Australia / Guides / Company vs Sole Trader: What Changes in the Books
Australia · guideCompany vs Sole Trader: What Changes in the Books
The short answer
A sole trader and their business are the same legal person, so the books can mix personal and business transactions and still be technically correct, just untidy. A company is a separate legal entity from the moment ASIC registers it, which means money moving between the company and the person who owns or runs it — the director — has to be recorded as a transaction between two parties, tracked through a director loan account, and kept inside a company bank account that is never used for personal spending. The company also takes on ASIC registration and annual review obligations, and a director who wants to be paid a wage rather than draw profit needs to be run through payroll like any other employee. None of this is a tax election a business chooses year to year — it follows automatically from which structure is registered.
Key facts — verified dates on each
The bank account stops being optional
A sole trader can run a business through a personal bank account and the books will still be legally accurate, because there is no legal separation between the person and the business to protect — every dollar in and out belongs to the same taxpayer either way. Many sole traders keep a separate account anyway, purely because it makes reconciliation faster, but nothing in the law requires it.
A company changes that. Once ASIC registers a company, it exists as its own legal person, distinct from its shareholders and directors, and it needs its own bank account in the company's name. Every dollar that moves between that account and a director's personal account is a transaction between two separate legal entities, not a transfer within one, and it has to be recorded as such — a payment out is either a wage, a dividend, a repayment of a loan the director made to the company, or a new loan the company is making to the director. There is no fifth category where it is just "the owner taking some money."
The practical effect on the books is that a company's bank feed cannot be coded the way a sole trader's can. A grocery run or a personal subscription paid from the company account is not a business expense with a personal footnote — it is a loan to the director that has to be tracked, and left untracked, it becomes the kind of unreconciled balance an accountant has to chase down at year end rather than a line item that was coded correctly the day it happened.
Director loans and Division 7A exist as a regime, not a line item
When a director draws money from the company outside a wage or a declared dividend, or the company pays a personal expense on the director's behalf, that amount sits in a director loan account — a running ledger of what the director owes the company, or what the company owes the director, tracked the same way any other loan receivable or payable would be. Bookkeeping's job is to record every one of those movements as they happen and keep the loan account balance current, so it reflects the real amount owing rather than an estimate reconstructed months later from a mix of bank statements.
Division 7A of the Income Tax Assessment Act 1936 is the reason that balance matters beyond bookkeeping tidiness. It is an anti-avoidance rule that can treat an unpaid loan from a private company to a shareholder or their associate as an unfranked dividend for tax purposes, unless the loan is put on a complying repayment agreement with minimum yearly repayments calculated at a benchmark interest rate the ATO publishes each income year. Whether a particular director loan balance triggers a deemed dividend, what a complying loan agreement needs to say, and how the minimum repayment is calculated are determinations for the company's tax agent or accountant — the mechanism sits in the tax return, not the ledger.
What the books can control is whether that determination is even possible to make cleanly. A director loan account that has been reconciled every month, with each drawing and repayment dated and coded as it happened, gives the tax agent a clean number to test against Division 7A at year end. A director loan account rebuilt from bank statements after the fact is where a genuine business expense gets misclassified as a personal drawing, or the reverse, and either error changes the Division 7A analysis.
ASIC obligations appear that a sole trader never has
A sole trader registers an ABN and, if trading under a name other than their own, a business name — there is no separate corporate regulator involved in the day-to-day running of the business. A company is different: it is registered with, and regulated by, the Australian Securities and Investments Commission for as long as it exists, which brings an annual review cycle a sole trader has no equivalent of.
Each year, on the anniversary of the company's registration, ASIC issues an annual review. The company has two months from that date to pay the annual review fee, confirm that its recorded details — registered office, principal place of business, share structure, and officeholders — are still correct, and have its directors pass a solvency resolution confirming the company can pay its debts as and when they fall due, unless the company has already lodged a financial report with ASIC in the past 12 months.
None of that solvency resolution is a bookkeeping judgment call, but it depends entirely on bookkeeping being current. A director cannot honestly resolve that the company can pay its debts as they fall due without an up-to-date view of what those debts actually are — accounts payable, loan balances, upcoming tax liabilities — which means the annual review date functions as a hard deadline for the books to be reconciled, not just a corporate filing that happens somewhere else.
Paying yourself becomes payroll, not a withdrawal
A sole trader does not have wages in the legal sense — money taken out of the business for personal use is a drawing against the owner's equity, not an expense, and it has no PAYG withholding or superannuation guarantee attached to it, because a sole trader cannot legally employ themselves.
