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Business, sole trader, company - tax?
11 replies to this topic
Posted 23 October 2016 - 09:14 AM
I expect the answer to this is readily available somewhere on the tax website, but I'm going to ask you guys anyway.
I am currently a sole trader. I'm making virtually no money but about to launch something that will hopefully improve that situation.
My question is about tax.
As a sole trader I believe that whatever I make as a net profit on my business is added to my employment income (gov dept) and taxed at my marginal rate, right?
What I don't know is how profits are treated if I was to become a company. I know you pay company tax but that's where I get fuzzy. So you pay something like 30% company tax on your profits, and then I have to pay myself and pay tax on my earning? Or do I pay myself as an employee and then pay company tax on whatever stays in the company? But since it's only me I'd just pay myself the entire profit anyway, so how does that work? I can't get my head around it, so if anyone can explain it clearly for me that would be lovely.
Posted 23 October 2016 - 09:23 AM
The 30% company tax gets treated/applied after all expenses are accounted for - including any depreciating expenses. So effectively you could setup as a company and pay yourself all of the profits so the company itself doesn't actually make any money. You would also need to take into account all the additional fees and rules with having a company - ASIC fees and the like.
What about just sticking with your personal ABN, build up your business first and then reassess when necessary?
Posted 23 October 2016 - 09:36 AM
So what you're saying is that after depreciation and expenses and paying myself a wage of everything that is leftover, I would pay no company tax but would pay personal income tax on everything I paid myself? Which would be exactly the same net outcome except for the additional fees associated with the company being a company? So if I became a one person company and took all the profits as income, I would actually be worse off?
I only ask because I was speaking to my financial adviser and he mentioned that I might be better to make it a company down the track. It's not something I would do right now.
Posted 23 October 2016 - 09:36 AM
I think you'll find in your situation, a company won't make $$ sense due to the costs involved. So yes, you could structure the tax better but there are far more costs involved in companies than being a sole trader.
Posted 23 October 2016 - 09:55 AM
Using a company to operate a business is not just about the tax position. Your advisor may have been suggesting a company as a way to protect your assets.
A claim against you as a sole trader would be against you personally. A claim against your company - recourse is, generally, limited to company assets.
Posted 23 October 2016 - 10:02 AM
Yes, I understand that bit. I just wasn't sure about the tax. He did mention it in a tax context though. But he isn't an accountant and said straight up that it wasn't advice as such. More like he was suggesting I get advice to see if a company would suit me better.
Based on what I'm doing, low overhead, minimal assets, zero debt, and very low likelihood of being sued for faulty product, I think I'd be pretty safe as a sole trader anyway. I will look at business liability insurance though. Just to cover my butt should a delivery guy trip over or some kid do something stupid with my product and sue me.
Posted 23 October 2016 - 10:16 AM
Another thing to consider with company tax is franking credits.
So the company pays company tax on the profits at whatever rate the government of the day is charging. Whatever is paid out as company tax isn't gone altogether. You get to account for it as franking credits that build up over the years.
You seem to already get the concept of taking money out of the company as an employee, the other way to take money out is by way of a dividend if you are a shareholder. When you take the dividend it also gets added to your taxable income for the year and you need to pay tax on it. Now, if you have paid company tax in the past then you may be able to apply the franking credits you build up previously... in other words if you pay company tax, that money can be used to offset tax you would otherwise pay when you take out dividends.
This is why when a government promises that small businesses get a tax break and pay less company tax, it is BS because many owners really will pay the same amount of tax in the long run.
There are likely to be complex rules about how this applies, get your accountant to explain how this can apply to you.
Companies also have the benefit of being a bit easier to incur expenses (thus reducing taxable profit) that you wouldn't get away applying a personal deduction to.
Posted 23 October 2016 - 11:45 AM
Its not quite as simple as "profit". The old etax had a whole section for sole traders where you filled in purchasing costs, sales, costs incurred in the process of making those sales etc to come out with your "income". Whether you pay yourself or not is irrelevant as any income is yours as a sole trader (unless of course you pay someone else).
Posted 23 October 2016 - 02:39 PM
Thanks The Wanderer. That makes sense. Setting up as a company would be way more trouble than it's worth at this stage. If I get to that point I will certanly speak to an accountant to get it all sorted out.
Yeah I get all that blackcat20 thanks. I am keeping records so I can work it all out properly.
Posted 23 October 2016 - 03:16 PM
Forming a company for tax reasons is really only beneficial if you are in the higher tax brackets. As a sole trader you will pay tax on all your profit for the financial year. As a company you will pay yourself as an employee which you will pay tax on that income and then any profit you make after your salary will be taxed at company tax rates. You can also pay yourself a dividend which comes with franking credits which basically means you are not paying tax twice. The benefit of a company structure is that at the end of the financial year you can leave profit in the business for reinvestment and the tax you pay is capped at 30%. If you were a sole trader that was making a lot of money (in excess of what you need to live on) then you could be paying up to 45% tax. You really need to get advice from an accountant as it gets a bit complicated. Another option is to create a unit trust which has advantages for CGT if you are buying property in your business.
Posted 23 October 2016 - 07:41 PM
One other possible advantage is a family trust, with the company as trustee for the trust. This again is only useful if you're in higher tax brackets, and there is a close family member or members (spouse or sibling) with a low income, so you can spread some of the business's earnings to that person and get the benefit of them being in a lower income bracket.
Eg, farmers with a spouse and adult child at home who also studies. In reality, everyone in the family contributes a bit to the farm's business. Say they earn what would amount to $150,000 profit. If the farmer earns it, she pays 37% on the top $70,000 and gets only $18,000 tax free.
If she uses a family trust, she can spread the $150,000 across her partner and adult child so they get $50,000 each, and they will ALL get the first $18,000 tax free (ie $54,000 tax free) and pay lower rates.
Children under 18? can only have a nominal couple of thou distributed to them. It only works for a limited set of family circumstances, and often only in some years.
Posted 23 October 2016 - 07:54 PM
Children under 18? can only have a nominal couple of thou distributed to them.
No, not any more. The rules changed a few years ago. Tax protected income from a trust that can be distributed to a child under the age of 18 is now only $416.
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