Understanding Difference Between Sole Trader And Company Tax

October 8, 2021    Accountant Perthwa

If you have been dreaming of opening your business soon, you must start working harder to add a feather in your hat! So, you have completed your apprenticeship and done your time working for a company. Nothing gives you more elation than achieving something on your own or establishing a full-fledged business. 

Therefore, before you get started, opting for a special business structure will streamline your business operation. Should you operate your business as a sole trader or a company structure? Being a self-employed sole trader, various income tax allowances are there for self-employed individuals.

On the other hand, being a small business owner, you are liable for your company taxes, a tax levied on corporate income in Australia. So, today’s blog will be going to discuss the major differences in a company vs sole trader tax. Let’s get started!


Difference between a sole trader and a company 

Companies and sole traders have distinctive tax, legal, and reporting obligations. Are you pondering about changing from a sole trader to a company? Significantly, you know what your legal, reporting, and mandated tax obligations are!

In order to ease your decision on which structure is correct for you, we have made a precise difference between a sole trader and company tax Australia.


What is a sole trader?

A sole trader in Australia is denoted as a self-employed individual who conducts a business. This business structure is pretty popular and has an inexpensive setup. Examples of sole traders are plumbers, electricians, and freelancers.

Are you a sole trader? Are you thinking of how to pay tax as a sole trader? The dollar you have been receiving after your work is treated as your individual income. You incorporate business incomes and expenditures in various business sections of sole trader return during tax time to arrive at your taxable earnings. 

You can easily demand costs incurred while conducting your sole business and after notifying your fund for self-contributions as tax deductions. Moreover, you can easily withdraw the money required from your business account. But, you can’t claim those as tax deductions. 

Are you fretting over how to compute the sole trader tax rate? The crucial way for a sole trader is to apply the corresponding tax charges for individual taxpayers to your taxable income. After that, if you are eligible enough, you can curtail your tax payable with the small business tax offset.   


As a sole trader:

  • You can easily report all your earnings in your individual tax return, utilising the business items sections to demonstrate your business earnings and expenditures.
  • Utilise your tax file number while lodging your tax return.
  • You must register for GST in case your annual earning is over $75,000.
  • Apply for an Australian Business Number or ABN and use that of all the crucial business dealings.
  • Set aside some dollars to pay your income tax at the end of the fiscal year. More accurately, follow the PAYG instalments.
  • You can utilise your TFN, aka individual Tax File Number, for lodging your return.

What is a company?

In contrast to a sole trader, a company has a work culture and life of its own. It’s termed isolated from a sole trader even though you made it. A proper business structure is a matter of fact because it possesses an ongoing impact on how many dollars you have earned and what financial risks you are exposed to. 


How to establish a company?

Establishing a company is surely more expensive than a sole trading business. Likewise, ABN registration is free, and the same amount will be imposed on you for your business name registration; you will have to register your firm with the ASIC, aka Australian Securities & Investments Commission, at the cost of $417 to $506. 

Moreover, there will be approximate charges of an annual review fee of $273. Again, an isolated bank account is mandatory for organisations where you have to pay bank fees. 


How are companies taxed?

Organisations pay tax on their appropriate taxable business income, denoted as its income net of expenditures. Here, you are unable to withdraw money for personal usage. 

The type of the company you have set up, the tax rate is charged approx 27.5% to 30%. However, such a tax rate has pertained to every dollar your company earns as firms are not liable for tax-free thresholds. 

Well, if sole traders can demand the tax-free threshold, which companies can’t, does it imply sole traders have to pay less tax every time? 

Ironically, the answer is “NO!” 

This is because such individual tax rates could go up to 47%! Therefore, the superior business structure from a tax perspective depends on your business components. 


Sole Trader – Advantages and Disadvantages



  • Only one set of accounting and tax return charges
  • No need for worker’s compensation or making massive contributions on your drawings
  • The competitive and quick setup process
  • Potential tax amenities for low-earning businesses
  • Fathomable business structure


  • Deficient flexibility for tax planning
  • Personal assets are at stake if something goes erroneous

Company – Advantages and Disadvantages



  • Enhanced flexibility for tax planning
  • Split income between family owners for tax purposes
  • Capability for bringing on extra shareholders and raise capital

[N.B: Any powerful strategies based on income splitting must be discussed clearly with your company tax accountant to understand their legitimacy.]



  • Extra accounting charges each year
  • Time-consuming and pricey to set up

To wrap up, the best-in-class option relies on the size and type of the business you are trying to set. Hopefully, this blog unravels the crucial difference between a sole trader and company tax Australia and their precise tax structures. 

Are you intended to work as a subcontractor to others? A sole trading business structure might be perfect for you. On the other hand, if you are searching for meticulous people, working on higher-budgeted projects, and taking on massive responsibilities, a company structure might be good for your needs. 

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