24 October 2014

Different types of taxable entities in Australia.

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.

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”
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
No – It’s a legal relationship
Entity – tax law
Entity - accounting
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
What happens profit
Individual tax
No tax. 100% distributed
Can accumulate, can be left in company
Must be left in fund
Percentage split
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
No, drawings.
Yes, limited by excessive payments to associates
Generally not – sole use provisions.
50% Discount Or index method 

Depends on who

Depends on who


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. 
Be careful because these entities are modified in  the way they behave for taxation purposes. Most of these are not actually a different type of entity - rather that just have slightly different rules apply to them.

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.