When Should a Sole Trader Incorporate? A Melbourne Accountant's Guide

At what income level does incorporation become tax-effective?

The primary tax argument for incorporating is the company rate of 25% (for base rate entities) versus the individual marginal rates of 32.5%–45% that apply above $45,000. In simple terms, if your business is generating consistent profits above approximately $100,000–$120,000 per year and you do not need to draw all of that as personal salary, retaining profits inside a company and paying 25% tax can save meaningful dollars compared to paying 37%–45% as a sole trader. At profits below $80,000, the compliance cost of running a company often erodes the tax benefit.

Does incorporating protect my personal assets?

Yes — a company is a separate legal entity, so in most circumstances its debts and liabilities do not attach to you personally. For Melbourne tradespeople, consultants, and business owners with personal assets like property, incorporation creates a legal firewall between the business and those assets. That said, banks routinely require personal guarantees on company loans, which removes the protection on that specific debt. Directors can also face personal liability for insolvent trading or unpaid superannuation obligations, so the shield is real but not absolute.

What are the ongoing compliance costs of a company?

A company requires an annual ASIC review fee (currently $310 for a proprietary company), a separate company tax return, and — if you have employees — all standard PAYG and SG obligations. You will also need a company bank account and must maintain minutes of any significant resolutions. In practice, most Melbourne sole traders who incorporate spend an additional $1,500–$3,000 per year on accounting and compliance compared to sole trader structures. That cost must be weighed against the tax saving at your actual profit level.

How do PSI rules affect the decision?

Personal Services Income (PSI) rules are a critical consideration that many business owners miss. If more than 50% of your income comes from your personal skills, labour, or expertise — and you fail the results, 80% rule, or unrelated clients tests — the ATO will attribute the company's income back to you personally. This means the company structure provides no income-splitting or tax deferral benefit for that income. Contractors, IT consultants, engineers, and designers frequently fall into PSI territory. Before incorporating primarily for tax reasons, confirm with your accountant whether your income is genuinely business income or PSI.

When should a sole trader NOT incorporate?

Incorporation often does not make sense if your profits are under $80,000, you need to draw all business income as personal salary anyway, your business activity would be classified as PSI, your industry requires ongoing professional indemnity that is personally held, or you are planning to wind down within a few years. The compliance overhead, ASIC fees, and additional accounting costs mean that below a certain threshold you are simply paying more to achieve the same outcome. Many Melbourne professionals are better served by a trust structure or simply remaining as sole traders with good tax planning around deductions and super contributions.

What is the best first step?

Before making any structural change, model the actual tax outcome at your current and projected profit levels, accounting for your salary drawings, distributions, and any PSI exposure. A 90-minute planning session with a CPA can clarify whether incorporation makes sense now, in 12 months, or not at all for your specific circumstances. Restructuring later when the business is larger is always possible — but getting the structure right early avoids costly capital gains events and unnecessary complexity.