If you're a sole trader or are thinking of starting a business & applying for an ABN, then this piece by Michael Nutt, one of our partners, is a must read.
If I had a dollar for every time, I have heard a new client say ‘oh I just went online & applied for my ABN & started… it was so easy’ I would have a nice crisp pineapple sitting in my wallet today.
On occasion a new client will come to us to prepare their tax & unbeknownst to them they have been trading in a completely inappropriate structure to their needs & requirements, putting themselves (& their assets) at risk & paying unnecessary, potentially avoidable amounts of tax.
At Rowe Partners we enjoy nothing more than helping clients to re-structure their businesses to a more advantageous entity such as a Trust or a Company or even a combination of both.
So, what is a Trust? What is a Company? And why should you consider structuring your upcoming business venture and or re-structuring your current arrangement? Because you’re really looking for a best fit solution for your business, rather than an off the shelf, one size fits all structure.
Trusts are widely used for investment & business purposes. The Australian Tax Office tells us that:
“A Trust is an obligation imposed on a person or other entity to hold assets for the benefit of beneficiaries. While in legal terms a Trust is a relationship not a legal entity, Trusts are treated as taxpayer entities for the purposes of tax administration.
The Trustee is responsible for managing the Trust's tax affairs, including registering the Trust in the tax system, lodging Trust tax returns and paying some tax liabilities.
Beneficiaries (except some minors and non-residents) include their share of the Trust's net income as income in their own tax returns. There are special rules for some types of Trust including family trusts, deceased estates and super funds.”
Trusts are commonly used by small to medium business owners & allow profits to be distributed to beneficiaries as determined by the Trustees in which could greatly minimise annual tax liabilities.
To put this in dollar terms if a sole trader amassed a $100,000 net profit for the year then this $100,000 would all be taxable wholly & solely in the sole trader’s name at tax time amounting to $25,717 in tax payable in the 18/19 financial year.
If instead the individual was operating through a Trust structure & all conditions were satisfied & the individual had a wife who was not employed & home with 2 kids & the trust was able to distribute profits by the way of $50,000 to Dad, $49,200 to Mum & $400 to each child, the total tax liability would then be $14,934 for the year. A massive tax saving of $10,783 in just one financial year. Yes! A saving of $10,783 in tax in one year alone!
What is a Company?
Rather than risk confusion & attempt to write a definition of a Company, it’s best to refer you to the official definition according to the Australian Securities and Investment Commission (ASIC).
According to ASIC, “a Company is an entity that has a separate legal existence from its owners. The owners of the company are known as members or shareholders. Its legal status gives a company the same rights as a natural person which means that a company can incur debt, sue & be sued. Companies are managed by Company officers who are called Directors & Company secretaries.
Small business owners often use a type of company structure called a proprietary limited company (which has the words 'Pty Ltd' after the name). This type of company does not sell its shares to the public and has limited liability. Larger companies that do sell shares to the public can still limit their liability and will often have the abbreviation 'Ltd' after their name.”
The Benefits of a Company Structure
Limited liability - The Company has its own legal entity so the liability of members or shareholders is limited and generally they will not be personally liable for the debts of the company. (However, the owners (shareholders) may still be liable for a Company's debts, such as when they have provided personal guarantees to borrow money.) Lower tax rate - Income generated by a Company attracts a Company Tax Rate. This may also be a disadvantage because the Company Tax Rate applies from the first dollar of income generated.”
Rowe Partners specialise in assisting our clients choose the best possible structure for their business & investment needs. We invest in this area heavily & often, to ensure we have the most advanced tools & expertise at our fingertips to help. We understand the ins & outs, the pros & the cons of the range of available options.
Ask us about our complete set up solution which includes set up of:
structures such as trusts & companies
associated registrations such as:
tax file numbers (TFN)
Australian Business Numbers (ABN)
Goods & Services Tax (GST)
Pay as you go withholding tax (PAYGW)
Workcover & registered business names
Cloud accounting software
Selecting the right business structure for your business requires very careful consideration & advice from someone with detailed knowledge of the options. It's important that you seek such advice before making any changes or decisions. Call 1800 04 7693 today for an appointment to discuss your needs.
With Rowe Partners services in business structure support & setup, you’ll save time & money by starting off on the right foot.
Rowe Partners Wealth Advisors Pty Ltd trading as Rowe Partners Financial Planning, Corporate Authorised Representative 1262602 | GPS Wealth Ltd | AFSL 254544 | Australian Credit Licence 254544 | 1700 548 2726 | www.gpswealth.com.au