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If we metaphorize a business to a building, structure to the business will be as important as foundation to the building. A suitable structure can provide tax effectiveness and assets protection to a business. Contemporarily, sole trade, company and trust are common structures used in business. Next, we will use a table to illustrate the difference between these structures. 

 

Sole Trader

Company

Trust

Cost

Cheap

Expensive

Expensive

Tax

Individual rate with 8% discount and will be 16% (capped $1000)

27.5% and will be reduced to 25%

Beneficiary tax rate

Assets protection

None

Limited liability

Strong

Superannuation contribution

Not compulsory

Compulsory

Compulsory

Income streaming

No

No

Yes

As you can see, cost wise, sole trader is cheaper than company and trust to be set up and managed. As a sole trader, you can either use your own name or register a business name. Like other business entity, a sole trader can register ABN, GST, PAYG Withholding, etc. Because of the complexity of company and trust, in addition with government and document platform charges, the cost of company and trust’s setting up and management are comparatively higher.

In terms of the tax rate, sole trader used to be the same to individual tax rate. There is an 8% discount capped with $1000 however for the sole trader with less than $5 million business turnover from 1 July 2016 due to the government new legislation announcement. The discount rate will be gradually increased to 16% in about a decade time and the capped amount is so far is still the same. Company tax rate has been dropped from 30% to 27.5% since 1 July 2016 for business turnover under $10 million and the turnover threshold will be increased to $25 million from 1 July 2017. The company tax rate will be finally reduced to 25% for all business with less than $50 million turnover in about a decade time. Trust net income is usually taxed in the hands of beneficiary. Therefore, if beneficiary is an individual, individual tax rate will be applied; likewise, company tax rate will be applied to corporate beneficiary.

Sole trader business runs under the personal capacity; therefore, the business owner’s personal assets will be exposed to all creditors. Assets protection is vastly low in the sole trader business structure. Proprietary limited gives company comparatively higher assets protection to both shareholders and directors. However, director may be forced to be personal liable to company debt under the Corporate Act 2001. Since trust structure separate the legal ownership and beneficiary of trust assets, trust assets generally protected well from beneficiary’s personal bankruptcy. Nevertheless, care needs to be taken of when trust structure is set up and trust income is distributed.

Employer superannuation guarantee is not compulsory to sole trader him or herself but they are still liable for employee’s superannuation guarantee payment. Company and trust need to pay superannuation guarantee if they hire  employee and pay them over $450 a month. This includes director himself.

Compared to sole trader and company structure, one of trust structure’s advantage is that it can stream the prior-taxed income to beneficiaries at different proportion each year. Therefore, it can fully use the tax free threshold of each beneficiaries and their tax loss if any. This strategy is often used by a family trust and hence the family members can overall pay less tax.

Pitt Martin Accountants & Tax Advisers is located at Martin Place in Sydney CBD. We can be reached on +61 2 92213345 or connect@pittmartin.com.au.