Many smaller practices may be wondering whether it is better to incorporate or remain as a sole trader or partnership. While the government has encourage incorporation through the new WorkChoices industrial relations legislation, the latest changes to tax in the 2006 Federal Budget may make it more appealing for some practices to remain as they are.

Small family run practices may now be better off by remaining in their current state rather than incorporating. This is because the tax advantages of incorporation are less attractive now for practices earning less than $300,000 per year thanks to changes announced in the recent federal Budget. The tax advantages may now not outweigh the extra administration costs required of companies that are incorporated.

Kel Fitzalan, Deloitte partner says that ”The administration costs of incorporation mean that family run small businesses should only consider incorporating when the combined income exceeds $300,000”.

While there were tax advantages to incorporation in the past due to the differences in the personal and company tax rates, the gap has narrowed which will make it far less attractive for some to do so.

The new tax rates have also mean that income splitting is now not as attractive as before for those splitting investment earnings or business income. Although according to Mike Forsdick from PricewaterhouseCoopers, “the administrative costs might outweigh the benefits in establishing a private company, it was still worth having investment income placed in a joint bank account and split. The tax saving may have dropped a bit but it is still worthwhile doing because it is still saving you money”.

Incorporation may be necessary however for practices wanting coverage under the new industrial relations law. This is because the law is legislated under the government’s corporations power. Therefore, currently, sole traders and partnerships are not covered under the legislation.

For smaller practices operating under a sole trader or partnership structure, who have been considering changing to a company structure, you will need to weigh up many considerations including the extra costs involved, the value of the tax benefits available and the whether they will benefit under the new WorkChoices industrial relations legislation. For practices in this position, they should seek the professional advice of their solicitor and accountant before making any decision on whether or not to incorporate.

Top WorkChoices concerns of small businesses  
According to a study conducted by the Australian Chamber of Commerce of 13,000 businesses, over half of which were small business, the top four concerns of the new industrial relations legislation were:

1. Minimum pay and conditions
2. Transitional arrangements where state awards were concerned
3. Certified agreements and Australian workplace agreements
4. Unfair dismissal

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