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Business Tax Tip – Business structure and handling tax on profits

images/Bus Tax Tip - structure.JPGConsideration of your business structure and the way profits are handled each tax year is what your tax agent can help you with. If you are starting a new business the question becomes whether using a company to operate your business is best. Having a company has some tax and commercial benefits eg. many businesses prefer dealing with companies rather than individuals or trusts, but for a small business it could be cheaper to operate as an individual.

The 30% individual marginal tax rate (32.5% including Medicare) now applies to income up from $45,001 to $120,000 (year 21-22) and the top marginal tax rate of 45% applies above $180,000. This means the company tax rate of 30% seems slightly better with taxable income up to $120,000 – (that is, sales/revenue less expenses) – BUT it applies to ALL the $120,000 for a company – you will pay less on individual tax rates as the first $18,200 is tax free, then 19% on $18,201 - $45,000, then 32.5% 45,001-120,000.

A handy tool to see the tax on individual incomes is Pay Calculator (not ATO).

On $50,000, the individual pays $5,967 (tax plus Medicare, less low income offsets Year 21-22) which is 11.9% tax.

On $50,000, company profit, the 25% tax is $12,500 – over double!

So a couple with a family business can have an annual net income of up to $180,000 before their salaries will be worse off due to more tax if they retain profits in the company and pay tax there.

As always, seek a tax professional to see what is best for your situation – and review profits in late April-May to decide if Director Bonuses may be better than leaving tax in the company, up to around $100,000, tax will be $23,767, 24% - then the taxes are comparable.

It’s a juggling act sometimes! Seek advice – or call us for a reputable referral close to you.

Get a FREE 30 min answer to your query, and FREE ongoing email or phone support – No-one offers as much! Call and you also get FREE “Avoid these GST mistakes” – There’s 18 that the Tax Office see regularly – Get them right!

Email This email address is being protected from spambots. You need JavaScript enabled to view it. or call 0407 361 596 Australia

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