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 $90,000 (year 18-19) and the top marginal tax rate of 45% applies above $180,000. This means the company tax rate of 30% seems slightly better with taxable income up to $90,000 – (that is, sales/revenue less expenses) – BUT it applies to ALL the $90,000 – you will pay less on individual tax rates as the first $18,200 is tax free, then 19% on $18,201 – $37,000.
A handy tool to see the tax on individual incomes is Pay Calculator (not ATO).
On $50,000, the individual pays $8,017 (tax plus Medicare, Year 18-19)
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 $180,000 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 $90,000 where the tax for every dollar over that is 37%.
It’s a juggling act sometimes! Seek advice – or call us for a reputable referral close to you.
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