1. What are the common legal structures available for conducting a business?
- Sole trader
2. What are the advantages and disadvantages of conducting business as a sole trader?
- Inexpensive to establish and run
- Taxpayer understands structure
- Taxpayer has total control and ownership
- Income assessed at own tax rate (advantage if only on a low rate)
- Able to obtain 50% CGT discount
- Able to obtain the small business CGT concession easily
- Business losses can be offset against other income, subject to the non-commercial loss rules in Division 35
- Losses can be easily carried forward
- Easy to restructure to a company using CGT rollover relief
- Taxpayer can borrow money from, and transfer money to, family members without any tax implications
- Business can lend money to family members interest free
- Can rollover assets to a wholly owned company
- No asset protection so creditors of the business could have access to the sole trader’s personal assets
- No income splitting
- Income assessed at own tax rate (disadvantage if on a high tax rate)
- Cannot refinance working capital as can for a partnership
- Less favourable deductions for superannuation contributions compared with employer sponsored superannuation contributions
- The taxpayer cannot be an employee and therefore, cannot salary package
- The substantiation rules must be complied with for car and travel expenses
- There will be tax implications when a partner is admitted
- There may be tax implications when the taxpayer dies or divorces
3. What are the advantages and disadvantages of conducting a business through a partnership?
- Less costly to establish than a company or a trust
- Inexpensive to run
- Can provide some flexibility in the partnership agreement
- Income splitting between partners
- Some tax planning possible with the use of “partners’ salaries”
- Partners can obtain 50% CGT discount
- Small business CGT concessions easily obtained
- Partnership losses “distributed” to partners to be offset against other income
- Flexibility for CGT in that each partner can independently choose the concessions they want
- Failure by one partner to satisfy the conditions will not affect the other partner
- Flexibility and asset protection can be obtained by using trusts as partners
- Independent parties can be easily admitted as partners
- Trading stock and depreciable asset rollover relief available on the admission of partners
- Tax planning opportunities available in respect of the refinancing of the partner’s capital accounts by borrowing funds – refer TR 95/25
- No Division 7A type problems with debit loan accounts
- The partners are jointly and severally liable
- Generally no asset protection
- New personal services income laws may attribute all income to one partner for tax purposes
- Income cannot be accumulated and must be assessed at personal tax rates
- Complex PAYG installment calculations
- If partnership registers for GST, then partners cannot use the GDP method for PAYG calculations except where the partnership’s turnover is less than $1 million
- Partners cannot claim input tax credits when paying partnership expenses
- Complicated reimbursement procedure must be followed so that the partnership can claim the input tax credit under Division 111 GST Act
- Partners cannot be employed by the partnership for salary packaging purposes
- Partners cannot claim a deduction for interest on borrowings to pay income tax, whereas, individuals and other business entities can
- Deductions for superannuation contributions are restricted in the same manner as they are for individuals
- The non-commercial loss rules in Division 35 apply
- The substantiation rules apply to car and travel expenses
- Possible double taxation in respect of work in progress when a partner leaves the partnership
4. What are the advantages and disadvantages of conducting business through a company?
- The company is a separate legal entity
- Asset protection – If the company’s business fails, the personal assets of the shareholder are protected
- Losses can be transferred within the group
- Perpetual existence
- The company can employ the taxpayer and provide salary packaging
- By employing the taxpayer, the company can provide employer sponsored superannuation and obtain maximum deductions compared to individuals and partnerships
- It is easy to admit or retire partners by simply buying or selling shares, or alternatively by issuing shares
- 30% flat rate of tax
- Shareholders have a fixed interest in the company so they can be certain of their entitlements
- Franked dividends can be passed to shareholders who can claim a refund of any excess imputation credits
- Profits can be retained and taxed at the corporate tax rate when personal services income is not involved
- Deductions may be claimed for interest on borrowings to pay tax or refinance shareholder’s loans or equity
- The substantiation rules do not apply
- Complex to administer
- Regulated by complex Corporations Law
- Costly to establish and run
- 50% CGT discount not available
- Cannot distribute losses to individuals
- Complex rules regarding the carrying forward of losses
- No easy way for a company to pass tax-free amounts to shareholders without them being taxed in the shareholders hands
- Income and capital cannot be distributed in a flexible manner
- Supplies to associates for below market value consideration can be subject to GST under Division 72 GST Act
- Directors can be personally liable for the company’s debts in certain circumstances
- Controlling individual test in the small business CGT concessions is difficult to satisfy. It cannot be satisfied where some of the shares are not owned by an individual
- The taxpayer must terminate their employment with the company in order to obtain the small business exemption
- A change in share ownership can cause pre-CGT assets to be treated as post-CGT assets
- A change in asset ownership can cause pre-CGT shares to be taxed as post-CGT shares
- Costly to wind up
5. What is a trust?
A trust is an obligation on the trustee to hold property or income for a particular purpose on behalf of another party. There are a number of different types of trusts. These may include:
- Discretionary trusts;
- Unit trusts (public and private);
- A combination of a unit and discretionary trust (hybrid);
- Fixed trusts;
- Testamentary trusts; and
- Inter vivos trusts
The essential elements of a trust are:
- A constituent document (the trust deed) although a trust can be created orally or implied;
- Trust property;
- Settlor; and
- Obligations in relation to the trust property as set out in the trust deed.
