TAX STRUCTURE
Choosing the structure that best suits your personal and business needs. Your decision will determine how you have to register your business and which laws you have to observe. It is vital that you understand the legal requirements of your business setup and seek advice in making this decision on the structure used.
There are four main business structures that are commonly used in small businesses. In increasing level of legal complexity, these are:
SOLE TRADER
This is the easiest method of starting a business. As sole proprietor you will be responsible for all business decisions and deal with all the financial matters.
ADVANTAGES:
- Low registration fee.
- Simple business structure and documentation.
- You maintain total control over business decisions.
- All profits and capital belong to you.
- Tax benefits exist if profits are low.
- Other than the Income Tax Assessment Act and contract law, no specific legislation applies.
DISADVANTAGES:
- Your capital is limited by your personal assets.
- Limited expertise and no one else to share the workload.
- It will be difficult for you to take time off.
- Your responsibilities can cut into your family and holiday time.
- No one to operate the business when you are ill.
- You will be personally responsible for all debts and liabilities.
- It can be difficult to sell ownership of the business.
* General Advice Warning – End of Page.
PARTNERSHIP
An association of people or entities carrying on a business together, but not as a company. A partnership is formed when two or more people go into business together. You can operate under your own names or with a registered business name.
ADVANTAGES:
- Inexpensive to establish.
- Tax advantages exist if your business partner is from your family.
- Having a partner means more start-up capital.
- Broader range of knowledge, experience and skills.
- Some ability to take time off.
- It is relatively easy to dissolve and recover your share of investment.
- Your partner can sustain the business during your holidays or illness.
- Profits belong to you and your partners.
- Shared control reduces your individual burdens.
DISADVANTAGES:
- Potential for disputes over profit sharing, administration and development.
- Personality clashes.
- You will be personally responsible for business debts and liabilities incurred by your partners.
- Your personal assets are at risk to settle partnership debts.
- There can be some taxation disadvantages.
- Conflict on deciding final authority.
- Problems when one person leaves or another wish to join.
* General Advice Warning – End of Page.
TRUST
A trust (including a family trust) is established whenever there is separation of the legal ownership of an asset from the beneficial (equitable) or real ownership of the asset. For example, the ownership of shares can be in the name of the Smith Family Trust, but are actually owned by John and Mary Smith.
THERE ARE FIVE COMMON TRUSTS:
- Family Trusts;
- Discretionary Trusts (a family trust is also a discretionary trust);
- Fixed Unit Trusts;
- Hybrid Trusts;
- Estate Trust;
ADVANTAGES:
- Unit trusts have several similarities to companies in that the trust is separate from the unit holders; the unit holders subscribe equity on units and the principals may be employed by the trust.
- A unit trust need not pay tax. Rather, the unit holders incur the tax on taxable profits derived by the unit trust.
- The benefit of tax free capital gains and tax incentives may be passed through to the unit holders provided that appropriate structuring is undertaken.
- Unit trusts offer different forms of income to different unit holders. This is achieved under modern forms of unit trust deeds by providing for different classes of units.
- The 50% CGT discount is available to all trusts in relation to disposal of assets.
DISADVANTAGES:
- A tax loss in a unit trust cannot be disturbed to the unit holders. Therefore it is important those unit trusts are structured in such a way that losses are incurred at the unit holder level rather than the unit trust level.
- A capital gain cannot be deferred through the CGT roll-over relief provision when assets are transferred into a trust.
A TRUST NEEDS A TRUST DEED:
The Australian Taxation Office (ATO) is unlikely to accept the existence of any trust unless a trust deed has been established. The trust deed is the document that sets out the terms or rules under which the trust operates.
A TRUST NEEDS A TRUSTEE:
A trust is an obligation that binds a person (known as the trustee) to deal with and manage property for the benefit of others (known as beneficiaries) in accordance with the requirements of the trust deed. A person (e.g. John Smith) can be both trustee and a beneficiary of a trust (of the Smith Family Trust). A Company or another individual can be a trustee.
WHY USE A FAMILY TRUST:
Family trusts are used for many personal and specific reasons, therefore you should seek professional advice from a legal, financial and tax practitioner before making any decision to establish a family trust.
COMMON USES ARE:
- Asset protection;
- Estate planning;
- Masking the ownership of assets; and
- Tax planning
MASKING THE OWNERSHIP OF ASSETS:
Some people are sensitive about public disclosure of their assets and prefer to use names to “mask” that ownership. For example, John Smith may choose a trust name completely unrelated to Smith.
* General Advice Warning – End of Page.
COMPANY
A company is an independent legal entity. You will run the business as a director and own the business as a shareholder.
ADVANTAGES:
- Your liability for the debts of the business is limited to the money you have invested in the business (unless you personally guarantee debts).
- Your limited liability can make it easier to attract investment.
- You can own and operate as the sole shareholder and director.
- You have no personal responsibility for debts unless the debts are reckless, negligent or fraudulent.
- A company can own property.
DISADVANTAGES:
- Large initial establishment fee.
- Complex establishment rules.
- Strict regulations.
- Attract higher compliance costs than other business structures.
- Your business will be subject to company tax.
- Limitations on who can buy shares can make it difficult for shareholders to recover their investment
- Company’s are not eligible for the 50% CGT general discount.
* General Advice Warning – End of Page.
TAX
Tax should not be the major factor in an investment decision. However, the use of all legal tax deductions will improve your cash flow position and help you achieve your financial goals.
BELOW ARE SOME EXAMPLES OF HOW TAX PLANNING CAN ADD VALUE:-
- Gearing Structures – there are tax incentives.
- Positive Gearing – is when the asset is bringing in more income than outgoing expenses.
- Neutral Gearing – is when income coming in is the same as outgoing expenses.
- Negative Gearing – is where income coming in does not cover outgoing expenses. The investor must fund the shortfall until the investment moves to a neutral or positive situation (see above) or is sold, at which point a profit is made if the capital gain on the asset exceeds the original purchase price and acquisition costs.
- Insurance – Structuring your insurance correctly can make the premium tax deductible, reducing its overall cost to you.
- Superannuation – specific understanding of your accumulation, pension and defined benefit accounts may provide the basis for a tax effective strategy.
- Capital Gains Tax – Capital Gains Tax is a one off event, triggered by either a sale or transfer above its original purchase price. As it is a one-off event, this allows effective planning to reduce or negate the impact. Before making the decision to sell or transfer an investment asset, please discuss with our team prior to proceeding.
- Death Benefits – The government may take up to 32% of your superannuation balance on death as tax. The correct structure for your estate is critical; therefore a well constructed estate plan is essential.
General Advice Warning:
The information contained in this website is for general information purposes only. The information is provided by BDM Financial Services and while we endeavor to keep the information up to date and correct, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the website or the information, products, services, or related graphics contained on the website for any purpose. Any reliance you place on such information is therefore strictly at your own risk.
Before investing in any product BDM Financial Services recommends that you first obtain a copy of the relevant Product Disclosure Document before making any decision regarding the purchase of or investment in that product or service in order to ensure that it is suitable for your own personal financial needs and circumstances.