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What are the tax implications for different business structures?

The structure of your business determines how you would pay tax and other business obligations you would need to consider. Whilst you are able to change your structure as your business develops, business owners must keep up with the changing tax responsibilities that may occur as a result. There are four major business structures in Australia that come with different tax implications.

Sole trader:
An individual running a business will declare revenue received from the business as part of their personal income tax return and will be taxed at the same rate as an individual. This means the more the income the business earns, the more tax the sole trader will have to pay. If their income is $18,200 or under for the 2018-19 financial year, then they are under the tax free threshold and do not have to pay tax. They can also receive a discount on Capital Gains Tax (CGT).

Partnership:
When more than one person runs a business and distributes income or losses between themselves, each partner must pay tax at the individual tax rate on their share of the business’ net income. They also need their own Australian Business Number (ABN) and Tax File Number (TFN) to use when lodging their annual business income tax return. An annual partnership return showing the income and deductions of the business must also be lodged.

Company:
A company is a separate legal entity with higher set-up and administration costs. They must apply for a company TFN and ABN if they are registered under the Corporations Act 2001. They must also be registered for GST if the annual GST turnover is $75,000 or more. There is no tax free threshold and no discount on CGT. Companies are responsible for paying income tax on their profits at the company tax rate, which is currently 30% under 2019-20 tax rates, or 27.5% for base rate entities.

Trust:
Businesses run through a trust must also have their own TFN and ABN, and register for GST if annual GST turnover is $75,000 or more. They are are not liable to pay tax because their beneficiaries who receive the trust net income are individually assessed for tax. If the trust generates net trust income and does not distribute it, they are assessed on this accumulated income at the highest individual tax rate. Each year, all the revenue earned by the trust and the income distributed to each beneficiary must be shown on their tax returns.

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Conducting your business’ health-check

Posted on May 28, 2020 by admin

With the current economic slowdown, now is the perfect time to review your business strategy and conduct a business “health check” to come out the other side improved and ready to go. Analyse whether or not your business is in the state that you want it to be in and any improvements you can make to prepare for when the economy starts to recover.

Clients and customers

Client and customer loyalty is a trait all businesses should appreciate, but if your clients’ values are misaligned with yours, conflict is inevitable. Hence, now is the time to re-evaluate which clients you want to keep loyal and which ones you can see a cooperative future with. Re-assessing your target audience and deepening your understanding of the wants and needs of your clients would also be beneficial, as you can perfect your marketing strategies now while you have the time. If you have clients who frequently struggle to pay you on time, rude to your service and employees and generally disrespectful to your business, take the time to assess whether your attention is worthwhile and if you would like to continue to work with them when the economic situation improves.

Employees

Your employees are another stakeholder to check up on during this downtime opportunity. Your employees will always be your business’ representatives so make sure they are up to standard and help them improve on their skills now when they have the time to. Take the time to teach your employees more about your business goals and strategies and improve the team atmosphere by introducing team recreational activities. Your relationship with your employees now during a global crisis will dictate how they feel about you as a leader and if they can rely on you in the future. Foster respectful, strong and healthy bonds between you and your employees and only good things will be coming your way.

Suppliers

The key question to ask when reviewing your suppliers is whether or not you are getting what you need from them at a reasonable cost. Of course, not all sales deals are made equally and while you may get the bad end of the stick now, that is sometimes for the benefit of the long term. However, if this is not the case and you feel that your suppliers are asking too much from you, letting you down with their product quality or causing other complications, take the time now to look for other options. As most businesses struggle through current economic conditions, more and more suppliers are becoming competitive and hence, there are more options to consider. Do your research and decide on the suppliers you want to work with for the long-term future.

Financing

Managing your finances is always a difficult task but it is now more important than ever. Your budget and profit predictions for this year are likely going rogue so reevaluate your finances and research other funding options such as commercial rent, interest rates and banking services. Consider how you can minimise cost while maximising efficiency and productivity, save as much money as you can during these downtimes, and review your investments in detail to determine whether or not they are worthwhile.

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