The Tax Mistakes Costing Australian Businesses Thousands and How To Avoid Them

As Accountants, we see business owners paying far more in tax than they should, in some cases it’s hundreds of thousands more!

We often tell business owners that tax strategy isn’t about clever loopholes. It’s about structuring your business properly, paying the right amount of tax, and keeping more of what you earn, legally and sustainably.

At the end of the day the ATO will always take their slice of the pie BUT by working with your accountants early and regularly you can ensure you only pay what you must using a combination of strategies that are relevant for you.

“But what are those tax strategies?” Yes, we hear you. It always sounds a little abstract doesn’t it. So, to help you we decided to create a practical breakdown of some of the key tax strategies available to Australian business owners, how they work and some examples of what this could look like.

Let’s get into it! P.s in case it isn’t obvious, this is general advice only and we recommend getting professional advice tailored to your situation.

1. Start With the Right Business Structure

Your business structure determines how you’re taxed and what flexibility you have. There are a few different structures available.

Structure 1: Sole Trader

You’re taxed at individual marginal tax rates (see below). It’s simple and low cost, but there’s no asset protection and limited flexibility for income splitting.

This structure is best for early-stage businesses, low-risk operations, or side ventures.

The 2024–25 and 2025–26 Tax Rates (Resident)

$0 – $18,200: Nil
$18,201 – $45,000: 16% for each $1 over $18.2K
$45,001 – $135,000: $4,288 + 30% for each $1 over $45K
$135,001 – $190,000: $31,288 + 37% for each $1 over $135K
$190,001 and over: $51,638 + 45% for each $1 over $190K

Trust (Discretionary / Family Trust)

The trust distributes profits to beneficiaries, who pay tax at their own marginal rates (see Tax Rates above). This allows flexibility in income distribution and can provide asset protection.

However, documentation must be tight, and Division 7A issues can arise where companies are involved.

This structure is best for families wanting flexibility and long-term planning options.

Company (Pty Ltd)

Companies pay tax at:

25% (base rate entities), or
30% (general rate companies)

Companies allow you to retain profits at a lower tax rate for reinvestment and offer strong asset protection. But profits are “trapped” until extracted via wages, dividends, or loans.

This structure is best for growing businesses generating consistent profits that are being reinvested back into the business.

Example of How Structures Work

Sarah starts a marketing consultancy. In year one she earns $80,000 profit.

As a sole trader:

She pays tax at her personal marginal rates (likely between 37-45%).

Two years later she’s earning $250,000 profit.

She switches to a company structure:

Company pays 25% tax.
She leaves some profit inside the company instead of paying 37–45% personally.

Tax Saving Strategy:

Change structure as income and risk grow.

2. How to Pay Yourself: Wages vs Dividends

If you operate through a company, how you extract your profit matters.

Wages or Director Fees

Are deductible to the company
Taxed to you at your marginal rate
Requires PAYG withholding
Super guarantee applies (12% from 1 July 2025)

This reduces company taxable income while building your super.

Dividends

Dividends are paid from after-tax company profits. If franked, they carry franking credits reflecting company tax already paid.

You include both the dividend and franking credit in your tax return and receive a credit for tax already paid. You may pay top-up tax if your marginal rate (37% or more) is higher than the company rate (typically 25%) or receive a refund if it’s lower.

A Common Strategy

Many business owners take:

A lower commercial salary for cashflow, super and lower personal tax rates
Dividends once profits are confirmed at year end, sometimes paid as bonuses.

This balances tax efficiency with simplicity.

Example of Wages + Dividends

James owns a plumbing company. The company makes $200,000 profit.

James:

Pays himself a $120,000 salary (deductible to the company)
Leaves remaining profit in the company
Later declares a dividend of $40,000 once final numbers are confirmed

3. Division 7A: The Trap That Catches Many Owners

Division 7A applies when a private company lends money to shareholders (such as the business owners).

It’s important that these loans are structured properly as otherwise this can have major implications and be treated as something we call an ‘unfranked dividend’.

Key points:

Complying loan agreements must be in place!
Minimum yearly repayments (including interest) must be made!
Currently, the interest rate on a Division 7A loan is 8.37%!

Strategies to manage these loans include:

Avoiding company loans where possible
Paying back the principal loan faster than the minimum
Avoiding “wash loans” (repaying and immediately re-borrowing)

If you have an existing Div 7A loan, reducing principal early significantly reduces long-term interest costs.

