With the occurrence of self employment or small business entrepreneurship on the increase, it is worthwhile becoming familiar with Australian tax laws to ensure that you do not pay more tax than you should. How a business is structured depends on individual circumstances and it is important to get it right at the start.
An individual operating a business alone will often operate as a sole trader. The concept is easy and there are minimal costs. But what other options do taxpayers have?
Partnerships are a common structure for many family businesses enabling losses to be distributed to the individuals and offset against other income. However, partnerships offer no asset protection so the individual partners are liable for the debts of the partnership.
A company is the most common business structure especially where capital gains is not likely and where the small business capital gains tax concessions will not apply. Companies have the so-called benefit of “limited liability”, but most directors will be asked for personal guarantees (ie when borrowing money from a bank) which negates the benefit.
Family Discretionary Trusts (with a corporate trustee) ensure that personal assets are protected from potential claims made against the business. Trusts offer asset protection, the ability to distribute income to adult children, and provide discretion in the distribution of income so as to reduce tax. A disadvantage of trusts is that losses are “locked” in the trust so individual taxpayers are not able to get an immediate benefit from any such loss.
A unit trust (with a corporate trustee) offers flexibility where the business may admit partners. The units in the trust would be held by a family trust/s.
Corporate beneficiary of the family trust
A corporate beneficiary should be considered where the business is doing really well and individuals are on marginal tax rates more than the company tax rate of 30%. The post-tax income would remain in the company and can be used to invest in the kind of assets that will not attract capital gains tax.
A self-managed superannuation fund is not allowed to conduct a business although the fund is able to own the business premises. Remember that the fund is not allowed to borrow money to finance any investments.
It is always recommended that you consult with your tax advisor before making any investment.