Sole Trader or Company: What Are the Tax Differences?

Tax Returns: Key Differences

The first practical difference lies in tax reporting. As a sole trader, you simply add your business income and expenses to a separate Business and Professional Items Schedule in your individual tax return, which you lodge each year.

In contrast, a company must submit a separate annual tax return and pay tax on the company’s income.

Additionally, companies are subject to annual reviews by the Australian Securities and Investments Commission (ASIC), meaning financial records must clearly show transactions and the company’s financial position, allowing clear statements to be created and audited if necessary.

A company tax return must list the income, deductions, and taxable income of the company. Furthermore, directors and any employees of a company must also lodge their own individual tax returns.

Comparing Tax Rates

Unlike individuals, companies do not receive a tax-free threshold—tax is paid on the entire taxable income. However, sole traders, whose tax is assessed as part of their personal income, benefit from a tax-free threshold of $18,200.

For companies not eligible for the lower company tax rate (generally those earning passive income), the standard corporate tax rate is 30%. However, a reduced tax rate of 25% applies to companies classified as base rate entities (BREs) – essentially a company carrying on business.

To qualify as a BRE, the company must meet strict requirements, including having an aggregated turnover of less than $50 million for the relevant income year (since 1 July 2018).

Additional Tax Obligations

Both sole traders and companies may need to consider other tax obligations, such as:

• Goods and Services Tax (GST) – You must register for GST if your annual GST turnover is $75,000 or more. Additionally, GST registration is mandatory for businesses providing taxi, limousine, or ride-sourcing services, regardless of turnover.
• Payroll Tax – If you employ people and your gross wages exceed the payroll tax threshold in your state or territory, you will be liable for payroll tax.
• Capital Gains Tax (CGT) – Both business structures are subject to CGT if a capital gain is made. However, sole traders may be able to reduce their capital gains through discount and indexation methods, whereas companies have more limited CGT concessions.
• Fringe Benefits Tax (FBT) – If your business provides employees with fringe benefits, you may need to register and pay FBT, regardless of whether you operate as a sole trader or a company.

Choosing the Right Business Structure

When deciding on the most suitable business structure, tax is just one of many factors to consider:

• If you prefer full control over your business and want to avoid ongoing costs and reporting requirements, a sole trader structure may be best.
• If you want protection against personal liability and are looking to grow your business with potential investors, a company structure might be more suitable.

Navigating these tax and structural considerations requires expert guidance. Seeking professional advice from a tax lawyer or accountant will ensure you make the most effective decision for your business.