David Douglas Accountants

BRISBANE TAX ACCOUNTANTS / MORAYFIELD TAX ACCOUNTANTS

CHOOSING THE RIGHT BUSINESS STRUCTURE

YOU MUST CHOOSE THE APPROPRIATE BUSINESS STRUCTURE BEFORE YOU DO ANY OF THE FOLLOWING:

1.     Register a business name....

2.     Apply to the ATO for an ABN, TFN, GST, PAYG, etc.

3.     Set up a financial arrangement to purchase a motor vehicle through a chattel mortgage, hire

         purchase, lease or loan agreement.

4.     Enter a real estate lease agreement.

5.     Enter insurance agreements e.g. public liability, loss of business profits, workers compensation,

         professional indemnity, etc.

 

CHOICE OF BUSINESS STRUCTURES

Your choice of business structures includes:

1.     Sole trader - You operate this as an individual using your own ABN, TFN, GST, PAYG, etc.

 

2.     Partnership - Two or more individuals or entities (companies or trusts) operate in partnership,

         sharing profits in an agreed proportion.

 

3.     Company - A company is owned by shareholders and run by directors. It is a separate legal entity

         to you and you must prepare financial statements and lodge income tax returns for it.

 

4.     Trusts - There are many different trusts. The most commonly used by small businesses are the

        discretionary (family) trust and the unit trust. These are a separate legal entity to you and you must

        prepare financial statements and lodge income tax returns for them.

 

4(a)  Discretionary Trust - A discretionary (family) trust is controlled by the appointor. The appointor

          appoints the trustee (a company or an individual). The general beneficiaries are the owners of the

          assets. It is a separate legal entity to you and you must prepare financial statements and lodge

          income tax returns for it.

         The trustee(s) may distribute income and capital gains to any beneficiaries as per the trust deed.

          These may include general beneficiaries, spouses, children, parents, relatives, associates,

          companies, trusts and other entities.

 

4(b)  Unit Trust - A unit trust is controlled by the appointor. The appointor appoints the trustee

           (a company or an individual). The unit holders are the owners of the assets. It is a separate legal

           entity to you and you must prepare financial statements and lodge income tax returns for it.

          The trustee(s) may distribute income or capital gains to the unit holders as per the trust deed.

           The unit holders may be discretionary (family) trusts, companies, individuals or other entities.

 

5.      Other entities - There many other entities e.g. unincorporated associations (not for profit entities),

           not for profit companies limited by guarantees, state and federal entities, etc.

          They are separate legal entities to you and you must prepare financial statements and may be

            required to lodge income tax returns for them if not exempt.

          Some have limited liabilities for their members but not their executives. Most of these entities

            require audits.

 

COSTS TO SET UP BUSINESS STRUCTURES

1.     Sole trader - This is nil if you trade under your own name. If you register a trading name directly via the ASIC website this is usually $170 for one year or $360 for three years. (But if you have issues with the ASIC website try TradingAs.com.au which is generally easier, has a good helpline and charges $111 in addition to the ASIC fee).

2.     Partnership - This is nil if you trade under your own names. If you register a trading name directly via the ASIC website this is usually $170 for one year or $360 for three years. (But if you have issues with the ASIC website try TradingAs.com.au which is generally easier, has a good helpline and charges $111 in addition to the ASIC fee).

3.     Company - You must have a Director's ID before you can be an ASIC company director. The costs to set up a company through online services from $120, incorporator.com.au charges $402, plus the ASIC filing fee $597 = $717 or $999.  You must also register a trading name if you do not use Pty Ltd e.g. Mary's Flower Shop Pty Ltd must register a trading name ($170 ASIC fee for one year or $360 ASIC fee for three years) if it is trading as Mary's Flower Shop.

4.     Trust (Discretionary or Unit) - Most trusts have a company as trustee so the set up costs depend on software used, are usually $717 to $999 for the company plus $162.00 for the trust plus my fee for setting up the trust and structure advice which is usually $560.  $162.00 + $560 = $722.00 + $717.00 (company set up if required) = from $1,439.

 

COSTS TO CHANGE BUSINESS STRUCTURE

There may be significant costs if you need to change the business structure.

1.     Change of ownership for State Government motor vehicle registration  (usually 3% of the market

        value of the vehicle).

2.     Change of finance arrangement for motor vehicles. This usually mean a new hire purchase, lease

        or loan agreement (Finance companies are usually very reluctant to do this).

