Information on taxation and business models
All of the information provided is correct at the time of publication, yet is subject to change. Please consult the Australian Taxation Office for up-to-date information.
They can be contacted:
- Online at http://www.ato.gov.au/
- By phone (24 hours business tax help) on 13 72 26
- If you are setting up a business in another state or territory, you should consult your state/territory government websites for specific information, laws and regulations or consult a professional.
1. Hobby Trader
A hobby trader is any person who is providing goods or services to people in the process of pursuing a hobby or recreation. Hobby traders are not seeking to make a profit from their work yet may seek payment to help cover the costs of equipment or materials.
In these situations, where the operation functions as a private recreation or hobby and a payment received is less than $75, there is an option whereby the hobby trader does not have to provide an ABN (Australians Business Number). If this structure applies, the hobby trader submits a form stating the reason for not quoting an ABN and they can then collect a payment. This form can be found at http://www.ato.gov.au/content/38509.htm. The enterprise (payer) then keeps this form in their records. You may qualify as a hobby trader if:
- You are not conducting a profit-making business
- The payment is under $75
This structure also applies when:
- The supplier is not entitled to an ABN
- The payment is not income taxable (the hobby trader will not earn above $6000* in the financial year and will, therefore, be exempt from paying tax)
For more information go to: http://www.ato.gov.au/content/38509.htm
*this is the tax-free threshold at the time of publication, yet this will change; please check with the ATO (Australian Taxation Office) at www.ato.gov.au for up-to-date information.
2. Sole Trader
This is the simplest business structure to operate. A sole trader operates under their own name, unless they choose to register a business name. As a sole trader, all business decisions are made by one person. If they choose, the sole trader can employ other people to work in the business.
A sole trader needs to obtain:
- A Tax File Number (TFN): an application form can be acquired by calling 1300 720 092. Visit http://www.ato.gov.au/youth/content.aspx?doc=/content/40962.htm&mnu=11648&mfp=001/013 for further information.
- An Australian Business Number (ABN): you can apply online at www.abr.gov.au. It is free to apply for an ABN online or by paper application.
- A bank account: this needs to be in the name of the sole trader or business.
- Insurance: your insurance needs will vary depending on the types of activity undertaken. The Australian Government website outlines the different types of insurance available and necessary for different types of businesses. That information can be found here: http://www.business.gov.au/BusinessTopics/Insurance/Typesofinsurance/Pages/default.aspx
- For further information on insurance or any other aspect of your business, you can go to: https://consultation.business.gov.au/consultation/Common/About/Default.aspx for business consultation or you can choose to consult a professional.
For a sole trader, tax is paid at personal marginal tax rates. The rate of tax paid varies in relation to the amount of taxable income earned.
Tax is paid at the following rates in the 2011-12 financial year:
Tax rates 2011-12
The following rates for 2011-12 apply from 1 July 2011.
|Taxable income||Tax on this income|
|0 – $6,000||Nil|
|$6,001 – $37,000||15c for each $1 over $6,000|
|$37,001 – $80,000||$4,650 plus 30c for each $1 over $37,000|
|$80,001 – $180,000||$17,550 plus 37c for each $1 over $80,000|
|$180,001 and over||$54,550 plus 45c for each $1 over $180,000|
These tax rates do change from year to year, so please ensure you consult the Australian Taxation Office for up-to-date tax rates: http://www.ato.gov.au/Businesses/content.aspx doc=/content/12333.htm&mnu=43165&mfp=
For more information regarding tax, go to the Australian Taxation Office website:
3. Sole trader with a business name
If a sole trader chooses, they may register a business name. This is only if they wish to operate under a name other than their given name. A registration fee of $129.75 for one year or $248.20 for 3 years is payable upon application. For further information or to register a business name, go to the Department of Fair Trading website: http://www.fairtrading.qld.gov.au/register-business-name.htm
In a partnership, two or more individuals co-own and participate in the operation of a business. There is an intention between parties to share profits and workload and for each partner to act on behalf of another in business.
When creating a business partnership, it is important to write and sign a partnership agreement. This is a document that outlines each partner’s role and share of the business. It will also outline how the profit and loss will be divided between individual partners, set up guidelines for dispute resolution, and contain a clause for how the business will dissolve should one or more partner choose to leave the business.
To form a partnership, you must:
- Register a business name (there is no need to do this if operating under your own names)
- Create and sign a partnership agreement
- Obtain any relevant licenses and permits
- Ensure all legal bases are covered by consulting with a legal professional. This may incur some costs and is optional.
- Acquire a Tax File Number (TFN): an application form can be obtained by calling 1300 720 092. Visit http://www.ato.gov.au/youth/content.aspx?doc=/content/40962.htm&mnu=11648&mfp=001/013 for further information.
- Acquire an Australian Business Number (ABN): you can apply online at www.abr.gov.au. It is free to apply for an ABN online or by paper application.
A partnership is not a stand alone legal entity. While a partnership has its own ABN and TFN and lodges its own tax return, the rate of tax is based on the respective rate of each partner.
A sole trader or a partnership are the two most common forms of small business and would probably best suit a person with a disability operating a small business. However, there are other ways of structuring a business in Australia. It is important to gain all of the information available in order to make a decision about which business structure would best suit you and your operation.
A trust is essentially a business relationship where a person (the trustee) carries on the business for the benefit of other people. The trustee, who can be an individual person or a company, conducts business and can split the profits with its beneficiaries. This arrangement can be helpful in sharing the income of the business with other family members. If this arrangement is chosen, careful consideration should be given to the specific sharing of income, who benefits, and who conducts business, as well as how the income will be divided. When drafting the trust, asset protection should be closely considered and legal advice should be sought.
6. Discretionary Family Trust
- A discretionary family trust is a way of structuring your small business that benefits family members and shares the burden of tax between family members. In this structure, there are four key people involved:
- Trustee: the legal owner of the business
- The appointer: has the legal right to hire and/or fire the trustee
- The settler: provides the initial financial support to start your small business. Once the financial transaction has been completed, they will no longer be involved in your business
- The beneficiaries: the members of the family who benefit from the business
In setting up a discretionary family trust, it is important to consider some of the benefits it provides. It can offer protection against bankruptcy by sharing the profit and losses across beneficiaries. It is a simple structure and is low cost. It allows a distribution of income across family members with low tax rates and slows income to be streamlined to many different individuals. It is essential in setting up a discretionary family trust that a legal professional is employed by the family and utilised throughout the process. This could incur a fee; however, it is important to have good legal advice with this particular business model.
How will my business affect my pension?
If you are receiving a pension payment, you need to inform Centrelink about any additional income you are receiving from work or business ventures. There is a limit placed on how much income you can earn before your Centrelink payment is disrupted; this will be calculated on an individual level. For every dollar you earn over that limit, your pension payment will be reduced by 50 cents. For further information, visit the Centrelink website,www.centrelink.gov.au