A director of a company can be paid a wage, and if they are, that wage runs through the same payroll process as any other employee: PAYG withholding calculated and remitted, superannuation guarantee paid into a complying fund at the rate that applies for the year, and the payment reported through Single Touch Payroll by the company's registered BAS or tax agent. A director can also take money out as a dividend instead of, or alongside, a wage — but a dividend is a distribution of profit the company has already been taxed on, decided and documented as a formal dividend, not an ad hoc withdrawal, and it carries none of the superannuation guarantee obligation a wage does.
Getting the split between wage, dividend and loan repayment right at the point the money moves is what keeps the director loan account described above from becoming a catch-all for anything that was not clearly one of the other two. CapEasy's bookkeeping support processes payroll for director wages and keeps the director loan account reconciled to the bank feed; whether a director should be paid by wage, by dividend, by a mix of both, and what the superannuation guarantee liability on that wage actually is are questions for the company's registered agent or accountant, not something the payroll run decides on its own.
The figures, and when we checked them
These numbers change by year or by notification. Each one shows the date we last verified it against the source — if that date looks old, check the source before relying on it.
Questions on this
Can a company owner still use their personal bank account for the business?
No, not in the way a sole trader can. A company is a separate legal entity, so its bank account has to be in the company's name, and any money moving between that account and a director's personal account is a transaction between two separate parties that has to be recorded — as a wage, a dividend, or a movement in the director loan account.
What is a director loan account?
It is the running ledger of amounts the director owes the company, or the company owes the director, built from every drawing, personal expense paid by the company, and repayment that is not a wage or a declared dividend. It needs to be reconciled as those transactions happen, not reconstructed later from bank statements.
What is Division 7A and does it apply to every company?
Division 7A of the Income Tax Assessment Act 1936 is an anti-avoidance rule that can treat certain unpaid loans, payments or debt forgiveness from a private company to a shareholder or associate as an unfranked dividend for tax purposes. It applies to private companies with director loan balances that are not on a complying repayment agreement. Whether it applies to a specific balance is a determination for the company's tax agent or accountant, not a bookkeeping call.
Does a sole trader need to worry about Division 7A?
No. Division 7A applies to private companies and the loans they make to shareholders or associates. A sole trader and their business are the same legal person, so there is no loan relationship for the rule to apply to.
What does ASIC's annual review actually require?
Within two months of the company's annual review date, the company must pay the annual review fee, confirm its recorded details are current, and — unless it has lodged a financial report with ASIC in the past 12 months — have its directors pass a solvency resolution confirming the company can pay its debts as they fall due.
Can a director just pay themselves a wage without setting up formal payroll?
No. A director wage is subject to the same PAYG withholding, superannuation guarantee and Single Touch Payroll reporting obligations as any other employee's wage, and Single Touch Payroll is reported by the company's registered BAS or tax agent, not lodged informally.
Is a dividend the same as a sole trader's drawing?
No. A sole trader's drawing is simply a reduction of the owner's equity with no tax event of its own. A dividend is a formal distribution of company profit that has already been subject to company tax, has to be declared and documented as a dividend, and is reported differently on the recipient's personal tax return.
Does superannuation guarantee apply to a director the same way it applies to other employees?
When a director is paid a wage, the superannuation guarantee obligation attaches to that wage the same way it would for any other employee. Whether a specific payment counts as a wage that attracts superannuation guarantee, versus a dividend that does not, is a liability question for the company's registered agent or accountant.
What changes in the bookkeeping if a sole trader incorporates partway through the year?
The sole trader's books and the company's books are for two different legal entities and are not simply continued — a new company bank account, chart of accounts and director loan account start from the incorporation date, and any assets or cash the owner moves into the company at that point need to be recorded as a contribution or a loan, not carried over as if nothing changed.
Who decides whether a director loan balance triggers a Division 7A deemed dividend?
The company's tax agent or accountant makes that determination as part of preparing the company's tax return. Bookkeeping's role is to keep the director loan account reconciled and current so that determination can be made from accurate numbers rather than an estimate.
Primary sources
- ASIC — Company annual review
- ATO — Division 7A benchmark interest rate
- ASIC — Forms and fees, all fees
- ATO — Super guarantee rates and thresholds
- legislation.gov.au — Income Tax Assessment Act 1936, Division 7A
Last reviewed 2026-08-14. Statutes and schedules change — the sources above are authoritative, this page is orientation.
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