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Choosing the right business structure part 4- Company

When setting up a business, it’s important to consider the structure of the business right from the start, as it will have ownership, tax and legal obligations. Your chosen structure must also be able to support your long-term business goals.

There are 4 common business structures in Australia, which include:

Sole Trader
Partnership
Trust
Company

This article will cover off the company structure, as well as the main benefits, disadvantages and tax implications. If you’re wondering which is the right structure for your particular circumstances, talk to one of our registered tax agents. Also remember to check out the other articles in this series!

What is a Company?

A company is a separate legal entity with its own tax and superannuation obligations. It is run by the company directors and owned by its shareholders.

The assets, liabilities, income and expenses incurred by of the company are accrued to the company, not an individual. There may be tax consequences if you are using your company’s money and assets for private purposes. The business is also regulated by the Corporations Act and must abide by all the standards the act stipulates. A company can be operated either privately or publicly.

Companies fall into the following categories:

Companies limited by shared – This type of structure limits the liability of shareholders to the value of their shares. This form of company can either be public or private
Companies limited by guarantee – The liability of members is limited to the amounts the members contribute to the company if the company wounds up. This form is often used by non-trading or non-profit organisations like areligious organisation, charity or sporting club

ASIC regulates and governs all companies in Australia, using the Corporations Act 2001. ASIC also maintains a database of all companies in Australia.

Advantages of a Company

Shareholders generally only lose the value of their shares, and aren’t liable for the company’s debts
A company can trade anywhere in Australia
A company is a much better structure if you anticipate high growth for your business
All legal arrangements are made in the company’s name, not an individual director in the business
Most flexible form of structure in relation to continuity of trade in the event of illness, disability or death of key owners
Company shares may be transferred
Company tax rates are more favourable than the highest marginal tax rate for individuals

Disadvantages of a Company

This is the most regulated of all the business structures, so there is significant cost, administration and expertise required to set one up, and run it
Companies must comply with all legislation as outlined in the Corporations Act 2001 and regulated by ASIC. This adds complexity and additional costs
Under the Act, directors have a set of duties, which if breached, can mean they are personally liable for the company debt. Duties include acting in good faith, not trade while insolvent
Supplier or lenders are often reluctant to lend money or enter contracts with proprietary limited companies unless personal guarantees are offered
There are tax disadvantages to this company structure. Corporation tax rates will apply and personal tax-free thresholds are not available. No CGT small business concession or 50% CGT discount for sale of assets held by a company is available to this business structure. Shareholders pay tax on their dividends at their marginal rate and there’s not much scope for tax planning
Any income derived by a company where it’s rental income, capital growth or interest is taxable, which is different to how a trust is structured
There are greater and more complex tax reporting requirements than sole traders and partnerships
There is a lack of confidentiality as a company’s financial affairs are public
If a company holds all the business’ assets and IP, they are at risk if someone sues the company. There are ways to mitigate this risk, including the use of a holding company or an operating company.

Key Tax Obligations

A company is responsible for its own tax and superannuation obligations
Must have its own TFN
Is entitled to an ABN if registered under the Corporations Act 2001
A company must register for GST if it turnover more than $75,000 annually, provides taxi, limousine or ride-sourcing services or wants to claim fuel tax credits.
Might be required to lodge BAS statements
Must lodge an annual company tax return
Tax is usually paid via instalments via PAYG system
Tax is paid at the applicable company tax rate
Must issue distribution statements to any shareholders it pays
Must pay superannuation guarantee for any staff

There are many reasons why a company may be the right structure for your business, and we’ve covered off the main points here. Don’t forget to check out parts 1-3 of this series, where we cover off structuring as a Sole Trader, Partnership or Trust. Don’t hesitate to get in touch if you need specialised advice for your situation.

Choosing the right business structure part 3 – Trusts

Business Structures: Part 3- Trusts

There are 4 common business structures in Australia, which include:

Sole Trader
Partnership
Trust
Company

In this series of articles, we have already covered off the Sole Trader and Partnership structures. This article will cover the structure of Trusts, as well as the main benefits, disadvantages and tax implications. If you’re wondering which is the right structure for your particular circumstances, talk to one of our registered tax agents.

What is a Trust?

A trust is one of the more complex business structures that provides more flexibility than those we have already covered off to date. In a trust, an individual or company holds trust assets either in their own name, or in its own name to benefit a group of beneficiaries. Beneficiaries can either be a group of people, or entities.

Trusts are usually created for tax planning, estate planning or asset protection. The flexibility to distribute income and assets, and the income tax savings make this an attractive business structure.

