Taxation of Businesses
A business may be one of the following types:
- A sole trader business;
- A partnership business;
- A business conducted through a trust; or
- A company.
In all these structures, the taxation structures are different.
This is the simplest and cheapest type of business structure, where one person is responsible for conducting the operations and is also responsible for debts and liabilities. The taxation rules for a sole trader are the same as that of an individual, at personal income tax rates. All income must be reported using the Tax File Number (TFN) and you must pay tax on your personal and combined income with PAYG (Pay As You Go). You are also responsible for withholding income tax from your employees’ salaries. You are liable to pay GST if your annual business turnover is more than $75,000. As a sole trader, you get a 50% Capital Gains Tax (CGT) discount on selling the business or its capital assets.
A partnership business is run on written or verbal agreements between two or more parties. All partners share the income gained through business based on their agreement and are jointly responsible for bearing the loss. A partnership business also requires a TFN and ABN. In a partnership business, all partners are taxed on their share of income arising from the business rather than paying tax on whole business income. A partnership business also enjoys the benefit of 50% CGT and is required to pay GST if the annual turnover is more than $75,000.
Business conducted through a trust
Trustees are the legal owners of assets or a business and are responsible for distributing the income to beneficiaries. A beneficiary may be an individual or a company. A trust is not a separate legal entity like a company, but a trust is treated as a separate entity for tax purposes. A trust must take care of its tax obligations and should have TFN and ABN. The income tax is charged from beneficiaries based on their income (on personal income tax rates) and on company tax rates if the beneficiary is a company. The trustee may choose to apply lower personal tax rates to the income distributed to its beneficiaries.
A company is a legal entity that is managed by directors and pays dividends to its shareholders. A company owns its income. A company tax is applied as a franking credit to the dividend you get as a shareholder. If you are an Australian resident, the franking credit is already deducted from the dividend and you receive a franked dividend. If you are a shareholder, you are only liable to pay tax on your personal income gained from the company dividend after subtracting the franking credit. If your personal income tax is more than the company tax, then you will be taxed based on the difference between the two. A company tax rate is 30% for large companies and 25% for small companies with a turnover of less than $25 million.
Hence, when choosing to run a business, you must take care of the tax implications, as sole traders and partnership businesses are taxed at personal income tax rates, and a company is taxed at the company tax rate, which is lower than the personal tax rate.