How Structure Affects Your Business Tax Obligations

Your own personal taxes are complicated enough, but as a business owner, it’s a whole new ballgame. Your business’ structure is one of the most significant determinants of the administrative burden created by your tax obligations. Many businesses will undergo restructuring as they grow and change when circumstances allow.

In most cases, the business’ income is also a key determinant of tax paid. Income tax rates are constantly in flux. Companies are generally subject to a flat 30% income tax rate, while this is lower for small businesses. The small business tax rate for the FY2022 moving forward is now 25%. The ATO provides critical resources on this and other related topics. Many find working with a tax professional to be essential when trawling through highly technical tax information.

With masses of information available, it can be difficult to know where to start when considering your business’ structure and tax obligations. Consider the following as a starting point to developing insight into this area:

Small Business Tax Obligations

Is your organisation categorised as a small business entity? Being a small business allows you to access a range of tax concessions, escalated depreciation, instant writing off of fixed assets, disregarding prepayments, reduced company tax rates as discussed above as well as several CGT concessions which can reduce your Capital Gain Tax on the sale of your business assets by 25% to 100%.

To be considered as a small business entity, generally, your company must have an aggregated turnover of less than $10 million per annum. Aggregated turnover is your business’ annual turnover plus the annual turnover of any entities connected with you and an affiliate of you. The $10m aggregated turnover threshold applies to most concessions, but there are exceptions (including the exception for income tax rate per above).

You can find out the details of these small business entity concessions on the ATO website. A general rule of thumb is that smaller organisations will be taxed less while higher-earning ones are taxed more. Whether or not this is always the case can lead to some debate. Take a look at this resource from Business.gov for a rundown on key differences between business structures.

Trusts

A trading trust is a type of business structure in which a trustee (either an individual or company) carries on business on the behalf of the trust’s beneficiaries. The key benefit of this structure is that you can decide who benefits from the profit derived by the business. It also allows a trust to make distributions to individuals who have no input or even knowledge of the business’ operations. A trustee can distribute income in the manner most effective to beneficiaries as permitted by the trust deed.

Businesses can also mix different structures in a hybrid structure. What begins as a partnership might be rolled over into a trust after the growth of the business. Restructures might be motivated by asset protection, ability to attract investment and tax effectiveness.

Implications

As an owner, it’s crucial to remember that business structure has significant implications on your tax obligations. And just because one sounds better, this doesn’t necessarily mean you can move your business into that structure without significant consequences. Each structure has its own legal characteristics beyond taxation. But keep in mind that it is common for business structures to change over their course.

Without question, the structure of your business will have long-lasting implications for you. It’s always worth consulting with a tax and business specialist to ensure you choose the best option for your circumstances. If you have any questions about any of the above matters, don’t hesitate to contact your Morrows advisor.