Business structuring & tax issues

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Tax rates video

Watch the video to see how different business structures have lower average tax rates as the taxable income increases.

Which business structure is best for minimising tax?

If you are considering tax structuring, business structuring, or tax planning, this webpage will provide some insights about this large topic.

The most common business structures used in Australia are:

  1. sole trader;
  2. partnership;
  3. company;
  4. discretionary trust; and
  5. unit trust.

The business structure sets the tax rate, every year. In other words, the rate of income tax payable depends on the business structure used. You should therefore carefully consider the business structure when it is being established, or when the business has reached a level of scale that a restructure of the business is required.

The company tax rate for the 2022/2023 and later tax years is 25% for businesses with a turnover below $50m and 80% or less income is passive income. A company is a simple way to implement a tax structure.

For partnerships, discretionary trusts and unit trusts, the tax rate depends upon the amount of income and whether the recipient of the income is a company.

For sole traders with a business profit exceeding $125,000 per year, its generally beneficial to use a company, however it will be necessary to consider whether the Personal Services Income rules apply. A company is generally a suitable tax structure for small businesses which have low numbers of employees and/or independent contractors.

Income tax comparison for the 2022-2023 tax year

The following table shows a comparison of the income tax payable for different business structures for the 2022-2023 tax year. The table compares sole traders to companies with turnovers below $50 million and above $50 million.

Taxable Income ($) Sole trader Company (* low turnover) All other companies
100,000 22,967 25,000 30,000
150,000 40,567 37,500 45,000
200,000 60,667 50,000 60,000
250,000 83,167 62,500 75,000
* A company is eligible for the lower tax rate when its turnover is under $50m and 80% or less income is passive income.

The company is a suitable tax structure when the taxable income exceeds $125,000.

Income tax comparison for the 2023-2024 tax year

The following table shows a comparison of the income tax payable for different business structures for the 2023-2024 tax year. The table compares sole traders to companies with turnovers below $50 million and above $50 million.

Taxable Income ($) Sole trader Company (* low turnover) All other companies
100,000 21,592 25,000 30,000
150,000 36,592 37,500 45,000
200,000 51,592 50,000 60,000
250,000 74,092 62,500 75,000
* A company is eligible for the lower tax rate when its turnover is under $50m and 80% or less income is passive income.

The company is a suitable tax structure when the taxable income exceeds $175,000.

Sole trader v Company comparison

For 2022/2023, a sole trader's average tax rate is higher than a company once they earn more than approximately $125,000.

For 2023/2024, a sole trader's average tax rate is higher than a company once they earn more than approximately $175,000.

A sole trader can restructure their business to reduce income tax by using a company. There can be capital gains tax and/or stamp duty issues, so its best to obtain advice before implementing a restructure of your business.

Income tax losses

How tax losses are treated depends upon the business structure. For example:

  1. generally, an income tax loss of a company and a trust is carried forward. The tax losses cannot be used by a shareholder or beneficiary. Special rules can apply; and
  2. generally, an income tax loss of a sole trader or partnership are used by the sole trader or each partner and are generally carried forward. Special rules can apply.
If you have carried forward tax losses as a sole trader or from a partnership, you should consider whether to use those existing tax losses before making any changes to your business structure.

Payroll tax issues

In each State and Territory, payroll taxes are payable depending on the size of the payroll and there are different definitions of 'employee'. For example, a worker may be an employee and not a contractor under the relevant legislation.

There may also be payroll tax issues if the business is part of a group of businesses because the businesses all become grouped and then incur an unexpected payroll tax assessment and penalties.

Stamp duty issues

The choice of business structure may depend upon whether any assets the business acquires will result in the payment of stamp duty. This is important if you believe that you may need to restructure the business in the future. It will be necessary to consider what exemptions from stamp duty may apply if a restructure occurs.

In Australia, what are the other issues to consider?

Australian tax is one consideration when establishing a tax structure for a business. Other considerations include:

  1. Will the business take a number of years to make a profit? The ability to use tax losses may be more important during the start up phase of the business;
  2. Do you need any licences? A licence may not be able to be transferred, so choosing the right business structure at the start will be important.
  3. Will the business be involved in research and development activities? Tax concessions may be available;
  4. Will the business be developing intellectual property? There are complex tax issues which relate to sales or transfers of intellectual property;
  5. How easy will it be to add new investors? Companies and unit trusts allow for transfers of shares or units and new investors can easily acquire new shares or units;
  6. Will the business borrow moneys? You would need to confirm whether the proposed business structure may limit a bank from lending money to it;
  7. Do you require asset protection? Many tax effective business structures do not properly protect assets. You may need to consider asset protection as a separate issue when considering tax structuring;
  8. What could be your liability if the business fails? Your home and other personal assets could be at risk, depending on the tax structure used;
  9. What are the costs of establishing and maintaining the tax structure? The more complex the tax structure, generally the more costly it will be to establish and maintain; and
  10. If you want to change the tax structure in the future, can you avoid costly capital gains and stamp duty implications? Some business structures have CGT rollovers and stamp duty exemptions. Stamp duty issues may vary between the different States and Territories.

Should a company be established overseas?

Some businesses may be able to be established outside of Australia, but there are numerous considerations, depending on the type of business and the business plan including:

  1. Will the business be engaging in research and development?
  2. Will the business provide goods or services to Australia?
  3. Is there a tax treaty between Australia and the foreign jurisdiction?
  4. Will there be any tax credits available in Australia for shareholders?
  5. Will there be shareholders resident in Australia?
  6. Could the business' operations be limited by licensing requirements in Australia or the foreign jurisdiction?
  7. Are there potential transfer pricing issues between Australia and the foreign jurisdiction?
  8. Where are the directors based?
  9. Do you need to consider foreign exchange gains and losses?
  10. Are there financing or equity raising limitations in the proposed foreign jurisdiction?
  11. Will the thin capitalisation rules apply?
  12. Will you need a skilled workforce or specialist 3rd party service providers?
  13. Will Australian residents be working in Australia and/or overseas for the business?
  14. Will there be any royalty, dividend or interest withholding taxes?
  15. What are the litigation risks in the foreign jurisdiction?
The above list provides some insights into the tax and operational issues for establishing a business overseas.

Conclusion

Tax structuring or business structuring should be carefully planned. When undertaken correctly, the tax structure will minimise income tax in Australia. When the tax structuring is done without adequate planning, it can create unforeseen risks for the business owners. If you need advice about tax structuring or business structuring, contact us by phone or email.

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