Business Structure 4 – Taxation

Exhausted of spending all your time reading endless articles about business requirements, and not really getting what you actually need?

Want to actually understand all the information you require to start and run your business?

Well, you’ve come to the right place!

Welcome to our series of Little Tips where we will cover a range of topics on starting and running your very own business.

Check our first topic – Introduction to Business Structure where we briefly explained the main issues in a simple and readable manner. In each post we will look at each structure from the following points of view:

• Risk
• Profit Distribution
• Taxation
• Opportunity to Raise Capital
• Costs to Run

These tips should only be used as a guideline as there are many implications for each type of business structure which should be discussed with your accountant/lawyer.

We continue discussion of different types of business structure and today we will compare them from the point of view who will pay tax on profit and at which rate.

Sole trader

As you are receiving all profit, it will be taxed at your marginal tax rate when you lodge your personal tax return. So, if your net income is $20,000 your tax will be nil. But if $200,000, then be ready for the maximum tax of 45% plus 2% Medicare levy.

Partnership

A partnership will need to lodge its own tax return, but no tax will be payable by it. Each partner will pay tax on income from partnership at his/her/its tax rate.

Trust

Trust also need to lodge its own tax return. But the tax could be payable by the trust and/or beneficiaries. If the profit was not distributed, or beneficiaries were not nominated, or beneficiaries are minor (under 18 y.o) or they are foreign residents, then the trust will pay tax at the highest tax rate. In all other cases the distribution will be taxed at the beneficiary tax rate when they are lodging own tax returns. E.g. if the beneficiary is a company – the tax rate will be 27.5% or 30%; if the beneficiary is an individual – at the individual’s marginal tax rate, and so on.

Company

Company is lodging tax returns and paying its own tax at 27,5% or 30%. Tax paid by the company will be in the future attached to the dividend and it called franking credits. Franking credits will reduce tax payable by the shareholder. However, if the company has accumulated profit without tax paid yet, the dividend won’t have franking credit attached and the dividend will be called unfranked.

Stay tuned and subscribe for the next topic in our “Little Tips” series. Up next we discuss the Opportunity to rise capital in each business structure.