For a trust to be established, the following criteria must be fulfilled.

The Trustee- the titleholder who is obligated to deal with the property on behalf of the beneficiary or object of the trust
Trust property – which must be identifiable and capable of being held on trust

If a trust is set up to run a business, it will normally have a trust deed that sets out the powers of the trustees and interests of the beneficiaries in the trust.

Types of trusts

There are many types of trusts outlined below. The most popular one being discretionary and unit trusts.

Discretionary trust -The trustee can use their discretion to distribute the net income amongst beneficiaries. Good to use when the taxpayer wants flexibility in distributing income and capital to different beneficiaries to lower the overall tax rate. A popular option for small family trusts.
Unit trust – This is a fixed trust, with all beneficiaries holding units in the trust. The income generated is distributed among beneficiaries in proportion to the number of units held. Different classes of units may have different rights or entitlements, such as voting rights, share of income or preferential rights to interests or income. A popular option amongst public offer managed funds
Fixed trust – the beneficiary’s share in the trust estate is fixed by the trust deed
Bare Trust – A basic form of trust fund with no trust deed in place. The trustee holds the trust property with no discretionary powers. A common example is a parent holding a bank account for a minor
Superannuation funds- These all operate under a trust structure

The trust is managed by the trustee who is bound by equitable fiduciary duties, by the provisions of the trust deed and the Trustee Act of each state and territory.

A trust does not pay income tax on profits, provided the profits have been distributed fully to the beneficiaries in that financial year.

Advantages of trusts

A discretionary trust provides protection of assets and limits all liabilities of a business
The control of an asset is separated from the owner of the asset, so can be useful in protecting the income or assets of a minor or family unit.
Beneficiaries are generally not liable for trust debts unlike the other 2 structures of sole trader and partnerships
Discretionary trusts provide flexibility in the distribution of income and capital gains amongst its beneficiaries
Tax is paid by beneficiaries at their own marginal tax rates
The CGT small business concession and 50% CGT discount for sale of assets held by trust is available

Disadvantages of trusts

A trust is significantly more expensive to establish when compared to a sole trader or partnership structure
A complex legal structure that must be set up by a legal or accounting professional
Strict obligations are in place for the trustee to hold and manage property for the benefit of beneficiaries
The trust deed limits the operation of the business
Losses are not distributable and can’t be offset by beneficiaries against other income they have
The trust must comply with extensive regulations
A trust cannot retain profits for expansion without penalty rates of tax

Key tax obligations of a trust

A trust must have its own TFN
A trust must lodge an annual trust tax return, which will include a statement on how income was distributed
A trust must apply for an ABN
A trust must register for GST if it has an annual GST turnover of $75,000, provides taxi, limousine or ride sourcing services or want to claim fuel tax credits.
May be required to lodge BAS
Must pay super for eligible employees

Trusts are complex to set up and administer when compared to sole traders and partnership structures, however they afford more flexibility and control over the simpler business structures. It’s important to have a trust set up correctly, so if this is something you are interested in, please get in touch. Check back in next week to see the advantages and disadvantages of a company.

Commercial Landlord Hardship Fund NSW

The Commercial Landlord Hardship Fund provides grants of up to $3,000 per month per retail or commercial lease to eligible NSW small landlords.

The Fund is an exhaustible financial resource and remains open until it is

– Declared closed by NSW Government; or

– The money in the Hardship Fund is exhausted (“runs out”) – whichever comes first.

Applications open in October 2021.

Eligibility criteria

Applicants must:

1. be a landowner (or trustee) with total taxable land holdings of less than $5 million (as at 31 December 2020)
2. have not claimed land tax relief for the relevant property for rent reductions between 1 July 2021 and 31 December 2021
3. have gross rental income as their primary source of income (gross rental income being more than 50% of total assessable income) for the 2019-20 financial year;
4. be a landowner of the property for which an application is made;
5. be the landowner of a New South Wales property subject to the Retail and Other Commercial Leases (COVID-19) Regulation 2021;
6. be a landlord with a current lease agreement that provides rent relief to the tenant(s) from 13 July 2021 that will not be claimed as 2021 land tax relief
7. attest that providing rent relief to the tenant(s) may cause financial hardship

Process before applying

Before applying to the Commercial Landlord Hardship Fund, landlords must complete the following process under the Commercial Tenancy Relief Scheme:

Step 1 – Reach an agreement through either mediation or private negotiation with impacted tenants, that complies with the Retail and Other Commercial Leases (COVID-19) Regulation 2021

Step 2 – Obtain tenant’s approval to disclose terms of agreement for the purpose of applying for the Commercial Landlord Hardship Fund grant

Step 3 – Show evidence that the agreed amount has been applied to the month for which the grant is being claimed

Landlords may then apply for a grant of up to $3,000 per month per eligible property in proportion to their ownership share.

