Tax differences between a sole trader and a company
| Sole trader | Company | |
|---|---|---|
| Tax-free threshold | The tax-free threshold for individuals is $18,200 in the 2019–20 financial year. A sole trader business structure is taxed as part of your own personal income. | There is no tax-free threshold for companies – you pay tax on every dollar the company earns. |
| Tax rates | Sole traders pay tax at the individual income rate |
The full company tax rate is 30%. Different company tax rates apply to companies that are base rate entities. You can keep up to date with any changes to company tax rates on the Australian Taxation Office website. |
| Lodging tax returns | An individual tax return needs to be lodged each year if you operate as a sole trader business. |
A company tax return needs to be lodged each year if you operate with a company business structure. Company tax returns must show:
As a separate legal entity, the company must lodge its own tax return and pay tax on income. If you are a director or employee of your company, you still need to lodge your own individual tax return. |
| Capital gains tax (CGT) |
A capital gain or capital loss is the difference between what it cost you to get an asset and what you received when you disposed of it. If you made a capital gain from disposing an asset (for example, selling an asset) you owned for at least 12 months, you may be able to reduce the capital gain through:
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Generally, the discount method does not apply to companies when calculating capital gains, although it can apply to a limited number of capital gains made by life insurance companies. If your company (other than a listed investment company) meets the conditions of the indexation method for calculating your capital gain, you must use the indexation method. |
| Small business entity concessions |
Small business tax concessions are available to any business structure type. For tax purposes, you are a small business entity if you:
Some of the concessions available to you include: |
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| Taxes and superannuation |
Your business activities determine which taxes and superannuation you may need to pay and report. You need to register for goods and services tax (GST) if you either:
You may also need to pay your income tax through pay as you go (PAYG) instalments. If you have employees, you will also need to:
If your employees receive a fringe benefit, you may also need to pay fringe benefits tax. |
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| Payroll tax | As a sole trader or a company, you can employ people. If you do, you may have a payroll tax obligation. Payroll tax is a state and territory tax on the wages you pay as an employer. Each state and territory government has its own payroll tax rules that you’ll need to comply with. |
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