Business structures in Australia and taxes to be aware of (2024)

Starting a business in Australia means you need to think about taxes from the start. Choosing the right business structure is important because it will affect how much tax you’ll have to pay later on. Here are some information about the different business structures and tax obligations in Australia.

Types of business structures in Australia

The first thing you need to know when learning about taxes, is which type of business structure you are going to operate. Let’s dive into a clear and straightforward guide to understanding the main business structures in Australia and the important tax considerations associated with each of them.

Sole trader

In Australia, a sole trader is an individual who legally owns and operates their business. It’s the most straightforward and cost-effective of the business structures, making it a popular choice for those starting out or preferring to work independently. As a sole trader, you have complete control of your business, including all profits and responsibilities for debts and losses.

Partnership

A partnership in Australia is a group or association of people who run a business together. Partnerships can be easy and inexpensive to set up. Each partner has a share in the business and is involved in its management. Profits are shared between partners according to terms set in the partnership agreement.

Company

A company in Australia is a commercial business or entity that exists separately from its owners (shareholders). It’s a more complex structure to establish and operate but provides significant benefits such as limited liability, meaning the shareholders’ personal assets are generally protected from business liabilities.

Trust

A trust is an entity where a trustee holds and manages the property or assets for the benefit of others, known as beneficiaries. Trusts provide a high degree of control over assets and income distribution, making them a sophisticated vehicle for asset protection and tax planning. In practice, trusts are often used to manage investments or family businesses.

Read also: 10 reasons why you need a business plan

Navigating the tax obligations of Australian business structures

Venturing into the business landscape of Australia brings with it a series of financial responsibilities, chief among them is understanding and adhering to the unique tax obligations that align with your chosen business structure. From the solo freedom of a Sole Trader to the shared responsibilities of a Partnership, the formal corporate environment of a Company, and the asset-guarding nature of a Trust, each structure carries distinct tax requirements that are essential to grasp for regulatory compliance and financial efficacy.

Read also: How to start a business in Australia: A simple guide

Tax obligations for sole trader 

As a sole trader, your key tax obligations in Australia include declaring your business income on your personal tax return. This income is then taxed at the individual tax rates. You are also required to pay a Medicare levy. If your turnover is more than the GST threshold, currently set at $75,000, you must register for and pay Goods and Services Tax (GST). Sole traders are also eligible to access the small business tax offset, pay quarterly instalments for expected tax liabilities through Pay As You Go (PAYG) instalments, and may need to contribute to their superannuation fund.

Tax obligations for partnership

In a partnership, the entity itself does not pay income tax on the profits earned. Instead, each partner must report their share of the partnership income or loss in their personal tax return and will be taxed according to individual tax rates. Like sole traders, partnerships need to register for GST if the annual turnover is $75,000 or more. Each partner is responsible for their own superannuation contributions, and the partnership should ensure that PAYG instalments are made for the estimated tax liability on the partnership income.

Tax obligations for company

Companies must pay income tax on their profits at the corporate tax rate, which is separate from individual tax rates. Companies must lodge an annual company tax return and pay the Medicare levy. They are also required to register for GST if the annual turnover is $75,000 or more. Another key obligation for companies is the requirement to withhold tax from employees’ wages and salaries through the PAYG withholding system. Additionally, companies must contribute to their employees’ superannuation funds in the form of the Superannuation Guarantee.

Tax obligations for trust

A trust is required to lodge an annual trust tax return, reporting all income, deductions, and the trust’s net income or loss. Beneficiaries must pay tax on their share of the trust’s net income at their own marginal tax rates, and the trust itself may be liable for tax if all income isn’t distributed. Trusts with a turnover of $75,000 or more must also register for GST. PAYG instalments may need to be made if the trust generates substantial income. Trustees are responsible for managing these tax obligations, and there may be additional complexities, such as the land tax, depending on the trust’s assets and activities.

Mastering tax essentials

In summary, while the ventures of Australian business can be a thrilling foray, it’s imperative for entrepreneurs to understand the tax implications of their chosen business structure. Whether operating as a Sole Trader, Partnership, Company or Trust, staying informed and compliant with tax obligations is non-negotiable. Each structure presents unique advantages and challenges, particularly in the realm of taxation. Being savvy with these financial nuances not only ensures that you remain on the right side of the law, it can also bolster your business’s financial health. 

It’s important to highlight that the administrative side of your business can be made significantly simpler with the right tools. For instance, managing tax invoices, tracking expenses, and staying on top of GST commitments is an integral part of running your enterprise.

Read also: How to get started with tax invoices

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