Monthly Reporting

Monthly attestation is required (for the term of the rental abatement agreement) from the applicant that

– The rental abatement agreement remains in force; and

– All other scheme requirements continue to be met, in particular ongoing financial hardship of both the tenant and landowner.

Applications and Evidence

Application is made through Service NSW – and open in October 2021

Applicants must attach

Statutory Docs

– a 2020 or 2021 Land Tax Assessment Notice OR

– 2019-20 Income tax return for the relevant entity

Lease Agreement

– the current lease agreement (or other suitable documents where not available) with their tenant(s) showing:

(a) the total value of pre-COVID rent;

(b) tenant(s) contact details;

Evidence of Relief

– written details of the rent relief agreed between landlord and tenant(s), including:

(a) rent relief start and end dates

(b) total value and per cent of rent deferred

– Acceptable Identification

Attestation

Applicants will be required to attest that:

(a) they meet the Commercial Landlord Hardship Fund eligibility criteria;

(b) the information provided in the application is true and correct;

(d) they hold the written consent of the tenant to provide business and contact details;

(e) the rent reduction has or will result in financial hardship to the applicant; (our emphasis) and

(f) they acknowledge and understand the NSW Government reserves the right to recover any grants paid if any application information is found to be false or misleading, or the grant is not used in accordance with the terms of funding set out in these guidelines.

FOR MORE INFORMATION VISIT SERVICE NSW: https://www.service.nsw.gov.au/commercial-landlord-hardship-fund-guidelines#other-information

Covid19 NSW Business Relief Summary

Introduction

If your NSW business has been impacted by the Covid-19 “Delta outbreak” and the NSW public health stay-at-home orders (commencing June 2021) there are a range of measures to support you during this lockdown.

The measure available are for:

– ABN Businesses (or Not for Profits),

– In NSW,

– With annualised turnover above at least $30,000 (at 30/6/20), and wages less than $10M,

– Where the 2020 tax return is complete,

– And the business has suffered a downturn of at least 30%.

2021 COVID Business Grant

– One off Grant

– Available for businesses suffering downturn of

– 30% (receive $7,500)

– 50% ($10,500)

– 70% ($15,000)

– Comparing the 2-week period 26/6/21 – 17/7/21 against the same period in 2019, 2020 or the 2 weeks prior.

– Business had income between $75K to $50M for FY2020

– Applications close 13 September 2021

– Link: https://www.service.nsw.gov.au/transaction/2021-covid-19-business-grant

2021 COVID Jobsaver

– For businesses with turnover $75K – $250M p.a at 30/6/2020

– Fortnightly payments (receive min $1,500 per week, MAX $100K p.w)

– Equivalent to 40% of weekly payroll

– Available for business suffering downturn of at least 30%

– By comparing any 2-week period after 26/6/21 against the same period in 2019, 2020 or the 2 weeks prior.

– Business must maintain employee ‘head count’

– Sole traders eligible for $1,000 p.w

– Applications close 18 October 2021

– Link: https://www.service.nsw.gov.au/transaction/jobsaver-payment

2021 COVID Micro business Grant

– For businesses with turnover $30K – $75K p.a at 30/6/2020

– Receive $1,500 per fortnight

– Paid fortnightly

– Available for business suffering downturn of at least 30%

– Comparing any 2 week period after 26/6/21 against the same period in 2019, 2020 or the 2 weeks prior.

– Cannot apply for NSW Covid Business or Covid Jobsaver

– The business must be the owner’s primary income source

– Link: https://www.service.nsw.gov.au/transaction/2021-covid-19-micro-business-grant

Revenue NSW Payroll Tax Relief

DEFERRAL

– Ability to defer payments due on 2020-21 Annual reconciliation

– Interest free

– Any business paying payroll tax is eligible for deferral

WAIVER

– Any NSW business with 30% decline in turnover is eligible for a 50% waiver in payroll tax bill

– Eligible for businesses with wages up to $10M

Revenue NSW Land Tax Relief

– Land Tax waivers for landowners who can demonstrate they provided Rent relief for tenants in distress;

– Up to 100% of the Land Tax bill

– Available until 31 December 2021

Commercial Landlord Hardship Fund

– Administered by Service NSW

– Provide grants of up to $3,000 per month to small commercial or retail landowners who suffer hardship due to the changed leasing arrangement with tenants who are financially impacted by COVID-19 in 2021, and have not claimed any land tax relief for rent reductions provided between 1 July 2021 and 31 December 2021

– Available per eligible property

– The fund is limited (once the funds are disbursed – the scheme is over)

– Link : https://www.service.nsw.gov.au/commercial-landlord-hardship-fund-guidelines

Six Member SMSFs allowed from 1 July 2021

It has been a few years since the proposal to increase the number of members in a self-managed super fund (SMSF) from four to six was put forward by then Treasurer Scott Morrison.

