- What common legal structures are available for conducting a business?
- What are the advantages and disadvantages of conducting business as a sole trader?
- What are the advantages and disadvantages of conducting a business through a partnership?
- What are the advantages and disadvantages of conducting business through a company?
- Briefly explain what a trust is and how it operates?
- Overview of employer contributions
- What is the simplified tax system (STS)?
- What expenses can I claim against my rental property income?
- Who does the margin scheme affect?
- What a Business Plan Should Cover
BUSINESS & TAXATION SERVICES
| 1. | What common legal structures are available for conducting a business? |
- Sole trader
- Partnership
- Trust
- Company
| 2. | What are the advantages and disadvantages of conducting business as a sole trader? |
| Advantages |
Disadvantages |
|
Control – a sole trader has total control over the business.
Goodwill – the sole trader gets to know his or her customers – goodwill may attach to the sole trader personally.
Ease of Sale – the simple structure means the business can be easily sold.
Simple – minimal set up costs, few
formalities and legal restrictions.
Losses – available as a deduction, but subject to non-commercial business loss provisions.
Capital Gains Tax – 50% discount if business held longer than 12 months.Small business capital gains tax exemptions available.
|
Admission of New Parties – a structure will be required in order to admit a new party into the business.
Finance – the sole trader often finds it difficult to readily access finance without mortgaging personal assets.
Liability – the sole trader cannot limit liability; no separate legal entity.
Sickness – if the sole trader becomes unwell who does the work?
Limited Life – if the sole trader dies the business usually terminates.
Tax Rate – marginal personal tax rates apply.
Tax Planning – difficult to split income.
| |
| 3. | What are the advantages and disadvantages of conducting a business through a partnership? |
| Advantages |
Disadvantages |
|
Admission of New Parties – providing the partnership agreement permits, it is usually possible to admit a new partner to the business.
Disposal Interest – it is possible for a partner to dispose of his/her interest in the partnership without the business ceasing.
Control – partners have control over the partnership business.
Tax Planning – consider a partnership of family trusts.
Losses – are distributed to partners.
Capital Gains Tax – 50% discount if business held longer than 12 months. Small business capital gains tax exemptions available.
|
Liability – partners are usually joint and severally liable for partnership debts; no separate legal entity.
Tax Rate – marginal personal tax rates apply.
Perpetuity – new partnership required for tax on change of partners.
| |
| 4. | What are the advantages and disadvantages of conducting business through a company? |
| Advantages |
Disadvantages |
|
Finance - finance can be raised through the issue of shares.
Limited Liability - limited liability applies (unless a director issues personal guarantees).
Change of ownership - facilitated by the issue of new shares or the sale of existing shares.
Research & Development - eligible for R&D concessions.
Franking of Dividends - credit for tax paid at the company level given to dividend recipients.
Tax Rate - flat rate of 30%
Employees - PAYG applicable and 100% deduction for superannuation contributions paid. |
Complexity - subject to a raft of regulatory controls and hence costs of establishing and maintaining are higher.
Control - ultimately the shareholders have control over the business.
Splitting of Income - limited opportunities; companies can only distribute dividends so that it cannot "stream" capital gains, foreign source income etc to targeted shareholders.
Capital Gains - small business exemption lost on distribution i.e. taxed as a dividend.
Limited Flexibility - profits can be paid out through salary, dividends or loans. Loans to shareholders are heavily regulated and can give rise to deemed dividends.
Losses - cannot be distributed to shareholders, future deductibility subject to complicated restrictions. | |
| 5. | Briefly explain what a trust is and how it operates? |
A trust of property is an obligation on the trustee to hold property or income for a particular purpose on behalf of other people. There are a number of different types of trusts:
- Discretionary trusts;
- Unit trusts (public and private);
- A combination of a unit and discretionary trust (hybrid);
- Fixed trusts;
- Testamentary trusts; and
- Inter vivos trusts.
Family trusts are typically discretionary trusts with family members as the beneficiaries. Discretionary trusts are so called because the trustee has a discretion as to which beneficiaries he or she may pay income or capital. Income can usually be paid to one beneficiary at the exclusion of another. The potential pool of discretionary beneficiaries is usually set out in the trust deed.
