Business Structures


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Sole Trader - Partnership - Discretionary Trust - Unit Trust - Company - Superannuation Fund

SOLE TRADER

This is where one person operates a business in his or her own name.
They must pay tax on the whole taxable income of the business.
Taxable income is equal to Gross income Less Tax deductions.

SET UP PROCEDURE

COMPLIANCE REQUIREMENTS

ADVANTAGES

DISADVANTAGES



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PARTNERSHIP

This is a structure where you, and one or a number of other people jointly carry on a business. It can also be 2 trusts, or 2 companies, or a combination of a person, and a trust or company, or any combination at all. The partnership may be formed as a result of a written or verbal agreement. All of the business assets must be owned by the partnership. Each partner is then held to own his or her own separate partnership interest. A Partnership interest can be any amount. Eg. partner A may own 1%, and partner B may own 99%. If no percentage is specified, then the interest is taken to be equal shares. The ATO will allow one partner, or partners to be paid a salary, which increases their share, even though they have an equal share. There must be a reason for this. Generally, it is that the partner receiving a salary does most of the work.
Partnerships must be genuine. ie the business being operated must be a genuine business. I realise that is a vague statement. However, whether a business is a genuine business or not is a grey matter. There have been many cases over the years, but each case must be decided on its merits. I like to say that it is common sense. If it looks, and smells like a business, then it is a business. Even if you pass the test for a personal services business, you can't divert income to family members if your income is derived from your personal skills and effort. As well, there must either be substantial goodwill (not merely a franchise payment), and perhaps substantial plant and equipment. The goodwill does not have to be purchased. It may have been built up. There is a lot to this, and you really have to seek my advice. Partners are also jointly and severally liable for any debts and litigations of the partnership.

SET UP PROCEDURE

COMPLIANCE REQUIREMENTS

ADVANTAGES

DISADVANTAGES



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DISCRETIONARY TRUST

A trust is a fiduciary relationship in which a person or company is the holder of an interest in property but is subject to an equitable obligation to use or keep the property for the benefit of another person or for some commitment object or purpose.

In a discretionary trust, the trustee is able to exercise discretion as to who is or are the Beneficiaries, and what proportions of the trust fund or trust income they are to receive.
In this structure you (and generally your wife) act as trustees for a family trust. The Trust owns a business, or simply an investment. The business is operated through the trust, which owns all the assets of the business. These assets are held in the name of the Trustee(s) on behalf of the Trust. A trustee can also be a Company. The Company acts as trustee only. The business is still owned and operated in the Trust. Again, the business must be a genuine business. Many people protest that they have a genuine business, when they don’t in the eyes of the ATO. Even if you pass the test for a personal services business, you can't divert income to family members if your income is derived from your personal skills and effort. You must seek my advice on this matter.
Most businesses use a Discretionary Trust for asset protection and the flexibility of distributing to various different entities to minimise their income and capital gains tax. Typically when the threshold of all beneficiaries are utilised fully the larger businesses typically run through a Company structure to take advantage of the Company's flat rate of tax.
We usually accumulate assets in a Discretionary Trust and we keep the assets separate from the Trading Company that deals with the clients or customers.
When a trust has a company as a trustee, then the trustee has limited liability for debts incurred by the trust. However, this advantage is usually negated in practice for large amounts, as the debtor, or bank require personal guarantees from the directors of the company. In addition, any personal negligence of the trustees or directors is sheeted home to them.

SET UP PROCEDURE

COMPLIANCE REQUIREMENTS

ADVANTAGES

DISADVANTAGES

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UNIT TRUST

This structure is very similar to a partnership. The difference is that you can divorce yourself personally from the business, by having a company as trustee. Again, you will not be able to get out of your personal liability for negligence.
There are a certain number of units issued in the trust. Each unit is usually equal. If there are 2 units, then each unit is worth 50% of the business. All profits must be distributed at year end, and are distributed according to the value of the units. If there are 2 units, then they must get 50% of all capital and income each.
This structure is often used where there are 2 or more families involved in a business venture, and they want to be able to own their shares in the business in their own right, and be able to dispose of their shares. This cannot be done with a discretionary trust, because there is no ownership, except that of the Trustee(s).

ADVANTAGES

DISADVANTAGES

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COMPANY

A company is a separate, legal entity and is administrated by its directors. It is formed by people who own its shares and whose liability is linked to the amount (if any) unpaid on the shares respectively held by them.
The Company must operate completely separately to you. If you mix your money, and the company's money, the ATO will penalise you. There are onerous rules in regard to Director's responsibilities. Changes of Address must be notified within 28 days of the change, or there are fines and penalties. There are numerous restrictions on what you can do. You cannot borrow money from the company, unless it is an arms-length transaction evidenced by a mortgage document, and appropriate security, or if unsecured, the loan must be paid back in 7 years, and appropriate interest must be paid. The loan must be evidenced by a deed.
There are only 3 ways to legally get money out of a company –
Wages on which you will pay tax at your marginal tax rate
As a dividend, on which the company has paid tax (called a franked dividend) You will still have to pay tax at your marginal tax rate, and get a credit for the tax paid by the company (Franking credit)
As an unfranked dividend, on which you pay tax at your marginal rate without receipt of a franking credit.
As a loan from the company outlined above.
If you take money out of the company, without it being wages, a franked dividend, or a properly documented loan, then it is deemed an unfranked dividend.

SET UP PROCEDURES

COMPLIANCE REQUIREMENTS

ADVANTAGES

DISADVANTAGES

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SUPERANNUATION FUND (Self-Managed)

All Self-Managed Super Funds (SMSF) have less than five members. Each individual trustee of the fund is a fund member, and each member of the fund is a trustee. No member of the fund is an employee of another member of the fund unless those members are related. The requirement that all members be trustees ensures that each member is fully involved in the decision making process.
This is a trust. It is a trust with special rules. The assets of the trust cannot be released to members until they reach the age of 55, if born before 01/07/1960. The age of release is then phased in to 60 if you are born after 30/06/64. There are some exceptions, but they are so rare that I am not going to mention them. So the first thing you must realise is that you can’t touch any of the money in the super fund until you are 55, or the ages stated above. If you want to withdraw a lump sum, then you must retire also.
Any contributions received by the fund are broken up into Undeducted contributions, and Post 30/06/1983 contributions. Undeducted contributions are those for which you have never received a tax deduction. They are not subject to tax in the fund, and they can be withdrawn at release age, without tax being paid. However, any earnings from these undeducted contributions are taxable at the rate of 15%. Other contributions are taxable at 15% as well as their earnings. Any capital gains are taxed at 10% (providing the assets are held for a year and 2 days).

SET UP PROCEDURE

COMPLIANCE REQUIREMENTS

ADVANTAGES

DISADVANTAGES

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