When establishing your business, one major fork in the road is choosing whether to operate as a sole trader or register a company. While impacting everything from liability to administration, this decision significantly influences your tax situation as well.
As tax time looms, understanding how your structure affects tax obligations, filing requirements, concessions, and other factors can empower you to make the smartest choice.
Below we break down key tax considerations across five critical areas when weighing up going solo vs incorporation:
📝 Tax Rates: Progressive vs Flat
🚚 Lodging Separate Returns
📈 Income Threshold Differences
🤑 Capital Gains Impacts
💰 Concessions Available
Tax Rates: Progressive vs Flat*
✅ Sole traders pay personal income tax at Australia’s progressive individual rates after accessing a generous $18,200 tax-free threshold in 2022-23. This means zero tax on the first $18,200 earned, then escalating percentages on amounts above that, topping out at 45% on income over $180,000.
✅ Companies face a flat 30% tax rate on every single dollar earned, with no tax-free income band (a lower 27.5% applies to base rate entities meeting certain conditions, check with your accountant!).
This flat structure receives some offsetting by allowing companies to retain profits rather than distribute them to owners as personal income taxed at higher rates.
But between corporate taxes, personal taxes on dividends, and capital gains taxes later upon selling the company, companies face substantial cumulative tax liability.
Lodging Separate Returns
Filing obligations also diverge significantly depending on structure:
✅ Sole traders must complete the standard personal tax return each year disclosing business income and expenses aggregated as part of total individual income for the year.
✅ Companies need to submit a separate company tax return annually detailing:
👉 Company income👉 Deductible expenses👉 Total tax owed
Income Threshold Differences
Sole trading offsets risks by allowing income splitting with a spouse and leveraging the substantial personal tax-free threshold.
Companies must pay tax starting at dollar one of revenue.
✅ A sole trader couple each claiming half of $50,000 net business income accesses their combined $36,400 tax-free allowance to dramatically reduce total tax liability.
✅ A company with the same $50,000 net income pays $15,000 in flat corporate taxes upfront, then more tax when distributing the remaining profit to directors as dividends down the road.
Capital Gains Impacts
When eventually selling business assets for a profit, tax treatment of these capital gains also differs:
✅ Sole traders and companies enjoy substantial capital gains concessions and discounts when holding assets longer term before disposing. Pay only tax on a portion of the nominal gain.
❌ Companies lose most concessions, paying full corporate tax rates on capital gains realized.
💰 Concessions AvailableFortunately, both structures equally access the full spectrum of small business entity concessions once meeting sub-$10M yearly turnover eligibility:
🎟️ Income tax reductions💰 GST and excise tax savings🧾 Lower PAYG installments👜 Discounts on fringe benefits tax
Take full advantage by substantiating claims for every available concession and discussing options with your accountant.
👩💻 Automate and Integrate Tax Compliance with Parpera
As this breakdown reveals, both sole trading and formal incorporation routes clearly impact tax obligations and planning.
Before deciding, carefully consider differences in rates and returns, administrative requirements, concessions and liability.
Then integrate Parpera’s mobile-first accounting tools to seamlessly track income and expenses and simplify compliance all year long!
Our app simplifies tax reporting so you can focus on growing your business. 🧾👌
*For more information, visit Business.gov.au