6. What is the value of my trading stock?
In valuing trading stock, a taxpayer may choose from the following methods:
- Cost price;
- Market selling value; or
- Replacement value Note that a different method may be used for each item of trading stock
7. Can I offset capital losses against trading income?
Capital losses cannot be offset against trading losses. They can only be offset against capital gains. Alternatively, if there are no corresponding capital gains then they can be carried forward indefinitely.
8. What expenses can I claim against my rental property income?
Expenses incurred in earning gross rental income, which are allowable deductions, include:
- Costs of obtaining finance;
- Telephone, postage & stationery;
- Travel, rent collection and property inspection expenses;
- Agent management and letting fees;
- Bank fees;
- Secretarial and bookkeeping fees;
- Depreciation on furnishings, stoves, hot water system etc;
- Legal fees relating to rental agreements;
- Water and council rates;
- Land tax;
- Repairs (not initial repairs) and maintenance (includes gardening, lawnmowing etc); and
- Construction costs write off (based on original cost of construction)
9. The Business Planning Process – Is It Important For My Business?
A business plan is a thorough overview of where a business is now, how it is currently positioned, where it wants to go and how it is going to achieve its goals and ambitions. It is a blueprint of an organisation’s past, present and future. A business plan is crucial to the success of any venture and is an indispensable management tool that can be used in a variety of situations.
10. What Should a Business Plan Should Cover
Your business plan must include an overview of the following key issues:
- Sufficient detail and overview to enable the reader to get a complete and accurate picture of the business;
- Your awareness of the risks associated with your plans and how you will minimise such risks;
- Flexibility and contingency plans if key assumptions are not met; and
- Trends and development in your particular operating environment and in the market place.
More specifically, your Business Plan should cover the following in detail:
- An executive summary and summary of objectives;
- A detailed description of your business;
- An analysis of your market place and various market growth and positioning strategies;
- A review of your product or service and the development of this to your market;
- A picture of your key management people and ownership information;
- Funding requirements and the application of those funds;
- Financial analysis of past results and future projections;
- A position statement or SWOT analysis;
- General operational matters unique to your business or industry; and
- A summary of external influences and opportunities (such as government export grants).
11. When is my annual review required?
From 1 January 2003 companies are no longer required to complete an annual return. Instead they are required to complete and lodge an annual review and pass a resolution of solvency within 2 months of their anniversary date.
The annual review filing fee is $212 per company. You are able to align the anniversary dates of companies with a common officer. There is a lodgment fee of $33 per company. The annual review form requires a review of the company’s addresses, officers and members.
When reviewing the form please ensure that the member’s details are correct. Any changes must be notified to ASIC within 28 days and late penalty fees will apply. We will notify you of your annual review requirements and request that you attend to them as soon as they are received.
12. When can I deregister a company?
You can apply to deregister a company if:
- All members of the company agree to deregister;
- The company is not carrying on business;
- The company’s assets are worth less than $1000;
- The company has paid all fees and penalties payable under the Corporations Act 2001;
- The company has no outstanding liabilities; and
- The company is not a party to any legal proceedings
13. How does a company deregister?
- Ensure that all outstanding documents (including annual returns) have been lodged with ASIC
- Ensure all outstanding charges against the company have been satisfied. You should make sure of this before applying for deregistration.
- Complete Form 6010 and include a $33 application fee.
14. What is a solvency resolution?
Company directors must pass a solvency resolution within 2 months of their review date. There are two types of solvency resolution:
- Positive solvency resolution – this is passed when the directors have reason to believe that the company will be able to pay its debts as and when they occur.
- Negative solvency resolution – this is passed when the directors have reason to believe the company will not be able to pay its debts as and when they occur.
- Negative solvency resolutions must be lodged with ASIC on a form 485 within 7 days of the resolution.
A positive solvency resolution is assumed if the directors of the company have:
- Paid their review fee;
- Not lodged a Form 485 within 2 months and 7 days after the company’s review date;
- Not lodged a financial report in the previous 12 months
15. Do I need to have the company’s accounts audited?
Proprietary companies are exempt from audit unless one of the following applies:
- They are classified as large;
- They are owned by a foreign company;
- More than 5% of the shareholders direct the company to be audited; or
- ASIC requests the company be audited.
Large proprietary companies have at least 2 of the 3 following criteria:
- Gross operating revenue of $10 million or more
- Gross assets of $5 million or more
- 50 or more employees
Audit relief is available to large proprietary companies only if the company is “well managed in a sound financial position”. There are minimum requirements to meet this test.
