Tax is that one thing we never want to think about. In the case of becoming a business, it can pay off to spend a moment to see what you can get your tax to do for you. The tax benefits your business might receive depend on the structure of your business. Nevertheless, both companies and unincorporated businesses like sole traders can gain benefits.
Registering a business
Company tax benefits
The biggest benefit for a company is a flat tax rate. The flat rate is 30% for large companies while a rate of 27.5% applies to smaller companies with a turnover rate of 50 million in 2018-19. A company, just like other structures can also be eligible for small business concessions. These concessions include income tax, GST and excise, PAYG and fringe benefits like travel expenses. If you decide to become a company there are more obligations to consider like reporting requirements and super guarantee contributions.
Instant asset write off
The government has a current initiative which is in place until the 30th of June 2019. If you purchase an asset which is under $20,000 and your turnover is less than $10 million you may be eligible. This means you can claim under the simplified depreciation rules, and this is an immediate claim. This applies to incorporated and unincorporated businesses.
A small business like a sole trader is taxed in the same way as income tax. The income from your business is added on top of your other income streams. This means if your total income including business income is under $18,200 then you would not need to pay any tax as you would be under the threshold. However, you would still need to lodge your tax return. There are other deductions small businesses can claim such as interest payments from a mortgage if the business is run from home. Businesses that earn less than $5 million aggregate turnover can claim a maximum tax offset of $1,000 through the small business income tax offset.
Tarah has earnt $5,000 from her casual work at a cafe. She has also earnt $5,000 from her small business this year. Her last source of income was $300 in bank interest. Her total income for the financial year was $10,300 which is under the threshold. Therefore, Tarah when submitting her tax return, will most likely not have to pay tax.
The tax benefits which apply to a sole trader also apply to a partnership. The difference is a partnership splits the income based on the share of each partner. This share is then taxed under the personal income of a partner just like in the sole trading example.
Capital gains tax
There are four main ways to claim a capital gains tax exemption as a small business. The first is a 15-year exemption, namely if you own an asset for over 15 years, are 55 years or older and will retire soon then there is no CTG. Next is a 50% discount on capital for active assets. There is also a retirement exemption up to a value of $500,000 for active assets which are sold. Finally, if you sell an active asset you may be able to defer the CTG for 2 years.
Whether the tax benefits of registering a company suit you depends upon the direction you see your business taking. There still remains for both business types a wide range of deductions and benefits to be claimed. If you’re unsure of which structure will suit you best for your current tax situation then you could always check with a business lawyer.
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