The profit you have made on the sale of a rental property (or shares) is added onto your other income (such as your salary bank account interest) and taxed at your marginal tax rate. Remember, if you have held the property for more than 12 months, the ATO give you a 50% discount on the profit you need to declare as income.
One of the main differences is how they are taxed. The small business entity company tax rate is 25% from 1 July 2021. The profit of a family trust is not taxed within the trust itself; instead, the profit is reported on the tax returns of family members and taxed at the individual’s marginal tax rate.
What is the best business structure for me?
The simplest and most affordable way to get your business up and running is to operate as a sole trader. Apply for an ABN, and away you go. There are, however, some pitfalls. The first issue is that 100% of the profit the business generates is taxable in the individual’s hands, so there is very little opportunity for tax planning. The other issue is one of liability. As a sole trader, you have no protection from lawsuits attacking your personal property (including your home).
One step up from being sole trader is entering a partnership. Unfortunately a partnership still doesn't offer protection from lawsuits. In fact, exposure can be worse than that of a sole trader, as both partners become liable if something goes wrong. The benefit is one of income splitting, which is an option here, in certain circumstances.
With over 1.5 million companies currently registered in Australia, this is definitely the most popular structure choice. Using a company as your trading entity provides simplicity in taxation and is a good option if large profits are expected, as the tax rate is capped at 30%. This can be much more attractive than the top tax rate for individuals, which is being 46.5% (including the Medicare levy). Another strong argument for using a company is the opportunity to protect personal family assets from legal situations. It's important to keep in mind that getting money out of a company needs to be done correctly. The two main methods are salaries or dividends (which are taxable to the individual).
Trusts are another popular structure to trade under for both business and investment. The great benefit of a trust is that you can access all the benefits of a company while maintaining control over the flow of income to manage tax. The major difference between the company and trust is that a company pays tax on the profits, but a trust distributes its income to beneficiaries (normally family members) and they pay tax at their marginal tax rates.
The three main types of trusts are discretionary (Family), unit and hybrid. A discretionary trust essentially allows the trustees to distribute the income at their discretion (hence the title). A unit trust must distribute in accordance with the unit holdings. The hybrid trust is effectively a combination of the two.
There are three factors you should consider when deciding on setting up a SMSF. Firstly, you really need around $200,000 in super to justify the fees and time involved in managing an SMSF. You could also justify an SMSF if you wanted to invest in an asset not normally available through a retail/industry fund, such as commercial property for your business or shares in an unlisted company. Finally, you might want to exercise full control over your superannuation funds, and an SMSF allows you to do that.
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