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Business Tips – Current Business structure – Time to review the way profits are handled?
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Published on Thursday, 11 February 2016 21:23
It is good to do a regular review of your business structure and the way profits are handled each tax year and your tax agent can help you. If you are starting a new business, having a company has some tax and commercial benefits eg many other businesses prefer dealing with companies rather than individuals or trusts, but for a small business it could be cheaper to operate as an individual, or draw out all the profit as director income.
A rate of 5% tax applies to income up to $18,200, 19% on $18,201 to $37,000 and 32.5% individual marginal tax rate (add 2% for Medicare from 1 July 2014) and the top marginal tax rate of 46.5% applies above $180,000. This means the company tax rate of 30% seems slightly better with taxable income up to $80,000 – (that is, sales/revenue less expenses) – BUT it applies to ALL the $80,000.
On $50,000, the individual pays $7,797 (tax plus Medicare)
On $50,000, company profit, the 30% tax is $15,000 – nearly double!
So a couple with a family business can have an annual net income of up to $160,000 between the 2 of them, 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 $80,000 where the tax for every dollar over that is 37%
It’s a juggling act sometimes!
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