Simplifying Structures

Date: 27th May 2009

So much for adding information on a fortnightly basis it is more like a monthly basis, one area where I have encountered a fair amount of confusion is that of the various business structures available, to that end I thought I would add to the confusion with just a quick word on structures. There are many different types of structure that can be used to operate your business each with its own set of advantages and disadvantages.

The Sole Trader

One of the most common structures usually cheap and easy to set up, you can simply apply for an ABN on the following site www.abr.gov.au, grab yourself a business name from the office of fair trading nearest you and off you go, be warned however that this structure offers very little asset protection and little flexibility. Basically you pay tax on the profit left in the business at the end of the year.

The Partnership

Can also be cheap to set up, however if you spend a few dollars getting a solicitor to put together an agreement, it can decrease the headaches as your business progresses. Have a think about what happens when one of the partners decides to retire, are you all going to have an active role in the business, what happens when the business is finally wound up or sold. Most people have a partnership horror story out there; remember you are joint and severally liable for the debts and actions of your partners. This structure can be used in conjunction with others for example a partnership of two trusts may offer a little more asset protection within the confines of a partnership environment. Partnerships do not pay tax in their own right, the profit or losses left at the end of the year are distributed to the partners per the partnership agreement and they pay tax on the income.

The Company

A little more costly than the above two, however a company is a separate legal entity offering some asset protection to the shareholders. There is a great deal of extra compliance associated with running a company, for a start any major decision needs to have a minuet associated with it, usually requiring a directors meeting. Companies pay tax in their own right currently at the rate of 30%. Try to avoid purchasing capital growth assets in companies (the rental property), as they pay tax on each dollar of growth and don’t get the 50 Percent discount. Money going into a company usually comes out as wages or dividends each having its own issues. Any losses are retained in the company to be used in future years (conditions apply).

The Trust

Very cool structure dating back to medieval times, a trust is not a separate legal entity like a company and requires a trustee to act on its behalf. This trustee is usually either an individual, number of individuals or a company, be aware of trustee directors liability that has become far greater in recent court cases. Trusts come in a range of flavors and can be an extremely useful tool, they can be equally complex especially when a loss is generated in the business, however they do offer flexibility when distributing profits. Trusts usually do not pay tax in their own right with the exception of Superannuation Trusts and instead distribute any profits out to the beneficiaries who then pay the tax (distributions retain their form i.e. they can distribute capital gains). Trusts can be extremely useful for asset protection purposes.

Disclaimer

The information contained above is general information only and does not constitute financial or taxation advice. Before making any decision you need to seek independent advice about your specific circumstances

Is Paying Tax Bad??

Date: 21st April 2009

Paying tax is not necessarily a bad thing, it more than likely indicates that you are making money. There are however some tax minimisation strategies around some of which can be useful, some can cost you a lot of hard earned cash with very little return.

Tax Minimisation Strategies to be aware of

Useful:

Negative Gearing, we have all heard about this one and it can be quite useful in the right situation.

Before I go through an example I will say this, if you can purchase an investment that will put more money in your pocket than it costs to keep, you would be way ahead, yes you would pay tax but once the tax was paid you would have more $$ in you pocket to spend on ice cream.

Negative gearing works by converting revenue income into capital income. Revenue income is wages, interest and dividends that all attract tax at your marginal rate i.e. if you earned $10,000 and had a marginal tax rate of 30% you would pay tax of $3,000 leaving $7,000 to buy ice cream, however if you earned $10,000 capital and provided certain conditions are met you would be taxed on $5,000 and pay $1,500 tax leaving $8,500 to buy ice cream (awesome).

Very basic example using the rental property, Costs around $20,000 to keep including interest, rates etc less rental income of say $10,000 there for generates a loss of $10,000 this loss can be offset against your taxable income, using the above example would leave a taxable income of nil and a tax saving of $3,000 ie you put in $7,000 and the ATO tipped in $3,000.

Provided the rental property increased in value by the $10,000 loss then you win if you decide to sell it and have held it for greater than 12 months etc etc you would only pay tax of $1,500.

Not so Useful:

Tax Effective Investments are the ones to be aware of, although tax effective at least in this financial year they will invariably bite (I once asked a financial planner why some planners would recommend this strategy and his reply, good commissions).

Once you are in business you are a target for sales people, we had a shop for a while and it was in a bad location but the sales reps still managed to find us, I think we had more cold canvases than customers, I still have a very expensive broom as a constant reminder.

Think carefully about what people are attempting to sell you, a Good idea is to go away and consider their proposal carefully and where possible get a second opinion.

It is very rare that you cannot buy something for the same price as it was advertised yesterday tomorrow. For interest sakes and if you have an afternoon spare attend a time shares sales meeting, those who have been to one will understand, for those who haven't if you can get through one of those without parting with your hard earned cash you can get through anything.

Legislation:

small business and general business tax break

This legislation has not been enacted at this stage however the proposal is to allow small businesses (i.e. turnover of $2million or less) an additional and upfront 30% tax deduction for eligible assets costing $1,000 or more acquired from 13 December 2008 to 30 June 2009 and installed by 30 June 2010.

General businesses would receive an additional 10% deduction for eligible assets acquired between the above dates. for more information refer to the following link.

http://www.ato.gov.au/taxprofessionals/content.asp?doc=/content/00175431.htm

Practice Info:

Having decided to impart some of the knowledge that I have attained whilst starting my business I should probably include some form of disclaimer least I have a whole bunch of taxi drivers with financial services licences trying to beat me with wads of old westpoint commission stubs, for those who don't know what westpoint was, and no it was not a television programme, make sure when obtaining advice you get a second opinion and don't take at face value everything "professionals" tell you some are here to make money with or without ethics.

Disclaimer:

The information contained above is general information only and does not constitute financial or taxation advice. Before making any decision you need to seek independent advice about your specific circumstances.

Topic of Interest

Date: 5th April 2009

In this current economic climate business leaders need to give some serious consideration to the fundamentals, this usually requires going back to the original business plan and the basis for your whole operation. For some the question will be 'what business plan' a number of small businesses are paticularly guilty when it comes to not having this most valuable of all documentation.

One of the best planning templates I have seen around was at the following address, http://www.nt.gov.au/business/resources.cfm?resourceid=47 On the right hand side of this webpage is a link called Business Plan Template (PDF). It promts the reader to consider a number of key business areas throught the planning process.

Once you have your plan documented, the time has come to have a long and hard look at the products, Pricing, marketing, staffing and processes in your business and make sure that all areas are complementing one another and if not what can be done to correct it. This will help to ensure your business is in the optimum position to get through the financial down turn and will be in a great position going into the impending market up swing.

Legislation

The Income Tax Assessment Amendment Regulations 2009 (No 2) have been registered to amend the Income Tax Assessment Regulations 1997 to update the cents per kilometre rates for calculating motor vehicle expenses for income tax purposes for the 2008 - 09 income year. The rates for 2008 - 2009 are:

Car expenses: rates per km 2008 - 2009

Practice Info

As some of you would be aware Tiffany recently started her Bachelor of Business at Griffith university, she is enjoying