A regular review 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 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.
The 30% individual marginal tax rate (32.5% including Medicare) now applies to income up from $37,001 to $80,000 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 $8,797 (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 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!
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 firstname.lastname@example.org or call 0407 361 596 Australia