You may be starting out in business and trying to decide whether to become a sole trader or to set up a company. Alternatively, you may already be an established sole trader and considering switching to become a company. Tax considerations are vital in deciding which of the two business structures is most suitable for you.<\/p>\n
The first practical difference is in relation to your tax return. As a sole trader, you simply add your business income and expenses to a separate Business and professional items schedule<\/i><\/em>\u00a0in your individual tax return that you lodge each year.<\/p>\n For a company, there\u2019s a separate annual tax return, and tax to pay on the company\u2019s income. Companies are subject to annual reviews by the Australian Securities and Investments Commission (ASIC), so financial records must clearly show transactions and the company\u2019s financial position, and allow clear statements to be created and audited if necessary. A number of strict legal and other obligations need to be met.<\/p>\n Tax returns for a company must clearly list the income, deductions and the liable income tax of the company. Also, directors and any employees of a company must lodge their own individual tax returns.<\/p>\n There\u2019s no tax-free threshold for companies \u2013 they simply pay tax on the amount they earn. However, for sole traders, whose tax is assessed as part of the individual\u2019s personal income, $18,200 is the tax-free threshold.<\/p>\n For all companies that are not eligible for the lower company tax rate, the full company tax rate of 30% will apply.<\/p>\n To be eligible for the lower company tax rate of 25%, the company needs to meet strict requirements to be a base rate entity. One of the tests is that your company\u2019s aggregated turnover for the relevant income year must be less than the aggregated threshold for that year \u2013 which since 1 July 2018 has been $50 million a year.<\/p>\n Both types of business also need to pay capital gains tax (CGT) if a capital gain has been made, but sole traders may be able to reduce this gain by what are known as the discount and indexation methods. The latter may also be used by some companies.<\/p>\n If your employees in either business structure receive a fringe benefit, then you may also need to pay fringe benefits tax (FBT).<\/p>\n","protected":false},"excerpt":{"rendered":" You may be starting out in business and trying to decide whether to become a sole trader or to set up a company. Alternatively, you may already be an established sole trader and considering switching to become a company. Tax considerations are vital in deciding which of the two business structures is most suitable for…<\/p>\n","protected":false},"author":1,"featured_media":16653,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[41,6,43],"tags":[],"class_list":["post-16652","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-accounting","category-news","category-tax"],"yoast_head":"\nBoth sole traders and companies can:<\/h3>\n
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