What Is The Difference Between Sole Trader Tax And A Company Tax?

Choosing the proper structure of a business may not always be easy as several parameters play a role. It includes cost efficiency, scalability, protection, taxes, growth, and various other reasons. Making sure that you pick a suitable choice depending on the criteria is an essential step. It is one aspect of why businesses may fail or succeed, so you have to be careful. To better understand a company and sole trader tax, you can refer to this guest post. After that, you can decide whether to hire a sole trader or a company tax return expert. The differences between them are: 

About sole trader and a company 

A sole trader is defined as the sole owner of the franchise and is entitled to all risks and profits of a business. A company is a separate entity where all owners will be responsible for gains and losses. The firm owns all its assets and income, and the owner owns the brand via the purchase of shares. Both organizations have similar reporting and tax obligations. However, you should be aware of the critical differences, and for that, the company income tax return can assist you. Check out the differences between a sole trader tax and a company tax return here!

  • Tax-free threshold 

For companies, no tax-free threshold was there, and the tax is paid on every dollar earned. In terms of individuals, the tax-free threshold for the 2019-20 financial year is $18,200. The structure is taxed as a part of personal income. 

  • Lodging tax returns 

Every year, individual tax returns should be filed while operating in a sole trader business. The same thing is applicable in a company tax return as well. It must show the deductions, income, and income tax the firm should pay. The firm needs to lodge the tax return and pay tax as a separate legal entity. The employee and director of an organization need to file their tax return. 

  • Tax rates 

A sole trader has to pay an individual income rate, and 30% is the full company tax rate. The different company tax rates apply to companies that are base rate entities. By visiting the Australian Taxation office site, you can keep all things up to date regarding the changes to company tax rates. 

  • Capital gains tax (CGT)

A capital loss or gain is the difference between the amount you have spent to get the asset and what you got after disposing of it. After selling, if you have earned a capital that you have owned for a year, you are eligible to decrease the capital gain. You can do it via the indexation method, the discount method, one or more of the four CGT (capital gains tax) concessions present for small businesses. 

In terms of a company, while calculating capital gains, the discount method is not applicable. Even though, in some cases, it can be relevant like life insurance companies. When your firm meets the specifications of the indexation method while calculating the capital gain, go with the indexation method. 

  • Payroll tax

Whether it is a company or for a sole trader tax return, you have the permission to employ people. When you do, you can have a payroll obligation. Payroll taxes are a territory and state tax on wages that you paid as an employer. Every territory and the state government has specific payroll tax rules which everyone has to follow. 

  • Small business entity concessions 

It applies to all business structures and types. Your business comes under a small business entity when you have less than the aggregated turnover of $10 million in terms of taxes. The second clause is when you are operating a business for a part or all of the income year. Some concessions to be included are “goods and services tax (GST) and excise concessions,” income tax concessions, “Pay as you go (PAYG) instalments concessions,” and fringe benefits tax (FBT) concessions. 

  • Superannuation and taxes 

Depending on the business activities, it can be determined which superannuation and taxes you might require to pay and report. Also, you may need to enrol for goods and services tax (GST) if you satisfy any of the below things: 

  • Wishing to claim fuel tax credits for your organization 
  • Offering limousine or taxi travel to passengers irrespective of your GST turnover 
  • With a GST turnover of at least $75,000

Through “Pay as you go (PAYG) instalments”, you might need to clear the income tax. In case there are employees, you have to fulfil the below aspects. 

Paying superannuation contributions to all eligible staff. If you want to collect information about this, visit the ATO (Australian Taxation Office) site. 

  • Gather PAYG withholding money from payments you make. You also need to report and give the withheld cash to the ATO (Australian Taxation Office). 
  • When your employees get a fringe benefit, you will also be required to submit a fringe benefits tax
  • Fees for a company and sole traders 

The fee charged by a company and sole traders is different, so you have to take care of that as well. Sole traders look for VAT returns, income tax returns, payroll management, VAT returns, etc. The fees depend on the level of cash transactions and turnover, and to do that, an efficient financial advisor can assist you. In a company, the fees can be a bit expensive. Also, you have to be aware of the necessary things, like “Revenue and the CRO”; otherwise, you might need to pay penalties. Several professionals can also take care of the company tax, and you can hire any of them. 

Final thoughts

Hopefully, the differences stated above will help in understanding both categories. With that, you can go ahead and approach the tax agent Perth and file for it. Always feel free to ask your queries if you have any, as it will help you avoid committing mistakes. While looking for professionals, you must always go with licensed and certified ones. The common aspect is both need to lodge an annual tax return before the last date approach without fail. 

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