On 22 June 2021, the legislation for this proposal received Royal Assent.

SMSFs are permitted to have up to six members from 1 July 2021.

There is a lot to consider when adding members to a SMSF and may not suit everyone.

Key Considerations:

More members can pool their balances to purchase larger or higher value assets such as property.
It could increase the ability to make contributions which in turn could increase cashflow.
Allows families to include more family members. It would allow Mum & Dad to include up to four children under the same SMSF.
Increased complications when there are disputes, in particular family law disputes
Increased risk of control imbalance if voting is based on weighted balances.
All trustees/directors are responsible for decisions made, even if they are not directly involved. Succession planning and future control will need to be carefully considered to help manage the risk of loss of capacity and death
Most States and Territorities, include New South Wales only permit up to four individual trustees. Accordingly, the SMSF will need to have a corporate trustee where all members would be directors in order to have up to six SMSF members.
Some trust deeds specify the four member limit and would need to be varied before increasing the number of members.

NSW Payroll Tax Rate Reduction

The NSW Government has announced a reduction in the payroll tax rate to 4.85 per cent for the 2020/21 and 2021/22 financial years.

The threshold has also increased to $1,200,000 for the 2020/21 and subsequent financial years.

These changes apply retrospectively from 1 July 2020.

Tax year	Threshold	Tax rate
01/07/2020 to 30/06/2021	$1,200,000	4.85%
01/07/2019 to 30/06/2020	$900,000	5.45%
01/07/2018 to 30/06/2019	$850,000	5.45%

About a Payroll Tax

If you’re an employer who pays wages in NSW, you must register for payroll tax if your total Australian wages exceed the relevant monthly threshold.

Days in the month	Threshold
28	$92,055
30	$98,630
31	$101,918

What are ”Wages”?

Wages and other payments to employees engaged on a permanent, temporary or casual basis are subject to payroll tax.

Wages
Allowances
Bonus / Commissions
Director Fees
Fringe Benefits
Superannuation
Salary Sacrifice
Termination payments
Third party payments
Salary Sacrifice

If you would like a review of your “Wages” to staff and contractors in light of Payroll Tax please contact us for a quote.

Amidst the growing fears around the spread of COVID-19 (coronavirus), we would like to take this opportunity to reassure our clients that Economos are committed to ensuring that the disruptions are kept to a minimum.

As you know this is an unprecedented and constantly evolving situation. The health and safety of our clients and employees are our number one priority and managing the risk of transmission of coronavirus is critically important.

Tax Obligations

The Australian Taxation Office (ATO) together with the Government’s economic response will be assisting taxpayers who experience financial difficulties due to COVID-19.

For more information on the ATO support: https://www.ato.gov.au/Individuals/Dealing-with-disasters/In-detail/Specific-disasters/COVID-19/

At this stage there have been no announcements with regards to any extensions to lodgement due dates. We will monitor and advise you of any developments.

Contact with our team and visiting our office

Based on the information provided by the Australian Government – Department of Health, we will be exercising social distancing. Accordingly, all face-to-face meetings will be held electronically via telephone or web meeting.

Our team have the technology and devices to be able to continue to support you regardless of work location.

For the latest information about coronavirus in Australia, visit the Australian Government’s Department of Health website https://www.health.gov.au or contact the coronavirus health information line: 1800 020 080.

We encourage our clients and the community to remain calm, if we work together to follow protocols within our community, we can help to reduce the risks associated to coronavirus.

We will get through this together.

There have been so many changes in superannuation in the last few years, it can be hard to keep track with the best ways to maximise your self-managed superannuation fund.

Here are our Top 10 strategies to utilise your Self-Managed Superannuation Fund (SMSF).

1. Maximise Contributions with Personal Superannuation Contributions

If you make a personal contribution into your superannuation fund, you may be able to claim a tax deduction for those contribution. The contribution must be made from your after-tax income i.e. from your bank account directly into your super fund. Before claiming a deduction, you must submit a Notice of Intent to Claim a Deduction for Personal Contribution Form and receive an acknowledgement from your fund. Personal super contributions that are claimed as a tax deduction will count towards your concessional contribution cap (2018-19: $25,000). If you exceed the cap, you will have to pay extra tax and will count to your non-concessional contribution cap.

