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  • #972943
    hotbmw
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    Guys

    I have been running as a sole trader for 6 years and it has been fine up till now as after my accountant does his magic with deductions and depreciation etc. it shows im on the 30% tax bracket.

    But im now earning more and at the stage where this could change.

    As a company, i know the tax rate is 30%. But is this applied when i draw the $ out and thats the only tax payable or is it a double whammy? 30% tax rate and then another personal income tax which is 2 lots of tax? Im confused here.

    Thanks
    Rob

    #1058681
    Past-Member
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    I was always advised to keep a separate bank account and ‘pay tax’ into it each month of estimated 20-30%. This is very helpful at tax and PAYG (Pay as you go) statements.

    The tax is worked out on the whole of the income for a sole trader – and that is from all sources, including investments. (It’s not a double tax.) So earnings are added to investment income and interest income and the tax worked out on the whole minus any deductions or prepaid tax.

    Whatever monies you draw out makes no difference to your tax as a sole trader.
    They are just Owner’s Drawings (Equity).

    If your income has gone up and your turnover will get near or over $75K you will also be required to be registered for GST and submit regular BAS.

    This is definitely something you should discuss with the tax office at http://www.ato.gov.au business division, or your accountant.

    #1058682
    JanF
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    hotbmw, post: 72431 wrote:
    Guys

    I have been running as a sole trader for 6 years and it has been fine up till now as after my accountant does his magic with deductions and depreciation etc. it shows im on the 30% tax bracket.

    But im now earning more and at the stage where this could change.

    As a company, i know the tax rate is 30%. But is this applied when i draw the $ out and thats the only tax payable or is it a double whammy? 30% tax rate and then another personal income tax which is 2 lots of tax? Im confused here.

    Thanks
    Rob

    Sole Traders do not pay company tax. If you are a Company shareholder and the Company has paid tax on profit, when you take the earnings out they are “franked” dividends and the company tax paid counts as personal income tax paid – so no double whammy.

    #1058683
    hotbmw
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    Hi Karen

    I am already registered for BAS and turnover well above 75k a year.

    Sorry my question was more to do with transitioning to being a company rather than a sole trader.

    Im confused into tthe taxation side. If lets say next year i will need to declare i earnt $70,000 personal income (after my accountant has done his magic). As a sole trader i see the taxation brackets applicable.

    If i was a company is it just straight out 30% taxable on every dollar? Or is there 2 lots of taxes? Company tax and then my personal tax?

    Im trying to ascertain whether i should stay as a sole trader or look at moving over to a company but need to know taxation elements 1st.

    Cheers
    Rob

    #1058684
    mbwyatt
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    Rob,

    When you have a company and want to take money out of it you will NOT be charged tax twice.

    Yes the company pays tax at 30% on it’s taxable income.

    However, when you take a Dividend then as long as the company has franking credits (in a nut shell it has paid its tax and instalments properly) then you will get a credit in your tax for what the company has paid (called an inputation credit or input credit).

    Say the company has franking credits of $30,000 available.

    Now assume there is money in the bank, and you want to draw $70,000.

    You will have what we call a franked dividend that will go in your tax return. Terminology gets thrown about here. You may say you have a $70,000 fully franked dividend.

    Actually you have a total dividend of $100,000 (being 70K + 30K).

    You pay tax on $100,000 (based on normal personal rates)

    You get a credit of $30,000 for what the company has paid.

    So you only pay the difference OR get a refund of the difference.

    You don’t get taxed twice.

    NOTE: I used these figures to show you simply because the ratios are based on 30% 70% and 100% once you are comfortable with that you can start playing with other numbers.

    Gross: $36,000 100%
    Net: $25,200 70%
    Input: $10,800 30%

    Note:
    You need to know how much Franking Credit is available and then work out what cash can be paid as the dividend. $10,800 / 0.3 x 0.7 = $25,200.

    OR

    Gross: $198,000 100%
    Net: $138,600 70%
    Input: $59,400 30%

    Note:
    You need to know how much Franking Credit is available and then work out what cash can be paid as the dividend. $59,400 / 0.3 x 0.7 = $138,600.

    Alternatively you can still take a wage as an employee and have your taxed paid to the ATO during the BAS and PAYG processes each quarter.

    As always, talk to your accountant.

    Regards,
    Mike

    Please note this information should not be taken as advice, as it is not intended to be. It is not possible to provide advice without fully understanding your circumstances or being engaged to provide you with advice. This information is merely general and very basic, hypothetical or conceptual in nature, other information affecting your circumstance is unknown. You should contact your accountant for specific advice about your situation.

    #1058685
    hotbmw
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    Thanks Mike. Very well explained!!!

    #1058686
    James Millar
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    Just expanding on that. With regards to franking credits – yes they prevent cascading of tax but be sure that they are available in the year that you take (or are required to take) the distribution. The last thing you want it to take a dividend before the actual franking credits are available. In other words If you take an unfranked dividend then you will be taxed twice.

    Helping build better businesses and better lives with expert financial and taxation advice. [email protected] www.360partners.com.au 03 9005 4900
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