When Cliftons start talking about structures we are not referring to your house or your business premises. But just like your house, we know that if you do not have the right structure for your purpose then it could be costing you money and be uncomfortable.
Tax structures are designed to reduce your tax burden and eliminate risk to assets in the case of litigation or bankruptcy. Tax structures can be used to provide income for your family members while reducing your total family tax liability. Whilst paying tax is an integral part of Australia's social structure, legally reducing the amount of tax you pay is a key element of successful wealth creation. And a fundamental step in that creation is the structure through which you operate your business.
For a detailed table with the pros and cons of each Tax Structure, click here to download Tax Structures Comparison.
We've also recorded a video on tax structures which you can watch below.
The right tax structure is not only important whilst your business is operating, but is also a key element when it comes to the sale of your business. Individuals, Partnerships and Trusts have access to more of the discounts and concessions when it comes to capital gains tax on disposal (see "Business Capital Gains Tax – Pitfalls & Possibilities") whilst a business conducted through a Company does not.
The main business and tax structures are;
- Sole Trader – Simple, easy and cheap, with little or no cost to establish, but if anything goes wrong you, the individual (you) bear the loss or liability.
- Partnership – Two or more (people of entities) working together with a view to a profit, and again costing little to establish. An agreement should be drawn up before commencing, as whilst all benefits are split, one party can end up liable for the debts of the other, with personal assets at risk.
- Company – A separate legal entity from the shareholders, losses are trapped for use against future profits whilst profits are taxed at only 30% but you cannot personally use the profits unless paid out to you as wages or dividends and then taxed at your individual marginal tax rate; there are strict rules against taking money out as a loan or drawing.
- Trust – Can be a discretionary trust where entitlement to income and capital is up to the discretion of the trustees, or a unit trust where income and capital is allocated according to set percentages or unit holdings. Trusts have the benefit of protection to your personal assets not in the fund and should you as an individual be sued or go bankrupt they cannot force the trust to pay funds held by it to your creditors. We can help set up a way that can greatly protect your assets. Trusts can also save tax by distributing income splitting to other family members and even church gifts can be given out of pre-taxed income.
One structure may be right for the bloke down the street but your circumstances are probably unique, and what works for him may not be best for you. Likewise, the structure that is appropriate for you right now, just like the house you live in at the moment, may not be right for you forever, so needs to be reviewed - contact us to discuss the right tax structure for you.