[Tax] Is a shell company still a good tax-saving vehicle in Australia?

Yes, a shell company can still be useful for Australian tax planning, but it is not automatically a tax-saving vehicle. Its effectiveness depends on what the company does, where its income comes from, whether it qualifies for the lower company tax rate, and how profits are eventually distributed to shareholders.

The key distinction is between tax deferral, permanent tax savings and asset protection. A company may provide a significant timing advantage by retaining profits, but the overall tax benefit can disappear when those profits are paid to an Australian-resident individual.

1. Why a company can still be tax-effective

A company is a separate taxpayer in Australia. Unlike an individual, it pays tax at the applicable corporate tax rate, rather than the individual's marginal tax rate.

For a company year ending 30 June 2026, the general rates are:

Company tax category	Tax rate
Base rate entity (BRE)	25%
Other company	30%

A base rate entity generally must have global aggregated turnover below $50 million and no more than 80% of its assessable income being base rate entity passive income. A company earning mainly interest, rent, dividends or net capital gains may therefore be ineligible for the 25% rate.

The main potential advantages are:

• Tax deferral: retain after-tax profits in the company instead of distributing them immediately to shareholders.

• Business reinvestment: use retained profits to fund new investments or business activities.

• Income management: potentially control when dividends are paid, subject to company law and the tax rules.

• Separation of ownership: a company may provide a separate legal entity for holding investments or conducting business, although asset protection depends on the circumstances.

A company that does nothing other than hold cash or investments does not automatically receive these advantages at the lowest corporate tax rate.

Further, a non-portfolio dividend (s.317 ITAA36) is not base rate entity passive income. A non-portfolio dividend paid to a company where the company has a voting interest amounting to at least 10% of the voting power in the company paying that dividend.

2. When a shell company is useful — and when it is not

Scenario	Potential tax benefit	Main limitation
Retaining profits from an operating business	Often useful for deferring personal tax	Dividends may trigger additional shareholder tax
Holding surplus cash and earning interest	May defer tax for an individual on a high marginal rate	Passive income may be taxed at 30%
Receiving distributions from a family trust	Can help retain profits in a company where the arrangement is properly structured	Division 7A, trust deed and anti-avoidance rules need consideration
Holding long-term investments	May provide a vehicle for reinvestment	Companies generally cannot use the 50% CGT discount available to eligible individuals and trusts
A dormant company with no income or assets	Usually little or no tax benefit	ASIC fees, annual reviews, tax returns and administration costs
Moving personal expenses through a company	Generally not a legitimate tax-saving strategy	Division 7A, deduction rules and other anti-avoidance provisions may apply

The main issue is that a company used purely to hold investments is not necessarily eligible for the 25% company tax rate. Under the statutory definition, interest, rent, most portfolio dividends and net capital gains are generally passive income for this purpose.

3. Why the ATO's integrity rules matter

A shell company can be legally used for tax planning. The problem arises when its arrangements are used to obtain a tax advantage contrary to the tax law.

The main rules to consider are:

• Division 7A: loans, payments or other benefits provided by a private company to shareholders or their associates may be treated as unfranked dividends unless the applicable requirements or exceptions are satisfied.

• Part IVA: the general anti-avoidance provisions may apply to schemes entered into for the dominant purpose of obtaining a tax benefit.

• Personal services income (PSI): interposing a company does not necessarily allow an individual to convert personal services income into lower-taxed company income.

• Deductibility and losses: setting up a company does not make private expenses deductible, and company tax losses are subject to specific rules.

• Capital gains tax: a company does not qualify for the general 50% CGT discount available to eligible individuals and trusts, which can make a company less attractive for assets expected to appreciate substantially.

The key is to establish a genuine, commercially sensible structure and ensure the tax treatment follows the actual transactions.

One further distinction: if by a shell company you mean a company with no business activity, but which is used to receive income from a family trust or hold investments, that is a different analysis from a dormant company with no income or assets.

4. Implications from the new Federal Budget: the new tax laws

• The removal of the 50% CGT discount

A trust can distribute income to a company, limiting tax to corporate tax rates, and if the entitlement remains unpaid and is reinvested in the trust, any future realisation of those investments can benefit from the 50% discount.

However, limits now placed on accessing the 50% CGT discount as part of the federal government’s 2026–27 Budget reforms have largely removed the core rationale for these structures. If a taxpayer cannot claim the 50% discount, it may be easier to invest directly in a company.

• The proposed 30% minimum tax on discretionary trusts

Under this proposal, commencing from 1 July 2028, discretionary trusts will be subject to a minimum tax of 30% on trust income. When distributed to an individual, that beneficiary can claim a non-refundable tax offset for the tax paid at the trustee level. This means a minimum of 30% tax must be paid but prevents double taxation.

No such offset will be available for a distribution of trust income to a corporate beneficiary. In effect, this will result in double taxation. Income already taxed at 30% by a trustee of a trust will be subject to tax again at the company level.

The effective tax rate exceeds 60%, which makes traditional corporate beneficiary distribution strategies completely infeasible.

Disclaimer: This article is intended to provide general information only and does not constitute professional advice for specific circumstances.  It should not be relied upon as a substitute for tailored advice.