Commprac Week 1

Week 1 - COMMPRAC
BUSINESS STRUCTURES
1. Sole trader: an individual operating as the sole person legally responsible for all
aspects of the business. Like other structures, as a sole trader you can employ
people to help you run your business.
2. Company: a legal entity separate from its shareholders. Read about the differences
between a sole trader and a company to understand the tax differences, your
potential personal liability and the legal obligations when employing people.
3. Partnership: an association of people or entities running a business together but
not as a company.
4. Trust: an entity that holds property or income for the benefit of others.
SOLE TRADER
Characteristics
A natural legal person (an individual). The business is run by the individual as an
individual.
There is no separate legal entity other than the individual.
Registration of a trading name does not create a separate legal entity.
Advantages
• A sole proprietorship is simple to establish and terminate.
• A sole proprietorship is simple to control with the individual in control.
• There are minimal reporting requirements.
• Income from the business is taxed at the personal rates of the sole proprietor.
This offers the tax advantage that tax losses may be offset against other
income of the taxpayer (for example, “negative gearing”).
• For CGT purposes, the sole proprietor is advantaged in a way unsurpassed by
any other type of entity. This is because the sole proprietor is eligible to claim
the 50% CGT discount for individuals. Under the concession, provided that the
sole proprietor has held an asset for at least 12 months, the sole proprietor will
only be liable to pay tax on half of any capital gain that they may make on the
asset. This compares with the tax situation for assets held within a company,
where tax will have to be paid on the whole amount of capital gain. The
advantage of the CGT discount is illustrated by the following numerical
example.
Suppose a sole proprietor buys plant and equipment in the year 2008 for
$100,000. In the year 2012, the proprietor sells the plant and equipment for
$120,000. Since the sole proprietor is an individual and has held the plant and
equipment for at least 12 months, they are eligible to claim the CGT discount.
The sole proprietor thus only pays tax on $10,000 (that is, half the capital gain
of $20,000).
Note that where the asset that the sole proprietor holds is an equity interest in
a small private company or trust, the CGT discount can only be claimed if
various anti-avoidance provisions are passed. These anti-avoidance provisions
are aimed at preventing taxpayers from circumventing the 12-month holding
rule and relate to the number of assets held by the company or trust for less
than 12 months.
• Sole proprietors are not employees of their business. This avoids the need to
take the sole proprietor’s drawings (that is, amounts drawn down by the
Week 1 - COMMPRAC
proprietor from the business on account of profits) into account in respect of
“compulsory employee” superannuation contributions (superannuation
guarantee charge). A sole proprietor also does not have payroll tax and
workers’ compensation liabilities in respect of their drawings.
Disadvantages
• The sole proprietor has unlimited liability for debts incurred in the course
of the business and for negligence occurring during the course of the
business.
• The sole proprietor may not simply allocate or split the income. Salaries
paid to family members are limited by the application of the Income Tax
Assessment Act 1997 (Cth) (ITAA 1997) and, in particular, s 26-35 of
that Act.
• The sole proprietor is required to substantiate business deductions for
“fringe benefits”. In the case of sole proprietors the substantiation
provisions will clearly restrict the level of deductions that can be claimed
in respect of motor vehicle expenses and travel expenses. Even if such
expenses are predominantly business related, many people will be
unable or unwilling to comply with the rigours of collecting the necessary
documentation required.
• Unless the sole proprietor employs or engages family members, they
have no ability to vary income between family members from year to
year. That is, there is no flexibility in tax planning.
• Under (PAYG) instalment system, a sole proprietor is liable to pay tax in
quarterly instalments according to the income earned during each
quarterly period. This may cause “cash flow” difficulties.
• The business ends when the sole proprietor ceases working on
retirement or death. Unless the sole proprietor is able to identify assets of
value which are transferable to a third party, the business of the sole
proprietor ceases without being able to derive any benefit from
“goodwill”, for example.
How do you become a sole proprietor?

Fast and simple
A sole proprietor running a business would usually register for an Australian
Business Number (ABN) A tax file number (TFN) is needed to register for an
ABN. While registration for an ABN is not compulsory, it will allow the sole
proprietor to:
• facilitate a single business activity statement (BAS);

• confirm the business identity to others when ordering and invoicing;
• avoid having other businesses withhold amounts from payments
received (PAYG withholding);
• claim GST credits;
• claim energy grants credits; and
• register a business name with the Australian Securities and Investments
Commission (ASIC).
A separate business name would also usually be registered. If the sole proprietor
intends to use a business name then that name will need to be registered under
the Business Names Registration Act 2011 (Cth). (ASIC)
Costs of being a sole proprietor?

To determine the cost of any business licence, contact the NSW Office of Fair
Week 1 - COMMPRAC
Trading, or visit their website: www.fairtrading.nsw.gov.au.
An application for registration (nationally) of a business name may now be
made through ASIC Connect, ASIC’s online service portal: www.asic.gov.au/bn-
apply.
A search of the Australian Business Licence and Information Service (ABLIS)
will also need to be made to determine whether any business licences or permits
will be required to run the business. Further information can be found on the
website: ablis.business.gov.au.
A sole proprietor will have to be able to manage their cash flow so as to meet
their quarterly PAYG tax instalments as well as their quarterly GST payments.
Other costs incurred will be the accounting costs generated in preparing the
sole proprietor’s tax return and, if required to be registered for GST, the periodic
GST returns.
Compliance requirements of being a sole proprietor?

There is no specific legislation regulating sole proprietors but they may be
required to comply with legislation which is specific to their business.
Sole proprietors may be required to pay a business name renewal fee, to
comply with specific business licences or with rules adopted by professional
associations.

Commprac Week 1

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Commprac Week 1

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Week 1 - COMMPRAC

How do you become a sole proprietor?

• facilitate a single business activity statement (BAS);

Costs of being a sole proprietor?

Compliance requirements of being a sole proprietor?

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