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Guidance

How does tax work for different business structures?

How does tax work for different business structures?

Starting a new business? Find out what you need to know about tax.

Your tax responsibilities will change with your business structure so it is important to choose the right set-up when bringing your business idea to life. A first step is understanding the obligations for each business structure so that you can choose one which best suits your needs.

All businesses

For all the business structures mentioned, you will need to consider:

  • Registering for Goods and Services Tax (GST) if your annual turnover is $75,000 or more
  • If you are employing staff, you will likely need to pay for their superannuation contributions
  • You may be required to make regular payments towards your expected income tax liability – these are known as pay-as-you-go (PAYG) instalments – the tax office will contact you if this is needed
  • Any ongoing administration such as lodging business activity statements and tax returns
  • Eligibility for tax concessions.

Sole trader

Generally this is a simple and low-cost business structure.

Things to know:

  • You’ll need to complete one income tax return for both your personal and business income and expenses under your personal tax file number (TFN)
  • Business profits will be taxed at the same rates as an individual. 

Partnership

An arrangement where between 2-20 people own part of the business, sharing any potential profits and losses.

Things to know:

  • You’ll have to complete a separate tax return for your business income and expenses under your partnership TFN
  • The business will not pay tax – the business profits are distributed to the partners, who will each lodge an income tax return and pay tax at the individual tax rate
  • The business profit or loss and any capital gains or losses will be split according to the each partners’ share of ownership.

Other tax considerations for both sole traders and partnerships

Company

A company can cater for one or more persons running a business. It is a legal entity so it may give you limited protection for your personal assets if anything goes wrong. It is also generally more expensive to set up and run compared to a business with either a sole trader or partnership structure.

Things to know:

  • You’ll have to complete a separate income tax return under your company TFN
  • You’ll pay tax on profits at the company tax rate
  • You’ll need to produce annual company reports
  • Profits may be kept in the company or paid out as dividends to shareholders
  • Dividends can come with ‘franking credits’ – credits for the tax already paid by the company, which may reduce tax for the shareholder
  • You may be able to claim a tax deduction for directors’ wages and other salary costs. 

Trust

This is generally one of the more expensive and complex structures with more administrative work involved, however it can be more flexible with profit distributions. A trust will need a trustee which is an individual or company.

Things to know:

  • You’ll have to complete a separate tax return under your trust TFN
  • There are complex rules of who pays tax depending on how much profit is distributed
  • You’ll need to pay super to employees (including the trustee if they are employed by the trust)
  • You may have flexibility in how you distribute the income to your beneficiaries.

Taxation considerations are general and based on present taxation laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information. Commonwealth Bank of Australia is also not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law. All products mentioned on this web page are issued by the Commonwealth Bank of Australia; view our Financial Services Guide (PDF 59kb).