Key Tax Differences Explained Between Sole Traders and Companies

If you are starting a business, you may be deciding whether to operate as a sole trader or to establish a company. Alternatively, you might already be working as a sole trader and considering transitioning to a company structure. Tax considerations are a crucial factor in determining which business model is most appropriate for you.

The first practical distinction lies in the way tax returns are managed. As a sole trader, you incorporate your business income and expenses into a separate Business and Professional Items schedule within your individual tax return, which you lodge each year.

In contrast, a company must lodge a separate annual tax return and pay tax on its income. Companies are also subject to annual reviews by the Australian Securities and Investments Commission (ASIC), which requires financial records to accurately document transactions and clearly present the company’s financial position, allowing for the creation and auditing of financial statements if necessary. Companies must comply with a range of strict legal and reporting obligations.

A company’s tax return must clearly detail its income, deductions, and income tax payable. Additionally, company directors and any employees are required to submit their own individual tax returns.

Unlike individuals, companies do not benefit from a tax-free threshold they pay tax on their total earnings. Sole traders, however, are taxed as individuals and can take advantage of the $18,200 tax-free threshold.

Companies that do not qualify for the lower company tax rate are subject to the full company tax rate of 30%.
To access the lower company tax rate of 25%, a company must satisfy strict eligibility criteria to be classified as a base rate entity. One key requirement is that the company's aggregated turnover for the relevant income year must be below the specified threshold set at $50 million per year since 1 July 2018.

Both sole traders and companies may:

• Register for Goods and Services Tax (GST) if their GST turnover is $75,000 or more, or if they wish to claim fuel tax credits. Regardless of turnover, registration for GST is mandatory if you provide taxi, limousine, or ride-sourcing services; and
• Employ staff. If the business’s gross wages exceed the threshold set by your state or territory, you may also be liable to pay payroll tax.

Capital gains tax (CGT) obligations apply to both structures when a capital gain is realised. However, sole traders may be able to reduce a capital gain using discount and indexation methods. Some companies may also be eligible to apply the indexation method.

Furthermore, if employees in either business structure receive fringe benefits, you may be required to pay fringe benefits tax (FBT).

Working with PKF can provide the clarity and confidence you need when navigating the complex decision between operating as a sole trader or setting up a company. Our experienced advisors take the time to understand your unique circumstances and long-term goals, ensuring your business structure is not only tax-effective but also aligned with your operational needs, compliance obligations, and future growth plans. With PKF, you gain more than just technical tax advice; you gain a trusted partner who will guide you through each stage of your business journey, from setup to expansion.

Contact your local PKF advisor today.