Choosing the Right Business Structure
The choice between sole trader, company, and trust has lasting tax, liability, and operational consequences. Each structure suits different circumstances - and changing structure later triggers stamp duty and CGT events.
- Sole trader: Simplest and cheapest to operate - income assessed directly to the individual at marginal rates. No asset protection - personal assets exposed to business liabilities. Best for: low-profit early-stage businesses, trades and services under $80,000 net profit
- Company (Pty Ltd): Separate legal entity - personal assets protected from business creditors (director's personal guarantees undermine this protection). Tax at 25% for base rate entities (turnover under $50M, passive income < 80%). Retained profits taxed at company rate; extraction as salary (deductible) or dividend (franked). Best for: businesses earning above ~$100,000 profit intending to reinvest
- Discretionary trust: Income splitting flexibility, asset protection from beneficiary creditors. No separate tax rate - income taxed in beneficiaries' hands. Best for: family businesses wanting to split income among lower-income family members
- Company + trust: Many established businesses use a trust as the operating vehicle distributing to a corporate beneficiary - combining income splitting and retained earnings at company rate. Most complex; requires ongoing specialist advice
- Changing structure: Moving from sole trader to company triggers a CGT event on goodwill and assets (small business rollover may apply). From trust to company - similar CGT consequences. Get advice before formation, not after
- Liability protection reality: Directors of companies remain personally exposed if they: provide personal guarantees (banks almost always require), engage in insolvent trading, or breach director duties under the Corporations Act. A company structure does not eliminate personal financial risk
GST, BAS and Cash Flow
GST is one of the most operationally significant taxes for small business - getting the basics right prevents cash flow shocks and ATO penalties.
- Registration threshold: $75,000 annual turnover - registration is compulsory above this. Taxi and rideshare drivers register from dollar one
- Voluntary registration: Businesses under $75,000 can voluntarily register - worthwhile if significant input tax credits (GST paid on purchases) are available or clients are all registered businesses
- Accounting basis: Cash (report GST when payment received/made) vs accruals (report when invoice issued/received). Turnover under $10M defaults to cash - generally more advantageous for cash flow
- BAS lodgement: Monthly (turnover >$20M), quarterly (most small businesses), or annually (turnover under $75,000 with ATO approval). Quarterly BAS due 28 October, 28 February, 28 April, 28 July
- GST cash flow trap: Collect GST in sales but remit to the ATO quarterly. The 10% component of every invoice is not your income - set it aside immediately or maintain a separate GST holding account
- Input tax credits: Claim GST paid on business expenses - equipment, supplies, subscriptions, rent, professional fees. Keep tax invoices for claims over $82.50 (no invoice required under this threshold)
- Motor vehicle ITC: GST on a vehicle costing over the luxury car threshold ($91,387 in 2025-26) is capped at $8,308 input tax credit - regardless of the vehicle's full price
Instant Asset Write-Off and Depreciation
The instant asset write-off allows eligible businesses to deduct the full cost of eligible assets immediately rather than depreciating over their effective life. The thresholds have changed frequently - here is the current position.
- 2024-25 position: The $20,000 instant asset write-off threshold applies for the 2024-25 income year (aggregated turnover under $10M). Assets costing $20,000 or more go into the small business pool at 15% in year one, 30% thereafter
- Previous higher thresholds: During COVID stimulus (2020-21 to 2022-23) the threshold was $150,000 then unlimited - do not assume the higher thresholds still apply
- Small business pool: Pool assets under the pooling threshold and depreciate at the simplified pool rate. If the pool balance falls below $20,000 at year end, deduct the entire pool balance
- Temporary full expensing ended: Full expensing of all eligible depreciating assets (unlimited threshold) ended on 30 June 2023 - assets acquired after this date revert to standard thresholds
- Motor vehicles: Deduction capped at the car limit ($69,674 in 2024-25) regardless of actual vehicle cost - the excess above the limit is not deductible
- Timing: The asset must be used or installed ready for use in the income year. Ordering in June but not receiving until July means the July year's deduction applies
- Structure matters: The write-off applies at the entity level. A sole trader claims against individual income; a company claims against company taxable income at 25%. At 37% marginal rate, a sole trader saves more tax per dollar of deduction than a company
Superannuation Obligations for Small Business Owners
Small business owners often neglect their own superannuation. This is compounded by Super Guarantee obligations to employees that, if mismanaged, result in severe ATO penalties.
- Directors and SG: A company director receiving director fees or salary must receive SG at 11.5% on those payments. Many small business directors fail to pay their own SG - this is an ATO compliance priority
- Sole traders: No SG obligation on your own income - voluntary contributions only. You are self-employed; no employer is required to contribute. This is the most common cause of under-funded retirement for small business owners
- Quarterly SG due dates: 28 October, 28 January, 28 April, 28 July. SG not paid on time must be reported via a Superannuation Guarantee Charge (SGC) statement and is non-deductible. The SGC includes additional interest (10% p.a.) and an administration charge
- Single Touch Payroll (STP): Required for all employers - SG reported directly to the ATO via payroll software. ATO can immediately identify unpaid SG
- Salary sacrifice for business owners: Company directors can salary sacrifice to the concessional cap ($30,000 in 2025-26 including SG). At 25% company tax vs 15% contributions tax - salary sacrifice saves 10% on sacrificed amounts at company level
- Voluntary contributions (sole traders): Concessional contributions (tax deductible under s290-150 personal deduction notice) save the difference between marginal rate and 15%. At 37% rate, each $1,000 contributed saves $220 after contributions tax
- Carry-forward unused caps: If your balance is under $500,000, unused concessional caps from the previous 5 years can be used in a single year - useful after a strong business year
Small Business CGT Concessions - Reducing Tax on Business Sale
The small business CGT concessions are among the most generous tax provisions in Australian law. They can reduce or eliminate CGT on the sale of an active business asset - including a business itself. Eligibility requirements are strict.
- Two eligibility tests (must satisfy one): (1) Aggregated turnover under $2 million, OR (2) Net assets under $6 million (excluding home, super, personal use assets)
- The four concessions (applied in order):
- 15-year exemption: If you have held an active asset continuously for 15+ years AND are selling in connection with retirement (age 55+ or permanent incapacity) - entire gain is tax free. $500,000 of the proceeds can go to super as a non-concessional contribution (retirement exemption amount contributes to TBC)
- 50% active asset reduction: Reduces the capital gain by 50% for active assets held for 12+ months. Applies before the general 50% CGT discount - combined, only 25% of the original gain is assessable
- Retirement exemption: Up to $500,000 lifetime exemption on capital gains from active assets, without the 15-year requirement. If under 55, the exempted amount MUST be contributed to super
- Rollover: Defer the gain for up to 2 years if proceeds are used to acquire a replacement active asset
- Active asset definition: The business asset must have been used in carrying on a business - goodwill, plant and equipment, commercial property used in the business qualify. Passive investment property does not
- Complexity warning: The interaction of concessions, the net asset test, and the $1.9M super TBC requires specialist advice. The savings are enormous - get it right
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