Income tax treatment is usually among the reasons for choosing a business or investment structure. The differences in the taxation of individuals, partnerships, companies, trusts and superannuation funds are many and varied. Here is a quick summary:
Individuals are taxed on their “taxable income”, which broadly is their assessable income less their allowable deductions. Who is entitled to what deductions varies enormously between individuals and occupations, and expert advice should always be obtained.
In addition to employment income, individuals should pay tax on the income from their investments, which may (for example) take the form of dividends from shares held in companies, and on capital gains from the sale of shares, units or property. The rate of tax (called a “marginal rate”) varies between nil (up to $6000 p.a) to 47% (over $62500 p.a).
Partnerships are not separately taxed (except for GST), although they are required to have a tax file number and lodge a tax return. Tax is paid at individual partner level.
Whilst partners in partnerships are generally taxed the same way as others who are not partners (whether they be individuals, companies or trusts), any losses of the partnership can be shared proportionately between the partners to offset other taxable income.
Companies are separate legal entities, and thus are taxed on their own income. However, companies, pay tax at a flat rate of 30%.
Companies can retain their after tax money, or pay it to shareholders by way of dividend. When the company has paid its 30% tax and then pays a dividend to shareholders, the dividend is called a “fully franked” dividend. In the shareholders hands, the dividend comes with a “franking credit”, meaning that the shareholder only pays tax on the dividend to the extent that their marginal rate is higher than 30%.
Unlike a partnership, a company cannot “distribute” its losses but can, subject to certain rules, carry those losses forward and offset them against future income.
Trusts are not strictly entities, but rather a relationship between the trustee and the beneficiaries. Accordingly, the trust itself does not pay tax.
However the trustee is required to submit a trust tax return, and the trust (through the trustee) should have a tax file number.
The beneficiaries pay tax in accordance to their own tax rules – that is, an individual will pay tax on a distribution in the same way that it pays tax on other income. Unlike a partnership, any losses cannot be “distributed”, and can only be offset against future income if certain very strict requirements are met.
Unlike a company, if a trust does not distribute 100% of its income to beneficiaries, the trustee pays tax on any undistributed amounts at the highest marginal rate (47% plus 1.5% Medicare levy).
Notwithstanding the strict and complex rules, the ability of a trustee to pay income to a broader range of people can often reduce the overall tax paid.
The taxation of Superannuation Funds is probably the most complex of all. Superannuation funds that meet certain criteria (called “complying funds”) pay tax on their income at a rate of only 15% – but this advantage can be deceiving when you take into account that usually the funds in super cannot be accessed until at least the age of 55.
Should you need a business lawyer or have any queries, please do not hesitate to contact Chris Wray on 9320 2951 or Brett Samuel on 8320 2957.
