Sole proprietors and corporations share comparable tax and reporting responsibilities, yet it’s crucial to understand their distinct features. In the table provided below, we outline both the disparities and commonalities between them. We also briefly look at trusts. These are the 3 main structures that usually operate in Australia.
For sole-tradersIn the 2019–20 financial year, individuals enjoy a tax-free threshold of $18,200. If you operate as a sole trader, your business income is subject to taxation as part of your personal income. (Update: that is still in effect as we update this today)
Companies do not have a tax-free threshold; they are liable to pay taxes on every dollar of income earned by the company.
Sole traders pay the individual income tax rate i.e. tax brackets and whole shebang.
The standard company tax rate stands at 30%.
However, companies categorized as base rate entities may qualify for distinct tax rates.
To stay informed about any alterations to company tax rates, please refer to the Australian Taxation Office website.
How to lodge returns:
If you run a sole trader business, you are required to submit an individual tax return annually.
If you conduct business under a company structure, it is necessary to file a company tax return each year.
Company tax returns should include:
-The company’s total income.
-The income tax liability of the company.
Since a company is considered a distinct legal entity, it must independently submit its tax return and settle its tax obligations based on its income. If you hold a position as a director or employee within your company, you are still responsible for submitting your own individual tax return.
Mostly likely you will need to prepare financial statements for a trading company. As usual, we recommend talking to your accountant about all this before doing anything. “Reading a blog post, an an accountant make you not” – Yoda. True story.
Then there is CGT – Yes, Capital Gains Tax in all its ugliness:
A capital gain or loss represents the disparity between the acquisition cost of an asset and the proceeds obtained upon its disposal. If you realize a capital gain by selling an asset that you held for a minimum of 12 months, there are potential ways to mitigate the capital gain, including:
Utilizing the discount method.
Employing the indexation method.
Exploring one or more of the four available CGT concessions tailored for small businesses.
In most cases, companies do not qualify for the discount method when computing capital gains, with the exception of a few specific capital gains made by life insurance companies. (There are some other mitigating circumstances, but generally speaking, companies get shafted when it comes to CGT, whereas trusts may able to get away with more. Interesting, right? Consult your accountant though. None of the advice you read on the internet in general may actually apply to your individual situation.)
If your company, excluding listed investment companies, satisfies the eligibility criteria for the indexation method in determining your capital gain, you are required to apply the indexation method.
Perhaps a few things in common now:
Some small business concessions may apply.
Small business tax benefits are accessible to businesses of any legal structure. To qualify as a small business entity for tax purposes, you must:
Operate a business during all or part of the income year.
Maintain an aggregated turnover below $10 million.
These concessions encompass various aspects, including:
Income tax advantages.
Concessions related to goods and services tax (GST) and excise.
Pay as you go (PAYG) instalment concessions.
Concessions pertaining to fringe benefits tax (FBT)
How about taxes and superannuation
The taxes and superannuation obligations for your business depend on the nature of your business activities. Here are the key considerations:
Goods and Services Tax (GST): You must register for GST if you meet one of the following criteria:
Your GST turnover is $75,000 or more ($150,000 for non-profit organizations).
You provide taxi or limousine services for passengers, including ride-sourcing, regardless of your GST turnover.
You intend to claim fuel tax credits for your business.
Pay as You Go (PAYG) Instalments: You may need to pay your income tax through PAYG instalments.
Employing Staff: If you have employees, you are also responsible for:
Collecting PAYG withholding amounts from the payments you make to them and reporting these withheld amounts to the Australian Taxation Office (ATO).
Making superannuation contributions for your eligible employees. You can find more information about superannuation for employers on the ATO website.
Fringe Benefits Tax (FBT): If your employees receive fringe benefits, you may also have obligations related to fringe benefits tax.
The specific tax and superannuation requirements for your business will be determined by its activities and financial circumstances.
If you operate as a sole trader or a company and hire employees, it’s important to be aware of potential payroll tax obligations. Payroll tax is a tax levied by state and territory governments on the wages you pay as an employer. Each state and territory government has its own set of rules and regulations regarding payroll tax compliance that you must adhere to.
There you have it, folks. As usual, this is purely a tax banter of some sort, providing very VERY general information. Do not rely on anything you see on our site to make important .. well, ANY decisions. Talk to an accountant first. An experienced one, at that too. Why? Because your situation may be completely different from what you are reading here. Nonetheless, I hope you enjoyed your reading.