Pty Ltd vs trust: how we actually decide

Technically reviewed 8 October 2026 · General information only, not personal advice. Read our disclaimer.

If you search “Pty Ltd vs trust” you’ll find about forty pages of feature comparison tables. Tax efficiency, asset protection, complexity, cost. They all line the two structures up side by side and let the reader squint at the rows trying to work out which one wins.

That’s not how the decision actually gets made. Not in a real conversation with a real business owner with a real situation, anyway. The decision is sequenced. There are five questions, asked in a specific order, and the answer falls out.

This is how we run the decision in practice. If your accountant has told you “trust” or “company” without walking you through these questions in order, get a second opinion.

A note before we start. The five questions below assume you’re choosing the structure for an active operating business. Passive investment vehicles (a property held to rent, a portfolio held to grow) sit in a different decision frame, and we’d cover that in a separate piece. So if you’re trying to decide where to park an investment property, this isn’t quite your question yet. If you’re trying to decide where to run an actual trading business, read on.

The transaction year matters. This article explains the decisions to work through, but a later sale may be calculated under different rules: from 1 July 2027 the general CGT discount ends for individuals and trusts and a minimum tax on capital gains begins. Our dated reform note explains the changes and the transition. We use the rules relevant to your transaction, not an old headline rate.

Question 1: Do you intend to sell the business in the next five to ten years?

This is the question we ask first because the answer changes everything else.

If the answer is yes (or even a clear maybe), the structure has to accommodate the sale. The 50% CGT discount under Subdivision 115-A of ITAA 1997 is available to individuals and to trusts that pass the trust streaming rules, but only retains its value where the discounted gain ultimately lands with an individual beneficiary. A discounted gain streamed to a corporate beneficiary is grossed up in the company’s hands and taxed at the corporate rate without the discount, per Subdivision 115-C ITAA 1997. So the “trust gets the 50% discount” lean only fully holds where the gain on sale is streamed to natural-person beneficiaries, not to a bucket company. That difference cannot be reduced to a fixed number of cents in the dollar, because the company side of the comparison depends on its tax rate, its franking account and what happens when the after-tax gain is eventually paid out to shareholders. But where the gain is going to flow through to individuals at sale, a company selling its business assets has no access to the discount at all (shareholders selling their shares in the company are a different transaction, and may), and for gains made before 1 July 2027 that has been the single biggest item on the trust side of the ledger.

The Small Business CGT concessions under Division 152 of ITAA 1997 then layer on top. Where the conditions are met (active asset test, $6 million maximum net asset value test or $2 million small business turnover test, significant individual and CGT concession stakeholder rules), the concessions can reduce the gain by another 50% to 100% depending on which apply. They’re available to individuals, trusts, and (with more conditions) companies, but the cleanest run-through is via a trust.

So if you’re building this with a sale in mind, the answer leans hard toward trust. We’d need a real reason to override that lean.

If the answer is genuinely no, you’re building this to operate forever, you’ll never sell, the business is the thing, that lean releases. Question one stops mattering and we move to question two with a clean slate.

Question 2: What’s the income profile, and who’s it landing with?

This question splits the answer.

A discretionary trust lets the trustee distribute trust income to different beneficiaries each year, in whatever proportions the trust deed allows. If your business income is variable, your spouse has a different income profile to yours, you’ve got adult children at university with low income, or you’re going to use a corporate beneficiary in a structured way (see the bucket company piece), the flexibility is real and it compounds year after year. One qualification that belongs next to every one of those examples: a beneficiary’s tax rate is never a reason on its own. A distribution to an adult child, a spouse or a company has to be one the deed allows, one where the cash follows the paper (that is our discipline rather than a statutory rule, and we explain why when it comes up), and one that holds up under section 100A.

A company doesn’t stream. It has shareholders. Dividends paid to shareholders are paid in proportion to shareholding. You can build differential dividend rights into the share structure (different classes of shares) but that’s a lot of complexity to do what a trust deed does for free.

So if streaming is genuinely valuable in your situation, multiple potential beneficiaries with materially different marginal rates, year-to-year income variability, trust wins again. If you’re a single director, single shareholder, single income earner, no one else in the picture, the streaming benefit is theoretical at best and the company starts looking more sensible.

Question 3: How much profit are you likely to retain in the business each year?

This is the question that pulls in the other direction.

If a meaningful proportion of profit is going to stay in the business each year, funding growth, working capital, asset purchases, war chest, a company is the more efficient holder. The corporate tax rate (25% for a base rate entity, which needs aggregated turnover under $50 million and no more than 80% of its income from passive sources such as rent, interest and most trust distributions of that kind; 30% otherwise) is materially lower than the top marginal individual rate of 45% plus 2% Medicare. That is useful when profits stay in the business. It is not a promise that the owners will pay only that rate when the money eventually comes out: profit retained inside a company is taxed once, at the corporate rate, and stays there until you choose to extract it as a franked dividend, at which point the shareholder’s own rate applies with a credit for the company tax already paid. The advantage is deferral and reinvestment, not a lower final rate.