Division 7A Loan Example

Emma’s company lends her $60,000 to renovate her house.

If she does nothing:

It could be treated as an unfranked dividend (bad outcome, trust us!).

Instead:

She sets up a complying Division 7A loan agreement
Makes minimum yearly repayments
Pays down extra principal to reduce interest

4. Superannuation: A Quietly Powerful Tax Tool (if used properly)

Super isn’t just retirement savings. For business owners, it’s a strategic tax tool. There’s two ways to look at Super.

a) Concessional Contributions (Before-Tax Money)

These include:

Employer super (12%)
Salary sacrifice
Personal deductible contributions

Any contributions are taxed at 15% inside super instead of your marginal rate (which could be 30%, 37% or 45%).

The catch is that you can only pay a maximum of $30,000 per year into your super (including employer contributions).

But for higher-income earners, this can mean significant tax savings.

Carry-Forward Concessional Contributions

If you don’t use your full concessional cap in a year ($30,000) you can carry forward the unused amount for up to five years.

To use this strategy:

Your total super balance must be under $500,000
Unused cap amounts from the past five years can be added to the current year’s cap

This is especially useful in strong profit years.

If you haven’t been maximising super in previous years and then have a high-income year, you may be able to contribute more than $30,000 and claim a larger deduction, reducing your tax in that profitable year.

It’s a tax-smoothing strategy for business owners with fluctuating income.

b) Non-Concessional Contributions (After-Tax Money)

These are contributions made from money you’ve already paid tax on.

The cap is $120,000 per year (subject to eligibility).

You don’t get a deduction, but earnings inside super are taxed at 15%, and potentially tax-free in retirement.

Superannuation Example

Liam earns $180,000 from his company and is in the 37% tax bracket. From this, he decides to contribute $20K into super

It’s taxed at 15% instead of 37%

He saves 22% in tax on that amount.

Later, in a strong year:

He uses unused carry-forward caps
Contributes $60,000 instead of $30,000
This strategy significantly reduces that year’s taxable income

5. Timing Strategies: Managing When Income and Deductions Fall

Smart timing can smooth tax outcomes.

Instant Asset Write-Off

Until 30 June 2026, eligible small businesses may have assets costing up to $20,000 be immediately deductible.

This is useful for:

Equipment purchases
Technology upgrades
Vehicles (within limits)

Other timing strategies include:

Writing off genuine bad debts
Reviewing stock valuations
Prepaying allowable expenses

The key is ensuring transactions are commercial and properly documented.

Timing Strategies Example

Chloe’s construction company has a strong year.

Before 30 June:

She buys $18,000 worth of tools and equipment
Uses the instant asset write-off

Instead of spreading deductions over years, she deducts the full amount immediately.

6. Income Splitting and the PSI Rules

Trusts can allow income distribution across adult beneficiaries. However, if your income is primarily generated from your personal skills (consulting, contracting, professional services), the Personal Services Income (PSI) rules may limit income splitting.

If PSI applies and you don’t qualify as a Personal Services Business, profits may need to be attributed back to the individual performing the work.

Structure alone doesn’t override PSI.

Income Splitting Example

Daniel runs his business through a discretionary trust.

The trust makes $300,000 profit.

Instead of distributing it all to himself (which would land him in the top tax bracket), he distributes:

$90,000 to himself
$90,000 to his spouse
$60,000 to an adult child who also works in the business
$60,000 to a bucket company

The overall family tax bill is then lower than if he took it all personally.

Final Thoughts

Effective tax strategy is about alignment of:

The right structure
A clear profit extraction plan
Managing Division 7A risk
Leveraging super

It’s not about chasing clever tricks. It’s about making deliberate decisions that support your business growth and personal wealth over time.

The earlier you structure properly and have tax strategy conversations with your accountant, the fewer headaches you’ll have later.

If you feel you’re paying more tax than you should be reach out and speak with our team at Proactive Accounting today. We love working with our clients to create tailored plans to ensure you can keep as much of your hard earnt cash as possible.

Learn how we support Australian Small Businesses with Tax Strategies at Proactive Accounting.

Book a call with our team to explore how we can create a tax plan that’s right for your business.

The information in this article is general advice only. Seek professional advice for tailored solutions that are right for your individual situation.