If you're starting a business, you have many options when it comes to which business model you want to use to run your business. Operating as a sole trader is generally the cheapest and easiest option as you simply include all your business income on your tax return using a separate business schedule, however, there are several key benefits to operating businesses via a company structure.
A company is considered as a separate legal entity. It is required to submit a company tax return and fulfill its tax obligations based on its income. Additionally, if you hold the position of a director in the company, you are still responsible for filing your personal tax return.
In Australia, the Australian Taxation Office (ATO) oversees tax matters, and you can seek assistance from a registered tax agent to help you with your tax position and ensure your company tax return is filed correctly.
The company's income should be reported accurately on the company tax return, taking into account factors such as income tax, capital gains tax, and potential tax credits or tax offsets.
Small business owners often need to manage their cash flow effectively and plan for tax time, which includes meeting due dates for tax payments. Some businesses may even set up payment plans to ensure they can meet their tax obligations without undue financial strain.
Benefits of running your Business as a Company
Lower Tax Rate
Companies have a flat corporate tax rate ranging between 25% and 30%. The company tax rate is lower than the highest tax rate for individuals, currently 45%, plus the 2% Medicare levy. However, depending on the business activity, there may be other tax rules to consider, such as Personal Services Income (PSI) rules. To learn more about PSI, read our article here.
Companies can also be used to protect assets as liability is limited to the nominal amount of the shares in the company, meaning an individual's assets are generally not at risk and the director is not personally liable. There are exceptions to this with Director Penalty Notices (DPN), where a company director can be held personally liable for 3 types of company debt; Pay As You Go (PAYG), Super Guarantee Charge (SGC), and Goods and Services Tax (GST).
Companies can be a more tax-efficient way of structuring your business depending on your circumstances. When you do your company tax return, you can usually claim most of your business expenses as tax deductions.
The company reports its taxable income, tax offsets and credits, PAYG instalments and the amount of tax it is liable to pay on that income or the amount that is refundable. You will need to have your accounts reconciled and financial statements prepared in order to report the company's financial and tax position.
Disadvantages of running your Business as a Company
Higher accounting and compliances costs
In addition to your personal income which requires a personal income tax return, you will also need to lodge a company tax return and have financial statements prepared by a tax accountant. Many firms offer company tax return packages, however, be wary of firms that promise much for little, as every company is different, and it is important you get the boutique service you need. Even if you are used to preparing and lodging your own tax return, if you are thinking about starting a company it is advisable to obtain support from a professional registered tax agent with substantial experience working with business owners.
Profits distributed to shareholders are taxable
While profits can be paid out to shareholders in the form of dividends, these are taxed at the individual level. There are two types of dividends, there's franked dividends and unfranked dividends. To learn more about franked dividends and the tax benefits they can offer you, read our article here.
The company's income is separate from personal income and, as such, you're required to pay tax on the company's income.
Public disclosure of directorship
Your personal information may become public when you operate as a company, such as the disclosure of your directorship, rather than exposing your financial affairs. If you value privacy and discretion, this transparency requirement may not align with your preferences.
Pay tax or get a tax refund
The company income is considered separate from your own personal income as the company is a separate legal entity, and therefore any profit may be taxed within the company. The Australian Taxation Office (ATO) offers a variety of self-service tools and online services designed to assist you in handling your tax affairs effectively. Payment options include using BPAY or making payment via a credit or debit card.
If you have concerns about your ability to lodge or make timely payments, it is advisable to reach out to the ATO for guidance. They are equipped to provide valuable information that can assist you in managing your tax obligations.
If you are having trouble staying on top of your taxes, you may find a payment plan helpful. Our ultimate guide to payment plans can be found here. If you need to set up a payment plan but you haven't done so before, a registered tax agent is the perfect professional to help.
Small business company tax rate
For income years starting on or after 1 July 2022, the small business company tax rate ranges from 25% to 30%.
Personal Services Income (PSI)
A company has the option to handle income and deductions differently when it comes to Personal Services Income (PSI). Specifically, the income derived from PSI can be treated as your individual income for tax purposes. To learn more about PSI, see our article here.
Do I need to lodge a Company Tax Return for my not-for-profit organisation?
If you run a not-for-profit, you will need to do the following three things to determine whether or not you are required to lodge a company tax return:
It is important to be aware of the taxable income threshold for your organisation's tax return filing requirement.
Calculate your organisation's taxable income. To determine the taxable income of a club, society, association, or company, simply subtract allowable deductions from the organisation's assessable income. This calculation is the same for all types of organisations for income tax purposes.
If you're running a business as a sole trader, it might be time to consider forming a company structure. Read our article on the sole trader tax rate for more information on the tax implications of running your business as a sole trader.
If you're thinking about starting your own business or considering changing the underlying business structure through which you operate your business, reach out to a professional for more information.
If you need help preparing or lodging your company tax return or find you're not getting the support you need, or if you have further questions about company tax returns, reach out to us to schedule a consultation.
Your Tax Agent will always aim to get your company tax return lodged on time, but you'll need to have your bookwork up to date and submitted well before the due dates. If you're finding tax time to be a stressful time of year or are having difficulty preparing your books, reach out to us. We work with small businesses from all over Australia where we make preparing and lodging your company tax return simple. We can prepare your company tax return online using cloud accounting software.
Causbrooks gives you a client manager supported by a team of knowledgeable accountants. We’re here to take the guesswork out of running your own business. Our accountants have much experience working with small business owners.
Get in touch with us to set up a consultation or use the contact form on this page to inquire whether our services are right for you.
Any advice contained in this document is general advice only and does not take into consideration the reader’s personal circumstances. Any reference to the reader’s actual circumstances is coincidental. To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstance.