Using companies for business purposes is common in Australia. The main reason business owners choose a company structure over sole proprietorships, partnerships and trusts is to limit their personal liability if the business faces financial difficulty as well as for asset protection. It is also easier to raise capital and unlike with partnerships there is no capital gains tax applicable when issuing shares to new partners in the business.

However the taxation of companies is complex. It is essential you understand company tax law before deciding whether a company is the right business structure for you. It is also essential to keep up to date with changes to company tax rules and to seek advice regularly as poor planning can result in unforeseen tax consequences.

As companies are separate legal entities they have their own income tax liabilities. Companies pay income tax on profits at the company tax rate. The current company tax rate is 30% with no tax-free threshold.

Common to some other business structures there are tax deductions, concessions and incentives that may be applicable for your company that may reduce your tax burden. For example:

• certain deductions for costs of running your business may reduce your assessable income: https://www.ato.gov.au/Business/Deductions-for-business/What-you-can-claim-and-when/;
• there are a range of concessions available to small businesses depending on eligibility criteria: https://www.ato.gov.au/Business/Small-business-entity-concessions/;
• certain types of businesses may be permitted to offset research and development expenses under current R&D incentive schemes: http://www.business.gov.au/grants-and-assistance/innovation-rd/RD-TaxIncentive/Pages/default.aspx;
• there are tax incentives available if your business involves shipping: https://www.infrastructure.gov.au/maritime/business/tax_incentives/; and
• there are offsets, deductions and concessional treatments available to primary producers: http://www.agriculture.gov.au/agriculture-food/tax.

Company tax law is more complex when it comes to how shareholders are taxed when profits are distributed to them or to their associates. For example:

• when distributing profits company shareholders are able to benefit from ‘franked dividends’. These are dividends that have the amount of tax paid by the company ‘imputed.’ This allows shareholders to get ‘credit’ for tax already paid by the company and can therefore reduce their personal tax liability;
• payments and loans as well as forgiveness of loans made to shareholders or their associates can be classed as ‘deemed dividends’ on which the shareholder or their associate must pay tax. Unless documentation is put in place before the end of the financial year covering such arrangement these ‘deemed dividends’ can lose the benefit of franking credits;
• rules around a company’s ‘distributable surplus’ can also affect whether loans or payments are ‘deemed dividends;’ and
• recent tax rulings add even more complexity when a business is run as a company under a trust structure where the company is one of the beneficiaries of the trust.

This Legal Guide on Company Tax provides small to medium business owners with information about company tax. Before making important decisions it is advisable to obtain legal advice specific to your situation. LegalEagle’s™ free directory profiles all lawyers in Australia. You can use it to Find a Lawyer near you.

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Warning: Information provided through LegalEagle™ is for general guidance. It is not legal advice. Laws and procedures referred to may change and differ between states, territories and nationally. There may also be important exceptions or qualifications. Only a lawyer providing formal legal advice can assess your particular circumstances to determine how the law will apply.