If you have recently started a small business in your own name or through a business name with an Australian Business Number (ABN), you may be increasingly aware of your tax obligations. In particular, there are differences between business, personal and professional income. This article will help differentiate how businesses receive income, how they are taxed, and how they can develop or restructure into more sophisticated structures over time.
What is Business Income?
Your business income is the revenue from the sale of your goods or services from your trading entity.
Invoices will be issued in the name of your business, which may or may not have a separate trading name. However, it must have an 11-digit ABN and possibly a 9-digit ACN.
Sole trader businesses are taxed at marginal rates (the same as individuals in their personal capacity). In contrast, private companies are taxed at company rates, which depend on their turnover. Sole traders also do not attract the benefits of limited liability companies attract by being recognised as separate legal entities.
Income Under a Trust or Partnership Structure
You can also earn income through other business structures such as trusts or partnerships.
A trust is a relationship between a person or company (known as the ‘trustee’) that holds legal title to property for the benefit of others (known as the ‘beneficiary). Trusts are not taxed themselves. Rather, the beneficiaries will pay their respective tax rates after receiving distributions from the trust.
Similarly, although a partnership must lodge a tax return, each partner will pay tax in their personal capacity.
Business structures can expand further over time, with some companies listing on a public exchange, and becoming publicly traded. If they remain private, it is not uncommon to see layers added, with subsidiary companies playing different roles in the overall group structure.
If you own a business and think another structure might be more optimal, or you want to bring on a partner or investors, it is worth noting that there are numerous ways to restructure your business. Some avenues are very generous in terms of preliminary tax relief, while others may incur some Capital Gains Tax (CGT). Legal and tax advice often go hand in hand when making these critical structuring decisions.
Continue reading this article below the formNet Profit or Loss
You can determine the success of any business by the simple equation below:
Likewise, a business making a net profit after taxation can reinvest for further growth or can distribute profits in the form of dividends.
Dividends
Your business can distribute dividends to shareholders from the pool of its remaining resources or your net profit after tax. Alternatively, your business may seek to retain profits and reinvest in favour of a particular acquisition or just for general growth.
Whether you’re a small business owner or the Chief Financial Officer of an ASX-listed company, one fact remains: your customers need to pay you.
This manual aims to help business owners, financial controllers and credit managers best manage and recover their debt.
What is Professional Income?
It is important to note that the taxation system provides distinctive rules for athletes, musicians, artists, authors and inventors due to their vastly fluctuating career choice. Professionals in these categories are not subject to the traditional taxation processes. The intention is to not unfairly punish professionals with the highest marginal tax rates in one financial year, particularly when their income may be far less the following year.
Notably, professional income is a unique system for creatives and athletes. As such, be sure to check whether you are eligible for income averaging due to your taxpayer category as a ‘Professional.’
Key Takeaways
When setting up a business, you should establish your corporate structure in line with your goals and objectives. Strategic planning early on can save you a lot of time and money down the track, in your personal name (through dividends or salary) or through your business (through profits on trading). It is important to seek accounting or professional legal advice for clarity on business structuring and taxation.
For more information on how your business structure can affect your business income and tax requirements, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Business income is the revenue you receive from your goods or services from your trading entity.
For athletes and creatives (including musicians, artists, authors and inventors), the Australian Taxation Office (ATO) recognises that professionals in these categories may receive fluctuating income. Accordingly, professional income is averaged before paying tax. The intention is to not unfairly punish professionals with the highest marginal tax rates in one financial year, particularly when their income may be far less the following year.
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