary trust immediately?

No. Rushing into a restructure today is premature. The proposed trust reforms are not scheduled to commence until 1 July 2028, and key legislative details are still to be released. Furthermore, the Federal Budget proposes a temporary three-year restructuring relief window (from 1 July 2027 to 30 June 2030), allowing eligible businesses to restructure out of discretionary trusts without triggering immediate income tax or capital gains tax consequences. Depending on the State or Territory, separate stamp duty considerations may still apply.

Q3: Why are companies becoming more attractive for active trading businesses?

Eligible Proprietary Limited (Pty Ltd) companies continue to benefit from the 25% corporate tax rate available to base rate entities. In addition, the Budget proposes several company-focused measures, including startup loss refunds and an expanded loss carry-back regime, which are designed to improve cash flow and support business growth. For businesses expecting startup losses or planning significant expansion, these measures may make a company structure more attractive than in the past.

Q4: Can I still get the 50% Capital Gains Tax (CGT) discount if I operate through a company?

No. Companies do not qualify for the general 50% CGT discount available to individuals and trusts. Depending on your circumstances, holding long-term appreciating capital assets outside the operating company—such as in a trust or another appropriate ownership structure—may help preserve access to available CGT concessions when those assets are eventually sold. The right ownership structure should always be considered alongside your broader commercial, succession and asset protection objectives.

Q5: What is a hybrid business structure, and why is it becoming more popular after the Budget?

A hybrid business structure combines different entity types so that each performs the role it is best suited for. For example, an active trading business may operate through a Pty Ltd company, potentially accessing company-specific tax measures, while shares in that company, commercial property or other long-term investment assets are held in separate entities for asset protection, succession planning and long-term wealth preservation. The objective is no longer to find one perfect structure, but to ensure each asset sits in the entity best suited to its commercial purpose.

Q6: What is a Strategic Tax Consultation (STC), and when should I book one?

A Strategic Tax Consultation (STC) is a structured advisory session with one of our senior tax advisers in Sydney or Perth to evaluate whether your current business structure remains suitable under the proposed Budget reforms. It is particularly valuable for business owners generating more than $300,000 in annual revenue, those holding commercial property or intellectual property within their trading entity, or anyone planning significant business expansion, succession or an eventual business exit within the next three to five years.

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The material on this page and on this website has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained on this page and on this website is General Advice and does not take into account any person’s particular investment objectives, financial situation and particular needs.

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