If you’re starting a business or considering switching from being a sole trader to a company, tax considerations play a vital role in choosing the right business structure. Let’s explore the key tax differences between operating as a sole trader versus a company.

Tax Returns

The first practical difference lies in your tax return. As a sole trader, you report your business income and expenses on a separate Business and Professional Items schedule within your individual tax return. This makes the process relatively simple since it’s all included in one return.

For a company, however, the process is more complex. A company must submit a separate annual tax return, detailing the company’s income and expenses. Additionally, companies are subject to annual reviews by the Australian Securities and Investments Commission (ASIC). This means maintaining accurate financial records, which may need to be audited to ensure compliance with legal and regulatory obligations.

Companies must also ensure that their tax returns list the income, deductions, and the taxable income subject to tax. Furthermore, company directors and employees must lodge their individual tax returns separately.

Tax Rates

There are key differences in the way tax is applied to a sole trader and a company:

• Sole traders are taxed based on their individual income tax rates. The tax-free threshold for individuals is $18,200. This means you won’t pay any tax on the first $18,200 of your total income, and the tax rate increases progressively from there.
• Companies, on the other hand, don’t have a tax-free threshold. Tax is paid on the entire taxable income. The standard company tax rate is 30% for most companies. However, companies that qualify as a base rate entity (with aggregated turnover of less than $50 million) can benefit from the lower tax rate of 25%.

Other Taxes

Both sole traders and companies may be subject to the following taxes:

• GST: If your turnover is $75,000 or more (or if you provide taxi, limousine, or ride-sourcing services), both sole traders and companies must register for GST.
• Payroll Tax: If your gross wages exceed the threshold set by your state or territory, both sole traders and companies must pay payroll tax.
• Capital Gains Tax (CGT): Both sole traders and companies must pay CGT on any capital gains. However, a sole trader may be able to reduce the gain using the discount and indexation methods, which may also apply to some companies.
• Fringe Benefits Tax (FBT): If either a sole trader or company provides fringe benefits to employees, FBT may be due.

Weighing Up the Pros and Cons

While tax is an important factor, several other considerations should influence your decision:

• Sole Trader: If you prefer full control over your business and are not concerned about ongoing costs and reporting requirements, the sole trader structure may suit you. It offers simplicity but lacks protection from personal liability.
• Company: If protecting yourself from potential personal liability is a concern, a company structure might be the better option. However, it comes with more complex reporting and regulatory requirements.

In either case, navigating these and other considerations requires expert advice. Consulting with a tax professional or business advisor will help you make the most informed decision for your business.