The Australian government highly encourages new businesses by aligning the tax systems and business laws with a culture of entrepreneurship and risk-taking. There are tax benefits for newly formed businesses available but they are also subject to the structure of your business. Simply put, a business might be in the form of a company, trust, or simply setting yourself as a sole trader.
Here we have outlined the tax benefits of starting a new business and a few options to know the difference between each business structure and their respective tax implications.
Tax benefits for new business owners
Deduction of initial fees:
The Australian finance ministry has recently introduced tax relief for entrepreneurs to reduce the tax burden incurred in the early stages. Any business, having a turnover of less than $10 million a year is allowed deductions of fees incurred during the start of the business venture which may include expenses in accounting and legal advice, government Chartres and taxes and many more.
The benefits also extend to tax deductions in payments made to government agencies relating to regulatory costs incurred in starting the business venture. They may include costing such as fees for creating a company as well as stamp duty.
Professional advice fees:
To boost new business in Australia, the government has implemented measures for getting advice from lawyers and accountants. This includes taking advice from those professionals in setting up the business and its structures. Moreover, developing a business plan also covers costs associated with rising debt and equity capital for the operation of the proposed business.
Sole Trader or Proprietorship:
For sole traders, there are minimal legal and professional costs to start your business. The advantage of being a sole trader is its simplicity. You can file your business taxes in your personal tax return rather than filing a separate tax return for your business.
As taxes are applied at the individual level you may write off taxes from other accessible income such as salary and wage as well as income from other business activities. If you don’t have any other form of income, or you are undergoing losses, then you may carry those losses forward and apply them against income generated for future years. In addition, there is an availability of 50% capital gain tax relief once you sell your business as well.
There is also the downside of being a sole trader. Once you start generating profit, you may be subjected to paying a marginal tax rate up to 47%. The potential profit split between family members is also unavailable in such a scenario.
A company is a legal entity that has a separate legal existence from its owners, usually formed by a group of individuals to operate a business in a commercial capacity. Any business with a turnover less than 10$ million is subject to a fixed company tax rate of 27.5% in Australia.
The main advantage of setting up a company is the access of limited liability to shareholders against the debt of the company. The creditors of the company won’t be able to access the assets of the shareholders if they are not personally liable. There is no 50% capital gain tax deduction available in this form of business.
A trust is a form of business structure where trustees carry out the business on behalf of the owners. Family-run businesses are often set up as a trust so that the family members can be made beneficiaries without having involvement in running the business.
One of the advantages of a trust is the deciding factor of who benefits from the income generated for the trust. So, when you start trading profitably, the trustee may distribute income in the most effective way possible. Since the beneficiaries of the trust may not be the legal owners of the business, the creditors won’t be able to access the assets of the business if they encounter financial problems.
How can SMG help?
If you are looking to start a new business, the Australian government is taking major steps in encouraging you and SMG can help you in setting up and guiding your new business venture. At SMG we pledge to keep small and medium businesses in getting accustomed to new business changes and helping them grow.