3.     State government stamp duty on the market value of the businesses (goodwill, equipment, fit out,

        etc. less liabilities). e.g. QLD stamp duty is usually 3%.

4.     Capital gains tax on disposal of growth assets e.g. Goodwill & real estate property.

 

ANNUAL ACCOUNTING FINANCIAL STATEMENTS, TAXATION LODGEMENT & ASIC FEES

1.     Sole trader - This is by far the easiest to run as most small businesses use a spread sheet to

        summarize expenses and put directly into their tax returns.

2.     Partnerships, companies & trusts are a lot more expensive as they require a set of financial

        statements, tax returns and distributions to relevant entities in addition to individual tax returns.

        While these structures have extra costs there are many benefits associated with them.

        The company ASIC annual fee is $310.

3.     Companies & trusts are required to lodge a tax return if they have an ABN or their income is

         greater than $1.

 

ASSET PROTECTION AND BUSINESS STRUCTURES

ACCOUNTANTS CAN NOT GIVE ASSET PROTECTION ADVICE SO PLEASE CONTACT A LAWYER

Below are only a few of the issues:

1.     Sole trader & partnerships (where individuals are partners) offer little asset protection. Individuals are personally responsible for the debts of the business. If these debts are not paid the creditors can sue the individuals for their personal assets e.g. their home, investments, etc.

 

2.     Companies - Asset protection in companies may be of limited use. Some issues such as directors and share holders of companies are often required to give personal guarantees to creditors such as banks and landlords. The individual may then become personally liable.

Creditors may apply to the courts to access directors and associates personal assets but there are many issues involved.

 

3.     Trusts - Similar issues apply as per above depending on whether the trustee is an individual or a company.

PLEASE SEE A LAWYER

 

INSURANCE IS VERY IMPORTANT

Accountants can not give insurance advice so please contact your insurance advisor.

For all of the above you hope that your insurance company will help with claims such as for public liability, professional indemnity, loss of trading due to flood, fire, etc.

 

FLEXIBILITY OF BUSINESS STRUCTURES

1. Sole trader - This is the least flexible structure as all profits must be declared in the owners income tax return.

In some cases spouses use their own ABN and charge a market rate for their services. However they must satisfy the ATO's rectification and personal services income rules to be eligible for an ABN (see below).

http://www.daviddouglas.com.au/SoleTrader.htm

 

2. Partnerships - Profits must be split in the proportion agreed to in the partnership agreement.

 Partners and others must pay themselves a market rate for any work performed before profits are distributed.

 

3. Companies - After paying everybody a market rate for work performed, a company must pay company tax 30% on it's profits, which is accumulated in the company franking credits account. These profits are distributed as dividends and franking credits to shareholders at sometime in the future. Therefore company tax 30% may seem like a low tax rate now but eventually the dividends plus franking credits will be 100% assessable income to the shareholders when they are withdrawn.

Company's shareholders are often discretionary (family) trusts so that dividends and franking credits may be distributed to family members.

Division 7A - Loans by private companies. Shareholders and associates must not receive loans unless an appropriate loan agreement is in place. If not, the loan may be deemed a dividend.

4. Trusts - Unit Trusts - After paying everybody a market rate for work performed. A unit trust usually distributes profits to unit holders who are often discretionary (family) trusts.

5. Trusts - Discretionary (family) trusts.  The trustee usually distributes trust profits based on a trustees resolution prior to 30 June each year. Most trust deeds have a default distribution clause which usually distributes income in equal portions based on the trust's general beneficiaries or a resolution can be made in general terms as the profit will not be known at this point. Check your trust deed.

Section 100A requires that the beneficiary receives the money distributed.

The trustees have the discretion to distribute to family members after everyone has paid themselves a market rate for their work. The ATO often audits how the market rate per beneficiary is determined.

Discretionary (family) trusts are often the shareholders of companies and unit trusts for similar reasons.

 

INCOME TAX MINIMIZATION BENEFITS OF BUSINESS STRUCTURES AND FAMILY TAX BENEFITS MAXIMIZATION

Flexibility to distribute income from business structures (see above) allows income to be distributed to individuals with favourable tax rates although this can not be the dominate purpose as per 'Spotless Case' (see PART IVA below).

30 June 2022 Tax rates

Trust often distribute profits as follows:

CHILDREN

Children usually pay nil tax up to $416 then 66% to $1,307 then 47%.

Children's 'excepted income' e.g. wages, Centrelink, inheritance, etc. are taxed as adults.

