How Much Tax Should a Small Business Pay in Australia? (And How to Pay Less Legally)
How Much Tax Should a Small Business Pay in Australia? (And How to Pay Less Legally)
It's one of the most common questions I get asked as a tax strategist: "How much tax should my business actually be paying?"
And the reason it comes up so often is that most business owners genuinely don't know. They pay what their accountant tells them to pay. They get the bill in October. They wince. They pay it. And they wonder - quietly, in the back of their mind - whether they could have paid less if someone had been paying closer attention.
The short answer? Yes. Usually, quite a bit less.
But before I get into that, let's start with the actual numbers.
The Australian small business tax rate (the basics)
If your business is set up as a company and your aggregated turnover is under $50 million with less than 80% passive income, you're what the ATO calls a "base rate entity." You pay company tax at 25%.
If you don't meet the base rate entity criteria, you pay the standard company tax rate of 30%.
If you're a sole trader or partnership, business profits are taxed at your individual marginal tax rate, which ranges from 16% to 45% (plus Medicare levy) depending on your total income.
That's the headline. And if that's all you're looking at, you're missing about 80% of the picture.
Why the headline rate is barely half the story
The tax rate is what applies to your taxable income. What most business owners forget is that taxable income is not the same as the money that came into your business. Between revenue and taxable income sits a lot of decisions - decisions your accountant may or may not be helping you make well.
Here's where the real tax bill gets made:
Your business structure (sole trader, company, trust, or a combination)
How you pay yourself (wages, dividends, trust distributions, or a mix)
The timing of your income and expenses
Which deductions you claim (and which you legally could claim but don't)
How you handle super, asset purchases, and end-of-year decisions
Two businesses with identical revenue can pay wildly different amounts of tax depending on how these are set up. I've seen $2M businesses paying more tax than $3M businesses because the smaller one had the wrong structure and no one had ever suggested changing it.
What well-structured Australian small businesses actually pay
For a business turning over $500k to $3 million, well-structured typically means the owner is legally paying somewhere between 20% and 27% effective tax on the profit that ends up in their hands - after considering the interplay between company tax, personal income tax, and any distributions through a trust.
Poorly structured businesses at the same revenue often end up at 32% to 40% effective tax. Sometimes more.
That difference (10 to 15 percentage points) is not a rounding error. On a $500,000 profit, that's $50,000 to $75,000 a year. Every year. Money that could have stayed in the business, gone into your super, paid down your mortgage, or funded the next hire.
Why so many small businesses overpay
The single biggest reason Australian small businesses overpay tax is that they've never had a tax strategist look at their setup - only tax accountants who lodge returns.
A tax accountant works with the numbers you give them, after the year is done. Their job is to prepare and lodge your return accurately. Most of them are excellent at that. But by the time they get your file, the year is already locked in. There's very little they can do to change the outcome.
A tax strategist works ahead of the numbers. They look at your structure, your plans for the year, your personal financial goals - and they make sure the decisions you make throughout the year work in your favour before EOFY arrives.
Most established small businesses have a tax accountant. Very few have a tax strategist. That's the gap where the overpaying happens.
So how do you find out if you're overpaying?
The honest answer is: you compare what you're paying to what a well-structured business at your revenue level would be paying. If there's a meaningful gap, you have room to legally reduce your tax.
At Tax by Lily, that's exactly what the Know Your Number call is for. We sit down with your numbers … your last return, your structure, your bookkeeping … and work out where you stand. By the end of the call, you'll know whether you're paying more tax than you should, where the biggest opportunities are, and what we'd do first if we work together.
For most of the businesses I work with, the answer to "how much tax should I be paying?" turns out to be quite a bit less than they currently are.
The only way to know for sure is to look.
Ready to find out what your business should actually be paying in tax? Book your Know Your Number call →
