Each business structure has different tax obligations. It is something you need to consider when deciding which structure would be best for your business. There are four key business structures in Australia: company, sole trader, partnership and trust. This article will explain how tax works for each business structure. For more information, visit the Australian Taxation Office (ATO) website here. Otherwise, if you need further assistance, it may be worth contacting an accountant or company lawyer.
Company
A company is considered to be a separate legal entity, managed by directors and owned by shareholders. Due to the administrative and compliance costs involved, it can be quite an expensive business structure to set up. There are also specific reporting requirements, including legal and financial reporting.
In terms of tax obligations, each company is required to have a unique Tax File Number (TFN). Companies need to lodge a company tax return each year which includes:
- The company’s income
- Any deductions
- Any income tax payable
Company profits are taxed at the company tax rate, which is lower than personal income tax rates. For a full company, this is 30%. Unlike individuals or for example, a sole trader business, there is also no tax-free threshold. This means that each company is required to pay tax on every dollar earned. A company may need to pay Goods and Services Tax (GST) if their GST turnover meets or exceeds $75,000. Usually, companies also pay income tax through Pay As You Go (PAYG) instalments.
Sole trader
A sole trader runs a business with its own Australian Business Number (ABN) as an individual. The sole trader maintains sole ownership and control of the business. While it is the most simple and cost-effective business structure, a sole trader is held personally responsible for the business.
In terms of tax obligations, a sole trader uses their own individual TFN. Sole traders are required to lodge their income tax return each year to include, for example, business income and business expenses. The tax rate for a sole trader is the same as individual taxpayers, meaning there is a tax-free threshold. A sole trader may need to pay GST if their GST turnover meets or exceeds $75,000. A sole trader may also need to set money aside for income tax by paying PAYG instalments quarterly.
Partnership
Usually, a business run as a partnership is controlled and managed by two or more people (‘partners’). Partners share any income or losses. Like a sole trader, setting up a business as a partnership is simple and cost-effective. However, partners are also personally responsible for the business, such as its debts.
In terms of tax obligations, the partnership is required to have a unique TFN. The partnership is required to lodge a tax return annually and each partner must each pay their respective share of their income for the year. The tax rate applied for each partner is the same as their individual taxpayer rate. The partnership may also need to pay GST if their GST turnover meets or exceeds $75,000. Like a sole trader, partners may also need to set money aside for income tax by paying PAYG instalments quarterly.
Trust
A trust is set up as a formal deed, involving a trustee and beneficiaries. The trustee, who can either be an individual or company, is responsible for the trust and distribution of profits from the business to beneficiaries. The trust must also have its own ABN if it conducts business. This is a costly business structure to set up.
In terms of tax obligations, the trust must have a unique TFN. The trustee is required to lodge a tax return each year. It is not the trust that is required to pay tax, but the beneficiaries who receive income. They are assessed for tax as an individual taxpayer. The trust may also need to pay GST if their annual GST turnover meets or exceeds $75,000.
Conclusion
Your tax obligations will vary depending on what type of business you operate. Tax Works for each business structure differently, and it’s important to bear this in mind when starting your business. If you have further questions about tax, it may be worth getting in touch with a business lawyer.
