When starting a business, one of the most important decisions you will make is choosing the right business structure. Two popular options in Australia are operating as a sole trader or company.
While both have their benefits and drawbacks, one key consideration is tax. In this article, we’ll take a closer look at the tax differences between a sole trader vs company, including the sole trader tax rate and company tax rate.
What is the difference between a sole trader and a Pty Ltd company?
One of the main differences between a sole trader vs a company is how they are taxed. A sole trader’s business income is considered their personal income, so they are taxed at the individual income tax rate. On the other hand, a company is taxed as a separate legal entity and pays tax on its profits at the corporate tax rate.
Another key difference is how losses are handled. A sole trader can offset business losses against their personal income to reduce their tax liability. In contrast, a company can use business tax planning strategies to reduce their tax bills, like carrying forward losses to offset future profits or carrying them back to offset previous years’ profits.
Another tax benefit for companies is the ability to distribute profits to shareholders in the form of franked dividends, which can reduce the overall tax liability of the company and the individual shareholder.
Sole trader tax rates
As mentioned, a sole trader’s business income is considered their personal income and is taxed accordingly at individual rates. The personal income tax rates in Australia for the 2023-2024 financial year are as follows:
- 0% on income up to $18,200
- 19% on income between $18,201 and $45,000
- 32.5% on income between $45,001 and $120,000
- 37% on income between $120,001 and $180,000
- 45% on income over $180,000
It’s important to note that sole traders are also required to pay the Medicare Levy, which is currently 2% of taxable income.
Do you pay more tax as a sole trader or a company?
The amount of tax you pay as a sole trader or a company in Australia can vary depending on a range of factors, including your income level, expenses, and deductions.
As a sole trader, you are taxed at your personal income tax rate on the profits you make from your business. This means that if your business earns a high income, you may end up paying a higher tax rate than if you were a company. Additionally, as a sole trader, you are not eligible for certain tax concessions and deductions that are available to companies.
On the other hand, companies running a business are taxed at a flat rate of 25% on their taxable income, which may be higher or lower than your personal tax rate as a sole trader depending on your income level. However, companies are also eligible for a range of tax deductions and concessions like the research and development tax incentive.
Asset protection
A common question we get asked when discussing sole trader vs company structures, is asset protection. How protected are your personal assets under each business type?
- Sole trader – if you’re liable for anything, all your assets are up for grabs – personal home, car, cash in the bank, etc.
- Company – the company is liable if anything goes wrong so only company assets are up for grabs (outside of a few select circumstances like insolvent trading)
Contact us if you’d like more information on this.
Sole trader vs company: What is right for your business?
Whether it’s better to operate as a sole trader or a limited company in Australia depends on various factors, including the size of the business, the nature of the business, the level of personal liability you’re willing to take on, and your tax situation.
Sole traders have the advantage of simplicity and flexibility, as they don’t have to deal with the formalities and regulations associated with running a company. They also have full control over the business and keep all the profits. However, they are personally liable for the debts and legal issues of the business.
On the other hand, limited companies offer protection to the owners by separating their personal assets from the business assets. They also have more options for raising capital and expanding the business. However, they require more regulatory compliance, which can be time-consuming and expensive.
We can help you choose
Choosing between a sole trader and a limited company can be a difficult decision and depends on your individual goals and circumstances. Seeking professional advice from a business accountant can provide clarity on which structure is most suitable for your business.
At creditte chartered accountants & Advisors, we can help you make an informed decision and choose the right business structure. Contact us to book in a free consultation.
