The structure of your business has a crucial impact on your business tax obligations. Whether you registered your business as a sole proprietor, a partnership, a corporation or a limited liability company, you would want to have a good idea about your tax obligations and how you can achieve the best tax outcome.
Different business structures have different tax obligations and as a business owner, understanding the differences in taxation of your business structure can help you maximize the tax benefits you may get from ATO at the end of the financial year. If you are still starting your business, knowing the differences in taxation can help you identify whether a certain structure is appropriate for the kind of business you have.
In this article, we will talk about the different tax requirements for a single proprietor/ sole trader and a company.
Tax Effectiveness and Business Structure
Though there are different types of business structure, the most common in Australia are sole trader and company. Before registering a business, it is essential that you know the specific obligations of your business structure, because it can vary in tax liability, asset protection and setup cost.
A sole trader is the simplest structure. As a sole trader, your business is solely owned by you. This business set up is straightforward and low cost. You can report your earnings directly through your personal tax file number. As a sole trader, your tax liabilities are based on standard marginal tax rates. This means that as your income increases, so do your taxes. Sole traders are also personally liable for any financial or tax debts made in the business.
Companies are more complex because it is recognized as a separate legal entity. Upon setting up a company, you would need to pay a business registration fee. You also need to pay regular annual fees. In a company, your business earnings are reported independently to the ATO and the business income is subject to company tax rate.
Tax and Reporting Obligations
We’ve mentioned above that a sole trader pays taxes based on the standard marginal tax rates. This means that if you are a sole trader, you can claim a tax-free threshold of $ 18,200. Above that amount, you will be taxed at a rate that ranges from 19% up to 45%.
There is no tax-free threshold for companies. You pay tax on every dollar the company earns. You can, however, avail of the individual tax-free threshold and lower tax rates by receiving a wage as an individual within the company. The full company tax rate is 30%. Lower company tax rates are also available in some years. It is essential to talk to a bookkeeper to know when to apply the lower rate and how to work out franking credits.
Tax Return Lodgement
Lodging your tax return differs depending on your business structure. Sole traders need to lodge an individual tax return each year. You put business income and expenses in separate sections within the individual return.
As a separate legal entity, a company must lodge its own tax return and pay tax on its income. A company tax return needs to be lodged each year. Tax returns for companies are also more detailed. They must include taxable income, tax offsets and credits, PAYG installments and the amount of tax payable or refundable. If you, as a business owner, also receive an income as an employee of your company, you need to separately lodge your own individual tax return. It is best to seek the advice of a professional bookkeeper and a registered BAS agent to complete your company tax return and ensure you achieve the best results.
Capital Gains Tax (CGT)
CGT also varies depending on the business structure. A sole trader may be able to reduce capital gains through the discount method, indexation method, or through 1 or more of the four CGT concessions available for small businesses if your business meets the required conditions set by ATO.
The discount method does not apply to companies when calculating for capital gains. It can, however, be applied to a limited number of capital gains made by life insurance companies. What a company is qualified to apply for when calculating capital gains is the indexation method as long as your company meets the required conditions set by ATO.
Small Business Entity Concessions
Both sole traders and companies can avail small business tax concessions. These include income tax concessions, goods and services tax (GST) and excise concessions, pay as you go (PAYG) installment concessions, and fringe benefits tax (FBT) concessions.
These benefits are only for small businesses. Your company can be considered as a small business if you have less than $10 million aggregate annual turnover.
Additional Taxes and Superannuation
Your business activities determine whether you are subject to additional taxes and superannuation obligations. Both sole traders and companies must register for goods and services tax if the business has an annual turnover of $75,000 or more. Both business structures may also need to make quarterly tax payments throught the Pay As You Go (PAYG) installment system to help manage the tax payable amount at the end of the financial year.
Sole Traders and companies are also most likely to hire employees so both are required to collect PAYG withholding amounts from salary payments. These are reported quarterly and are directly transferred to the ATO.
If you have employees, you also have a payroll obligation. Your business must pay payroll tax to the relevant state.
Talk to a Bookkeeping Expert!
Tax rules and business structures are complicated. You may obtain better tax minimization, cost saving and better asset protection by asking the advice of an experienced bookkeeper. The team at ACT Bookkeeping Group is always up to date with the current information on tax obligations and reporting. Contact us today for a free consultation.