Suitable for members who are investors externally to their SMSF

2. Direct Property Investment

Buying an SMSF Property or investment property directly through an SMSF is becoming increasingly popular. Direct property investing can provide capital growth and rental income in a very tax advantageous structure. Rental income is taxed at 15% and capital gains at 10% if the property is held for more than 12 months. If you hold your property until you have retired and commenced a pension, both rental income and capital gains could become tax free.

Suitable for people who enjoy property investing

3. Business Real Property

Generally speaking, you cannot buy an SMSF property and live in it, nor can you rent it to a relative, even on commercial terms. However, if you run a business, you can buy a commercial property using your SMSF and lease it to your own business.

Your business would pay rent at market rate to your SMSF, which is a tax-deductible expense for your business. Since rent is not classified as a superannuation contribution, you can still make concessional and non-concessional contributions, subject to your age and contribution caps.

Suitable for members who are investors externally to their SMSF

4. SMSF Property Loans or Limited Recourse Borrowing Arrangements

SMSFs can borrow money to purchase a single acquirable asset such as a property, or a collection of identical assets that have the same market value such as a parcel of shares. This is achieved via a limited recourse borrowing arrangement (LRBA). This arrangement involves the lender’s recourse being limited to the single asset. Borrowing in an SMSF is not without risk although there are several potential benefits including leverage, tax advantages and asset protection.

Suitable for experienced property investors with the ability to service the loan in their SMSF.

5. Recontribution Strategy

A re-contribution strategy is where you withdraw your super and re-contribute it back into super. There a several reasons as to why you may utilise this strategy:
• Estate Planning
• Tax Planning
• To utilise you and your spouse’s Transfer Balance Cap (currently $1.6 million)
• To maximise Centrelink Benefits
• Access government co-contribution and spousal contribution tax offset.

Suitable for members who have retired or over 65 years old, and eligible to make non-concessional contributions

6. Start an Account Based Pension

Once you reach preservation age and have met the relevant retirement conditions, you can allocate up to $1.6 million to start an Account Based Pension. An Account Based Pension converts your accumulation balance into “retirement phase”. In retirement phase, earnings are tax-free.

Suitable for members over 65 years old and members who are retired – aged between preservation age and 64 years old

7. Spousal Contribution Splitting

This strategy involves one member of a couple to split up to 85% of their concessional contributions received within a financial year with their spouse. This opportunity provides an opportunity to equalise their retirement benefits in particular where one spouse is younger, earning a lower income or is not working.

Suitable for couples

8. Separate Investment Strategies/Segregated Assets

Circumstances may warrant separate investment strategies within one fund e.g. Parents with children in one fund. The children have a different investing profile to their parents. Under new legislation if funds have over $1.6 mil in pension phase, they are not entitled to use segregation to determine tax-free earnings. However, there is a difference between segregation for tax and segregation for accounting.

Suitable for funds with both parents and children

9. In Specie Transfers

This involves making a contribution by transferring listed shares or business real property into your SMSF and not receiving cash proceeds. Although this triggers a SMSF capital gains tax event, this will allow future earnings to be made in a concessional tax environment. Subject to contribution caps.

Suitable for investors who hold investments in listed shares and business real property outside super

10. Downsizer Contribution

An older Australian who downsizes can contribute up to $300,000 to super regardless of employment status, Total Superannuation Balance and non-concessional contribution cap. This involves a member 65 years old or older, selling their home and making a contribution within a prescribed period.

Suitable for members over 65 years old

Bonus Strategy

11. Carry-forward concessional contributions of unused caps over five years

From 1 July 2018, if your Total Superannuation Balance is less than $500,000 at the end of a financial year, you will have the opportunity to start accumulating the unused portions of your concessional contribution caps from previous years (up to 5 years) in the following financial years. This mechanism will allow you to “catch-up” on concessional caps and make contributions which will count towards your unused concessional contribution caps.
Amounts carried forward that have not been used after five years will expire.
The first year in which you can access unused concessional contributions is the 2019–20 financial year.

Suitable for members with balances less than $500,000 in superannuation

Our SMSF Accountant and Specialist, Leanne Tinyow

Speak to one of experienced SMSF Accountants in Sydney. Leanne Tinyow is Economos’ Head of SMSF Services and is in charge of the compliance and administration of over 400 Self-Managed Super Funds. She is also well versed in helping new clients with SMSF setup and sdministration and can answer several SMSF property related questions.

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