Tax differences between a sole trader and a company

Tax differences between a sole trader and a company

Sole traders and companies have similar tax and reporting obligations, but you should be aware of the key differences. In the table below, we detail the differences as well as some similarities.
Sole trader
Company

Tax-free thresholdThe tax-free threshold for individuals is $18,200 in the 2019–20 financial year. A sole trader business structure is taxed as part of your own personal income.There is no tax-free threshold for companies – you pay tax on every dollar the company earns.
Tax ratesSole traders pay tax at the individual income rate
The full company tax rate is 30%.
Different company tax rates apply to companies that are base rate entities.
You can keep up to date with any changes to company tax rates on the Australian Taxation Office website.
Lodging tax returnsAn individual tax return needs to be lodged each year if you operate as a sole trader business.
company tax return needs to be lodged each year if you operate with a company business structure.
Company tax returns must show:
  • the company’s income
  • deductions
  • income tax the company is liable to pay
As a separate legal entity, the company must lodge its own tax return and pay tax on income. If you are a director or employee of your company, you still need to lodge your own individual tax return.
Capital gains tax (CGT)
A capital gain or capital loss is the difference between what it cost you to get an asset and what you received when you disposed of it. If you made a capital gain from disposing an asset (for example, selling an asset) you owned for at least 12 months, you may be able to reduce the capital gain through: 
Generally, the discount method does not apply to companies when calculating capital gains, although it can apply to a limited number of capital gains made by life insurance companies.
If your company (other than a listed investment company) meets the conditions of the indexation method for calculating your capital gain, you must use the indexation method.
Small business entity concessions
Small business tax concessions are available to any business structure type. For tax purposes, you are a small business entity if you:
  • operate a business for all or part of the income year
  • have less than $10 million aggregated turnover.
Some of the concessions available to you include:
Taxes and superannuation
Your business activities determine which taxes and superannuation you may need to pay and report.
You need to register for goods and services tax (GST) if you either:
  • have a GST turnover of $75,000 or more ($150,000 for a non-profit body)
  • provide taxi or limousine travel for passengers (including ride-sourcing) regardless of your GST turnover
  • want to claim fuel tax credits for your business.
You may also need to pay your income tax through pay as you go (PAYG) instalments.
If you have employees, you will also need to:
  • collect PAYG withholding amounts from payments you make to them, and give and report the withheld amounts to the ATO
  • pay superannuation contributions for your eligible employees. Read about super for employers on the ATO website
If your employees receive a fringe benefit, you may also need to pay fringe benefits tax.
Payroll taxAs a sole trader or a company, you can employ people. If you do, you may have a payroll tax obligation. Payroll tax is a state and territory tax on the wages you pay as an employer. Each state and territory government has its own payroll tax rules that you’ll need to comply with.
Set up costs
Sole trader business structures have fewer set-up costs. Your costs may include:
Companies are more complex business structures, and have higher set-up costs. These costs may include:
Record keeping
A sole trader is a simple business structure so it generally has less paperwork.
Business income and expenses go in your individual tax return using a separate Business and professional items schedule – you don’t need to lodge a separate tax return for your business.
You need to keep your financial records, including tax returns, for 5 years.
You need to make sure you notify government agencies of any business changes within 28 days.
A company generally has more paperwork and potentially higher ongoing costs.
Companies must:
Your financial records must:
  • record and explain transactions and financial position and performance
  • enable true and fair financial statements to be prepared and audited.
  • Companies are subject to annual review by the Australian Securities and Investments Commission (ASIC)
Companies are subject to annual review by the Australian Securities and Investments Commission (ASIC)
You will also need to keep records that show your compliance with your other obligations and legal requirements of companies. These requirements include having:
  • a registered officer
  • a principal place of business
  • regular company meetings
  • a written record of meetings and resolutions.
You need to make sure you notify government agencies of any business changes within 28 days.
Business income
The Australian Taxation Office (ATO) treats the money you earn in your sole trader business as your individual income. This means you are also responsible for any tax your business must pay.
You can claim deductions for costs incurred in running your business.
You can withdraw money from your business bank account.
Money the company earns belongs to the company. Even if you own the company (you are a shareholder), the money belongs to the company.
A separate business bank account is mandatory for a company.
As a director, the company may pay you wages or directors’ fees, but you cannot draw money from the company as personal drawings.
If you receive funds from your company, then you must show the funds on your individual tax return.
Business debt liability
You are personally liable for financial or tax debts in a sole trader business structure.
There is no division between business assets or personal assets (including your share of joint assets such as houses or cars).
Assets in your name can be used to pay business debts.
The company is generally liable for all business debts. However, your personal assets can also be at risk if you’re a director of a company and the company can’t pay its debts.

As a director, you are personally liable for pay as you go (PAYG) withholding and superannuation debts. Even when you cease as a director, you are liable for the period you were a director.

A company can own property or assets, and these belong to the company – not the directors nor the shareholders. The company may sell these assets to help pay its debts.
Insurance
Your business activities will determine the type of insurance you need, for example the business type, whether you sell products or services and if you employ people.
You should consider insurance for personal injuries, disability and death, as sole traders aren’t covered by workers’ compensation insurance.
You require workers’ compensation insurance if you employ staff.
As with sole traders, your business activities will determine the type of insurance you need.
Directors and officers liability insurance is not compulsory but may be considered by directors.
You require workers’ compensation insurance if you employ staff.
Generally, directors will not be held liable for the debt of a WorkCover claim. The company is liable.
Accessing money from your bank
As a sole trader you can take money out of your business account as personal drawings.
A separate business bank account isn’t compulsory for sole traders, but it is recommended to keep track of your business finances.
separate business bank account is mandatory for a company.
As a director, the company may pay you a salary, wages or director's fees, but you cannot simply withdraw money as ‘personal drawings’ from the company. You may also receive money via shares, dividends or loans
Control of business
In a sole trader structure, you will have full control over your business. This also means that you are personally liable and responsible for all aspects of running the business.
In a company structure, if you are the only director, you will have full control over your business, but certain decisions must still be recorded as resolutions of the company.
If there is more than one director, you will not have full control. All directors govern the internal management of the company and in line with certain rules, such as the company’s constitution or the replaceable rules.
The most important obligations for directors include the duty to:
  • act in good faith
  • act in the best interests of the company
  • exercise care and diligence
  • prevent the company trading while insolvent
  • report to and help the liquidator on the affairs of the company if the company is closing
Ongoing costs
You’ll need to update your business name annually. The cost of a business name registration is $37 for 1 year or $87 for 3 years.
Different fees may apply to your company at different points in time, depending on your business operations. 
Your company has an annual review date, usually the same date it was registered. Shortly after this date, ASIC will issue an annual statement and an invoice. You need to pay the annual review fee to keep your entity registered.
Closing your business
You need to cancel your ABN and cancel your business name within 28 days of ceasing trading.
Closing a company is more complex than just ceasing trading. A company needs to be formally deregistered so that it ceases to exist as a legal entity.
Employing people
Both sole trader and company business structures can employ staff. In either instance, you will need to:
  • provide workers’ compensation insurance
  • understand your tax and superannuation obligations
  • understand your employees’ entitlements.
Specifically in a company business structure, directors have a legal responsibility to ensure the company meets its pay as you go (PAYG) withholding and superannuation guarantee charge obligations.

(Source: https://www.business.gov.au/Change-and-growth/Restructuring/Tax-differences-between-a-sole-trader-and-a-company)

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