Trust income has to be distributed each year (or the trustee gets taxed on it at the top marginal rate plus levies under section 99A of ITAA 1936). A trust is a flow-through; it doesn’t accumulate retained earnings the way a company does. If your plan is to leave $400,000 of profit in the business each year for the next five years to fund a fit-out and a hire round, a trust is going to make you distribute that money and then you’ll have to figure out how to get it back into the business as working capital, often via loan accounts that create their own headaches.

So if retained earnings are a real part of the plan, the answer leans toward company. If profits are going to be distributed in full every year, this question doesn’t push.

Question 4: How exposed is the activity, and how separate does the asset base need to be?

Asset protection is where the conversation gets misframed most often.

Both a Pty Ltd and a discretionary trust offer separation between the business owner and the business activity. The owner of a Pty Ltd has limited liability under the Corporations Act 2001, creditors can pursue the company’s assets, not the shareholder’s, except in cases of personal guarantees, breaches of director duties, or the various piercing-the-veil scenarios. A discretionary trust offers structural separation too: the trust assets are held by the trustee on behalf of beneficiaries, and beneficiaries don’t own the trust property until distribution is made.

The version we usually prefer uses both. A corporate trustee (a Pty Ltd whose only role is being the trustee) with the trust holding the operating business. That keeps the trustee’s liabilities off the family’s personal names and keeps the beneficiaries from owning the assets directly. It is not a wall: a trustee that incurs debts running the business has a right to be indemnified out of the trust’s assets, directors carry their own exposures, personal guarantees cut through everything, and valuable assets usually belong in a separate entity from the one that trades. Asset protection is a legal design question and we do it with your lawyer.

Asset protection on its own doesn’t decide between Pty Ltd and trust. It tells you to do both and use a corporate trustee. It also tells you to take personal guarantees off the table where you can, because no structure protects you from a guarantee you’ve signed.

Question 5: If we get this wrong, what does the fix cost?

This is the question that determines whether to bias the decision toward reversibility.

Going from a trust to a company structure later is doable, but the path depends on the trust type. For a unit trust, Division 615 of ITAA 1997 allows the unit trust to interpose a company between unitholders and the trust assets without crystallising CGT, and Subdivision 124-N allows the unit trust to be wound up and replaced by a company entirely. For a discretionary trust, which is the typical SME case, neither of those applies. The relevant path is the Small Business Restructure Rollover under Subdivision 328-G ITAA 1997, which can move active business assets out of a discretionary trust into a company where the small business entity test is met, ultimate economic ownership is preserved (typically via the family trust election), and the genuine restructure test is satisfied. The conditions are tight, the legal cost is real, a family trust election is difficult to vary and can only be revoked in limited circumstances, but the path exists.

Going from a company to a trust later is materially harder. There is no general rollover from a company to a trust under the ITAA. Subdivision 328-G can, in the right conditions, move active assets out of a company into a trust where ultimate economic ownership is preserved (a family trust with an election in place can satisfy that), but where it doesn’t fit, the move involves a CGT event, possibly a Division 7A issue, and possibly stamp duty. The right time to choose a trust is at the start. The wrong time to discover you needed one is six years in.

So when we’re genuinely on the fence between the two, questions 1 to 4 didn’t produce a clear lean, we have usually leaned toward the trust, because the trust is usually the easier position to move from later: the restructure rollovers are not one-directional, but moving active assets out of a company into a trust tends to be the harder trip. That lean is weaker than it was. With the general discount ending for gains after 30 June 2027 and a trust minimum tax in draft for 2028, it is a tie-breaker we now test case by case, not a default.

Putting it back together

The five questions, sequenced:

• Sale in the next decade? Yes → trust.
• Streaming valuable? Yes → trust.
• Material retained earnings? Yes → company (or trust + corporate beneficiary, structured properly).
• Asset protection? Both, with a corporate trustee. This question doesn’t break a tie.
• Reversibility? When tied, trust.

Most clients land in trust-with-corporate-trustee, sometimes with a corporate beneficiary in years when retained earnings are real. Some clients genuinely belong in a Pty Ltd as the operating entity, and we run that recommendation when it’s right. The wrong answer is the lazy default, “everyone uses a trust, let’s just do that”, without working through the questions.

The structure isn’t a feature comparison. It’s a sequenced decision.

If you’re at this decision point, ring us. Thirty minutes and we’ll walk you through your version of the five questions. The answer that falls out is usually clearer than either of the comparison tables you’ve been reading would suggest.

Raise higher.