Your business or tax structures may affect your tax obligations.
When you start a business you need to choose a business structure.
There are four main ways businesses are set up in Australia – sole trader, partnership, company and trust – and each one has different tax responsibilities.
A sole trader is the simplest business structure and the cheapest to set up. Many businesses decide to start small as a sole trader.
But you need to choose what’s right for you. The structure you choose can affect things like the tax you pay and how debts are treated. You can also change the structure later if you want to.
If you need advice or help with deciding on a business structure, talk to us.
A sole trader declares their business income (or loss) as part of their personal income tax return and is taxed at the same rate as an individual.
Once the ATO has received your income tax return you will be advised if you need to start paying pay-as-you-go (PAYG) instalments. The instalments are a pre-payment of your tax for the following financial year and you will be credited with these instalments on your next income tax assessment.
Until you are required to start PAYG instalments consider putting money aside, or making voluntary ATO payments, to budget for any future tax payments.
Personal Services Income (PSI)
PSI is income from your skills or efforts as an individual. You earn PSI when more than 50 per cent of the income you receive from a contract is for your skills, knowledge or efforts.
You can receive PSI in almost any industry, trade or profession. However, common examples include financial professionals, IT consultants, engineers, construction workers and medical practitioners.
- less than 50 per cent of your income from a contract is for your skills, knowledge or efforts
- you receive income from selling or supplying finished goods, even if you made these goods
- you receive income from an income-producing asset, such as renting a vehicle or piece of machinery
- your income comes from licensing your intellectual property, such as a patent.
A partnership must lodge a tax return and each partner will be required to pay tax on their share of the partnership’s net income. Partners may also be required to pay PAYG instalments, in the same way as a sole trader. Individual tax rates apply to a partner who is an individual (a person). They do not apply to a company or trust.
A company is a separate legal entity and is responsible for paying income tax on its profits at the company tax rate. There is no tax-free threshold for companies.
A trustee must lodge an annual trust return. The trust is not liable to pay tax; it is the beneficiaries entitled to receive the trust net income who are individually assessed for tax. In many cases, the beneficiary of the trust is a company (or another trust). In rare circumstances, if the income is not fully distributed to the beneficiaries the trustee pays tax on the undistributed income at the highest marginal rate.
Change Business Structure
A business restructure refers to reorganising your business. It is generally done to be more profitable, improve processes and adapt to the changing needs of the business. The restructuring may include changing ownership, adding partners or changing the legal, operational or other aspects of the business.
A business structure is often the first thing to change when your business grows, particularly if you start as a sole trader and then want to take on a partner or even register as a company.
As your business changes and grows you need to ensure that you manage these changes successfully. Growth can lead to significant changes that affect your business structure and tax requirements.
Tax Rates for 2017-2018:
|Taxable Income||Tax on this income|
|$18,201 – $37,000||19c for each $1 over $18,200|
|19c for each $1 over $18,200||$3,572 plus 32.5c for each $1 over $37,000|
|$87,001 – $180,000||$19,822 plus 37c for each $1 over $87,000|
|Over $180,000||$54,232 plus 45c for each $1 over $180,000|