The essential elements of a trust are:
- A constituent document (the trust deed) although a trust can be created orally or implied;
- Trust property;
- Beneficiaries;
- Trustee;
- Settlor; and
- Obligations in relation to the trust property as set out in the trust deed.
For tax law purposes a trust is considered to be a separate legal entity although this is not the case in general law. In any event the trust is required to determine its net trust income and lodge an income tax return. If the trust has net distributable income, the income will generally be distributed to beneficiaries and is taxed in the beneficiaries respective tax returns at the marginal tax rates. Income retained by the trust is generally taxed at the top marginal rate plus medicare levy.
The advantages and disadvantages of trusts vary depending on the type of trust it is. Generally speaking, the major disadvantage of a trust structure is that it cannot distribute losses to its beneficiaries. The major advantage, particularly in the case of a discretionary trust, is the ability to split income amongst the pool of beneficiaries. A benefit can be obtained by directing income to members of the family with low marginal income tax rates.
The trust loss regime is more severe than for companies. However if the discretionary trust elects to become a family trust this disadvantage can be eliminated.
CGT exemptions available to the trustee can be passed on to beneficiaries.
If the trust is structured correctly it will provide considerable asset protection against personal creditors.
| 6. | Overview of employer contributions |
Introduction
An overview of tax and superannuation obligations when employing workers.
Employer obligations include:
Ø Determining whether workers are contractors or employees
Ø Pay as you go (PAYG) withholding
Ø Superannuation
Ø Fringe benefits tax (FBT)
Ø Eligible termination payments; and
Ø Workplace giving programs.
| 7. | What is the simplified tax system (STS)? |
The STS is an alternative method of determining taxable income for eligible small businesses with straightforward financial affairs. It began on 1 July 2001.
The STS has three main elements:
1. a cash accounting method that recognises most business income and expenses only when they are received and paid.
2. simplified trading stock rules where businesses only need to conduct stocktakes and account for changes in the value of trading stock in limited circumstances; and
3. simplified depreciation rules where depreciating assets costing less than $1,000 each are written off immediately. Most other depreciating assets are pooled and deducted at a rate of either 30% or 5% depending on their effective life.
In addition, STS taxpayers can claim a full deduction for certain prepaid expenses.
Participation in the STS is optional.
If you choose to enter the STS you must use all three elements, where they apply. The STS applies to whole income years only and not to parts of a year.
| 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
- Insurance
- Bank fees
- Secretarial and bookkeeping fees
- Interest on monies used to acquire property
- Depreciation on furnishings, stoves, hot water system etc
- Advertising
- Legal fees relating to rental agreements
- Water and council rates
- Land tax
- Repairs (not initial repairs) and maintenance (includes gardening, lawnmowing etc)
- Construction costs write off (based on original cost of construction)
| 9. | Who does the margin scheme affect? |
Sellers
If you make a sale of real property and GST is payable, you may be able to use the margin scheme to calculate the amount of GST.
Purchasers
Regardless of whether you are registered for GST, the seller may ask you to agree in writing to make the purchase under the margin scheme. If you agree and the margin scheme is used, you will not be entitled to claim a GST credit for the GST included in the purchase price.
Can I use the margin scheme?
In order to use the margin scheme, you must be registered for GST and be making a taxable sale of real property by:
· Selling a freehold interest in land
· Selling a stratum unit; or
· Supplying a long term lease.
However, you will not be able to use the margin scheme if you are selling real property that you:
· Acquired through a taxable sale on which the margin scheme was not used.
· Inherited from a person who would not have been able to use the margin scheme.
· Acquired from a member of the same GST group who would not have been able to use the margin scheme; or
· As a participant in a GST joint venture, acquired from the joint venture operator who would not have been able to use the margin scheme
| 10. | What 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).
This process is exhaustive and provides a framework for all business, large and small, to work towards achieving pre-defined goals and plans.
The implementation of a plan should involve key people in your business and be guided by your BM&Y adviser.
BM&Y Business & Taxation Service people have an understanding of and experience in delivering Business Planning Solutions for clients across a variety of industries.
Our consultative approach not only helps you establish a business plan but we also work with clients in developing a time line for achievement of goals.
One of the great challenges of the business plan process is making it work.