16. How do I set up a Self-Managed Superannuation Fund (SMSF)?
There are a number of trust laws and legislative requirements relating to setting up a self managed superannuation fund (SMSF). If you wish to set up your own fund please contact us for further information.
- Obtain a Trust Deed – The first thing you need to do is to have a trust deed. The deed must be dated and properly executed. Content contained in the deed is important in determining the structure and operation of the fund.
- Appoint Trustees – All superannuation funds are required to appoint trustees. Trustees are responsible for ensuring the fund is properly managed and that it complies with the Superannuation Industry Supervisory Act and other legal obligations. To be aSMSF all fund members must be appointed as trustees of the fund. A SMSF can not have more than four members. To be a single member fund the trustee of the fund must be a body corporate and the member is one of only two directors of a single member body corporate. A SMSF can also be created if the member is one of only two trustees, of whom one is the member and the other is a relative of the member.
- Other Considerations – Trustees should open the fund’s bank account (or other appropriate investments) in the name of the fund. The assets of the fund should be kept separate from any assets owned personally by any of the trustees or from those belonging to a business (where partners in a business set up the SMSF). Trustees need to establish an appropriate investment strategy for the fund. Trustees need to be aware that there are numerous administrative obligations that must be met throughout the life of the fund.
17. What are the benefits of a Self-Managed Superannuation Fund?
The following are some of the advantages of a SMSF.
- They can have greater investment freedom;
- Members feel their money is safer being invested by them as trustee;
- Members can actively participate in the management of the fund;
- There are reduced formal reporting requirements; and
- They can be advantageous investment vehicle for individuals considering tax and estate planning
Setting up a SMSF is not for everyone. People considering a SMSF must familiarise themselves with the requirements and obligations of running a fund. We are able to provide you with basic fact sheets released by the ATO. If you wish to set up your own SMSF please contact us for further information.
18. What kind of investments can I hold in a Superannuation Fund?
A key area of responsibility for trustees of SMSFs is investment management. SISA places certain duties and responsibilities on trustees when making investment decisions. They aim to protect and increase member benefits over time for retirement purposes.
- Investment Strategy – Trustees are required to prepare and implement an investment strategy for the SMSF. The strategy must reflect the purpose and circumstances of the fund. An appropriate investment strategy will set out the investment objectives of the fund and detail the investment methods the fund will adopt to achieve these objectives. Trustees must make sure all investment decisions are made in accordance with the documented investment strategy of the fund and should seek investment advice or appoint an investment manager in writing if in any doubt. Investment rules are one of the most important requirements of SISA and failure to comply with the rules could result in trustees being fined and/or the fund losing its compliance status
- Prohibition of loans/financial assistance to members or a member’s relative – Trustees are prohibited from lending money or providing financial assistance from the fund to a member.
- Prohibition of Borrowings – SMSFs are prohibited from borrowing money except in some limited circumstances.
- Limitations on Acquisition of Assets From a Related Party – Trustees are prohibited from acquiring assets for the superannuation fund from a related party of the fund. Limited exceptions to this rule exist, if:
- The asset is an in-house assets and would not result in the level of in-house assets of the fund excedding5% of the fund’s assets;
- The asset is a listed security (e.g. shares, units or bonds listed on an approved Stock Exchange); or
- The asset is business real property
19. What is the sole purpose of a Superannuation Fund?
It was previously mentioned that a complying superannuation fund is essentially a regulated superannuation fund that meets the operational standards of SISA. Complying superannuation funds are taxed concessionally (i.e. a complying fund is taxed at a rate of 15% while a non-complying superannuation fund is taxed at 47%). The object of the sole purpose test is to ensure that regulated superannuation funds are maintained for the purpose of providing benefits to fund members upon their retirement or their dependents, in the case of a member’s death.
20. What is the current Medicare levy rate?
The Medicare levy rate is 1.5% of taxable income, subject to certain exclusions and reductions.
21. When does the Medicare levy surcharge apply?
The Medicare levy surcharge is imposed at 1% of the total of taxable income and reportable fringe benefits if the taxpayer, the spouse and all dependants are not covered by private hospital insurance and the following thresholds are exceeded:
22. What is the current company tax rate?
23. What is the current fringe benefits tax rate?
48.5% of the grossed up taxable value of the fringe benefit.
24. What tax rate applies to the income of a superannuation fund?
25. What is the current superannuation guarantee charge percentage?
26. What are the new payment and reporting rules for superannuation guarantee amounts?
From 1 July 2003 employers will be required to pay superannuation guarantee amounts quarterly, by the 28th day after the end of the relevant quarter. From 1 January 2005 employers will no longer be required by law to report to your employees in writing.
However, the following may be provided to employees:
- The amounts of contributions you have made; and
- The number of the superannuation provider and, if possible, their contact phone numberAlso if known:
- The employee’s account or membership number
Disclaimer: This is not advice. Items herein are general comments only and do not constitute or convey advice per se. The information contained in this website is for guidance only and should not be relied upon without obtaining professional advice having regard to your specific circumstances.