Tax and your business structure

Your business structure may affect your tax obligations.

TIP: The Australian Tax Office (ATO) has resources to help you to understand your obligations, including a video on choosing your business structure.

Sole trader

A sole trader declares their business income (or loss) as part of their personal income tax return and is taxed at the same rate as an individual.

Once the ATO has received your income tax return you will be advised if you need to start paying pay-as-you-go (PAYG) instalments. The instalments are a pre-payment of your tax for the following financial year and you will be credited with these instalments on your next income tax assessment.

Until you are required to start PAYG instalments consider putting money aside, or making voluntary ATO payments, to budget for any future tax payments.

For more information regarding your tax obligations as a sole trader visit the ATO website.

Personal services income (PSI)

PSI is income from your skills or efforts as an individual. You earn PSI when more than 50 per cent of the income you receive from a contract is for your skills, knowledge or efforts.

You can receive PSI in almost any industry, trade or profession. However, common examples include financial professionals, IT consultants, engineers, construction workers and medical practitioners.

You don’t earn PSI if:

  • less than 50 per cent of your income from a contract is for your skills, knowledge or efforts
  • you receive income from selling or supplying finished goods, even if you made these goods
  • you receive income from an income-producing asset, such as renting a vehicle or piece of machinery
  • your income comes from licensing your intellectual property, such as a patent.

Partnership

A partnership must lodge a tax return and each partner will be required to pay tax on their share of the partnership’s net income. Partners may also be required to pay PAYG instalments, in the same way as a sole trader. Individual tax rates apply to a partner who is an individual (a person). They do not apply to a company or trust.

For more information regarding your tax obligations as a partnership visit the ATO website.

Company

A company is a separate legal entity and is responsible for paying income tax on its profits at the company tax rate. There is no tax-free threshold for companies.

For more information regarding your tax obligations as a company visit the ATO website.

Trust

A trustee must lodge an annual trust return. The trust is not liable to pay tax; it is the beneficiaries entitled to receive the trust net income who are individually assessed for tax. In many cases, the beneficiary of the trust is a company (or another trust). In rare circumstances, if the income is not fully distributed to the beneficiaries the trustee pays tax on the undistributed income at the highest marginal rate.

For more information regarding your tax obligations as a trust visit the ATO website.

More information

► Consider enrolling in the free tax basics webinar hosted by the ATO.
► View the ATO video: Tax basics for small business.
► In preparation for tax time review your finances regularly.