ADULTS

Adult income tax plus Medicare levy is as follows:

Individuals tax payable on $21,884 = ($21,884 - $18,200 (tax free threshold)) x 19 cents 

= $700 less low income tax offset $700 = Nil

21% tax payable up to $45,000

34.5% tax payable up to $120,000

39% tax payable up to $180,000

47% tax payable over $180,000

Small Business Company tax is 25%

Superannuation fund tax is 15% unless in pension phase 0%. Non complying fund 47% of assets.

 

FAMILY TAX BENEFIT THRESHOLDS

http://www.daviddouglas.com.au/FamilyTaxBenefits.htm

Family tax benefits Part B thresholds for spouses are $6,497 (2024 yr) then they lose 20% up to $32,302 or $25,147 (depending on the age of the youngest child).

A dependent full time child < 20 be studying full-time secondary school or equivalent.

 

REASONABLE OVERNIGHT TRAVEL ALLOWANCE

Trusts & companies

Employees of trusts and companies who do overnight travel and are paid an overnight travel allowance  can claim up to $123.45 (2022 yr) for meals and incidentals in high cost cites without receipts if they satisfy ATO requirements by keeping a 28 days regular pattern of expenditure using diaries, receipts and bank statements (see below).

http://www.daviddouglas.com.au/OvernightTravel.asp

 

CAPITAL GAINS TAX MINIMISATION AND BUSINESS STRUCTURES

There are some small business discounts and exemptions for capital gains. A small business must have assets less than $6,000,000 and sales of less than $2,000,000.

1. Sole trader & Partnerships - the capital gains tax will usually qualify for a 50% discount for an asset that has been held for more that 12 months and another 50% if it is an active asset. If you have the assets for greater than 15 years it will tax free.

There is a lifetime limit of $500,000 (after discounts) CGT retirement exemption per individual if the entity contributes the proceeds to a superannuation fund within seven days of the lodgement of the relevant tax return.

2. Trusts - the capital gains tax will usually qualify for a 50% discount for an asset that has been held for more that 12 months and another 50% if it is an active asset. If you have the assets for greater than 15 years it will be tax free.

There is a lifetime limit of $500,000 (after discounts) CGT retirement exemption per individual if the trust contributes the proceeds to a superannuation fund within seven days of the lodgement of the relevant tax return.

This capital gain may be distributed like ordinary income to beneficiaries which is very flexible (see above).

3. Companies - All of the above applies to a company except the only way to get money out of a company is by paying wages or dividends. Therefore these discounts and exemptions are of limited benefit other than to defer tax payable except for the following:

If you pass 'the significant individual test' in a trust or company these concessions may apply.

The $500,000 (after discounts) CGT per individual lifetime capital gains tax exemption if the company contributes the proceeds to a superannuation fund within seven days of the lodgement of the relevant tax return.

4. Superannuation - All entities may receive a $500,000 (after discounts) CGT per individual lifetime capital gains tax exemption if the individual, company or trust contributes the proceeds to a superannuation fund within seven days of the lodgement of the relevant tax return.

Also there is a roll over exemption for the sale of a business if another business is bought with 2 years and is of a similar structure and ownership. (see below)

http://www.daviddouglas.com.au/capitalgainstax.htm

 

OTHER BUSINESS STRUCTURE ISSUES:

Some government departments and businesses will only deal with companies or trusts. As a result some micro businesses are required to change business structures.

 

TAX MINIMIZATION AND PART IVA

Under the latest tax cases the purpose for setting up any structure or scheme can not be for a tax benefit.

As the Commissioner of Taxation has commented:
"The particular significance of the Spotless decision is that the High Court has confirmed that "a person may enter into or carry out a scheme, within the meaning of Part IVA, for the dominant purpose of enabling the relevant taxpayer to obtain a tax benefit where the dominant purpose is consistent with the pursuit of commercial gain in the course of carrying on a business". Had Spotless been lost a gaping hole would have appeared in the protection offered by Part IVA.

In doing that the High Court has also confirmed that the application of Part IVA is not to be determined according to whether you bring the arrangements under a particular commercial, business or other categorisation. Rather the application of Part IVA is to be determined by an analysis of the factors set down in section 177D. This requires consideration of such issues as the manner in which the scheme was entered into, the form and substance of the arrangements. And in this regard the degree of contrivance, artificiality and elaborateness of the transactions will be relevant."

Google ATO Part IVA

 

Disclaimer
The information provided in the above documents is not intended to be, nor should it be construed as tax advice. Any specific recommendation for a client can only be done after their individual circumstances have been determined by David Douglas Accountants.