Tradies have valuable services to offer to their clients. However, it’s crucial that they put the same care into structuring their businesses as they do into their work.
Those working in a trade build their businesses on the quality of their service. If a plumber doesn’t do a good job, they don’t get recommended to the client’s friends.
It’s a little more complicated than that, of course. But the key point is that many tradies are practitioners first and business owners second. They focus on providing amazing service, which can mean they’re not looking so closely at their business structure.
According to the Australian Taxation Office (ATO):
“It’s important to understand the responsibilities of each structure because the structure you choose may affect:
The tax you’re liable to pay
Simply put, choosing the correct structure for your circumstances can help you to make tax savings.
This article examines the main business structures and the tax implications related to them. It also offers some tips for saving money on taxes as a tradie.
The Available Business Structures (And How Tax Plays a Role)
As a tradie, you have the option of four business structures when you start your company.
- Sole Trader
Each structure comes with its own tax implications. It’s crucial that you understand each before you make a decision.
As a sole trader, you benefit from the simplest business structure there is. The issue with this structure is that all of the business’ earnings are also considered personal income. There’s no separation between personal and business assets.
As a result, you have no protection for your personal assets. You may also miss out on some tax benefits. Even so, this is the most common structure for Australian tradies.
As a sole trader, you may pay up to 49% tax on your earnings.
A company is a separate legal entity. This makes it easier to separate personal and business assets and taxes. However, it also means that everyone who owns shares in the business is also liable for its tax burdens.
In terms of tax, you’ll pay 27.5% on your taxable income if your revenue is below $2 million. This increases to 30% if your revenue exceeds $2 million.
This works in much the same way as a sole trader business. The only real difference is that you have multiple people involved in the ownership of the company.
This ownership does not work in the same way as a company. A partnership is not a separate legal entity. As a result, each partner faces the same asset-related risks as a sole trader. They also have to pay the appropriate level of personal income tax, per their earnings from the partnership.
The interesting thing about a trust is that it doesn’t pay any tax.
Instead, the beneficiaries who receive income from the trust pay tax based on the appropriate rate.
One thing to note is that you will have to pay the top marginal rate of 49% if you don’t distribute income. As such, this isn’t a structure that’s suitable if you wish to keep money inside the business to grow it.
Regardless of which structure you choose, there are some tips that will help you to save money on tax.
Tip #1 – Know What You Can and Can’t Claim
There are many tax deductions that you can claim as a tradie.
For example, as a tradie, you’re able to claim 100% of any expense related to self-education. Of course, this assumes said education is in service of your business.
You may also be able to claim for small assets that you purchase, up to a limit of $30,000. This limit applies if you bought the asset between 2nd April 2019 and 30th June 2020. Such assets may include:
And many more tools or assets required to operate your business.
You may also be able to deduct expenses from your tax bill:
Tools required for work
The key is to understand that you incur many expenses as a business owner. The ATO provides allowances for this. Work with an appropriate tax professional to make deductions as they relate to your business structure.
Tip #2 – Distribute Profits Appropriately in a Trust
If you operate a trust, you can distribute profits to minimise your tax bill.
For example, you can distribute a maximum of $416 per year to one of your children. This saves $180 on tax. Distributing income to a spouse who doesn’t work also means that income gets taxed at a lower rate.
Distributing income to other relatives, such as parents and grandparents, can also help. It all depends on if they’re in a higher tax bracket than you. If they are, they’re not suitable in terms of saving on tax.
You can also distribute between $30,000 and $35,000 to a superfund. This gets taxed at a rate of 15%, which is far lower than your income tax rate.
The point is that who you distribute the trust’s income to matters.
Tip #3 – Manage How You Pay Yourself
You have three options when paying yourself:
- Draw directly from the business
- Pay yourself a salary
- Lend yourself money from the business
Paying yourself a salary is the simplest and safest option. This is especially the case in a company structure, where drawing from the business doesn’t work. If you do this as a company owner, the ATO classes the money as a loan.
Speak to your tax advisor about which strategy works best for your business structure.
Pay Attention to Tax
Service-oriented professionals may not always focus on business-related issues. But getting your structure right from the start could help you to save a lot of money on tax.
That’s where Bottrell Business Consultants come in. We can work with you to identify the best structure for your trade business. And from there, we can help you to figure out how to minimise your tax bill under that structure.
To find out more, call us on 02 49 336 888 to arrange a free consultation.