Different types of taxable entities in Australia.
Here is a handy table to help accounting and business students to understand the key differences between the different taxable entities in Australia.There are five key types of taxable entity in Australia, they are:
- Individuals
- Partnerships
- Trusts
- Companies
- Super funds*
*NOTE: super funds are really just a special kind of trust that "comply" with superannuation laws. However, if the trust follows these laws, they are able to access special taxation privileges (such as being taxed at the ultra cheap rate of 15%). The fact that the taxation treatment is so radically different to that of trusts, means that we often treat them as their own taxable entity, even though in their legal form they are still at the end of the day, just another trust.
This table should help you see the differences, and help plan your structure the tax purposes.
Individual
|
Partnership
|
Trust
|
Company
|
Superfund
|
|
Legal rights
|
Has
full rights
|
No
rights of the group, the rights are with the partners
|
Rights
of the trustee (under the deed)
|
By
charter or by registration
|
Rights
of the trustee – but limited to “comply”
|
Liability
|
Full
– no shield
|
Full
- Joint and several
|
1)
No liability of beneficiaries.
Liability of trustee which can be indemnified.
|
Shareholders
liability limited to shares
|
Members,
limited to their account.
|
Entity – legal
|
Yes
|
No
– It’s a legal relationship
|
No
|
Yes
|
Yes
|
Entity – tax law
|
Yes
|
Yes
|
Yes
|
Yes
|
Yes
|
Entity - accounting
|
Yes
|
Yes
|
Yes
|
Yes
|
Yes
|
Tax rates
|
Marginal
rates0,
15, 30, 38, 45
|
Distributed
– can’t be taxed
|
46.5%
of undistributed profits. In effect,
zero.
|
Taxed
at 30%, dividends distributed post tax + franking
|
15%.
|
What happens profit
|
Individual
tax
|
No
tax. 100% distributed
|
distributed
|
Can
accumulate, can be left in company
|
Must
be left in fund
|
Percentage split
|
100%
|
Fixed
According to agreement
|
Fixed
/ discretionary
|
Fixed
by shares
|
Isn’t
any during accumulation phase.
|
Loss provisions
|
Roll
forward
|
CAN
distribute losses (special)
|
Trapped
-Will
lose any franking credits
|
Trapped
& Roll forward
|
Trapped
& Roll forward
|
Wages to owners
|
Nonsense
|
No,
drawings.
|
Yes,
|
Yes,
limited by excessive payments to associates
|
Generally
not – sole use provisions.
|
CGT
|
50% Discount Or index method
|
Depends on who |
Depends on who |
Nothing |
1/3 discount |
Other “strange” entities
When choosing taxation structures, you need to consider these other "strange"entities which will have slightly different rules applied to each of them. Some of these entities include:- Non-resident individuals
- Children – who under a legal disability for trust law
- Foreign Companies
- Limited liability partnerships
- Full Liability corporations
- Double Liability corporations
- No liability companies - Victorian mining only
- Public trading trusts and Corporate Unit Trusts– held to be companies.
- Joint ventures (not really partnerships)
- Government departments
- Not for profit entities
- Unincorpated associations.
For example, individual taxpayers who are nonresidents will pay non-resident tax rates, and are only taxed on their local source income. Nonresidents also have a number of special exemptions, such as the ability to take home fully franked dividends as non-assessable-non-exempt income.
Likewise children have penalty tax rates applied to them for an earned income. This essentially stops wealthy families from splitting income and streaming it to the children in order to avoid tax. Without these rules, wealthy families would have the incentive to "overproduce children" - indirectly subsidising childcare for the wealthy, and thereby making it relatively more expensive for poor families to raise kids.
Please be aware that this table is a massive oversimplification of a very complex system.
If you spot any errors, or like to make any additions, please let me know in the comments below.
- Tetracarbon out.
