The Good, The Bad and The Ugly
Deciding on whether to start a business or what investments to buy can be a challenging experience. However, once you’ve made this important decision you’ll then need to determine the appropriate tax structure to operate through.
Consideration needs to be made to a wide range of factors, with many of the primary areas of focus being taxes, costs, time, and risk reduction. Below we’ve broken down the four most popular tax structures with their good, bad and just plain ugly features.
Sole Trader/Personal Name
It’s cheap, it’s clean and there are less set-up and ongoing fees than the other structures. Popular for low-income, low-risk businesses.
Income from all sources will be consolidated in your personal name and taxed a marginal tax rate (as high as 49%).
You have unlimited liability for debts as there is no distinction between private and business assets.
The structure is easy to establish with low start-up costs and reduced ongoing costs. It’s also easy to change as your business needs change.
The liability of the partners for any debts of the business is unlimited.
The partners are jointly and severally liable for the partnership’s debts. Partners are agents of the partnership and therefore liable for each other’s actions.
It can provide flexibility in distributions among beneficiaries, therefore reduce overall family tax. Also offers additional asset protection as liability is limited when a corporate trustee is appointed.
The structure adds complexity, therefore additional time and cost is required in establishing and maintaining the trust. Contractors need to be particularly careful with the personal services income (PSI) rules.
Losses may be trapped in the trust, therefore tax benefits from negatively geared investments may be delayed or removed. Conversely, all net income must be distributed to beneficiaries to avoid the trust paying tax at the highest marginal tax rate.
Greater asset protection as liability for shareholders is limited. Businesses with annual aggregated turnover lower than 10 million attracts up to 27.5%. Profits in the business can be retained, therefore providing shareholders with greater tax planning opportunities.
As with trusts, the company can be expensive to establish, maintain and wind-up. Furthermore, the reporting requirements can be complex. Again, as with trusts, be careful with PSI.
If directors fail to meet their legal obligations, they may be held personally liable for the company’s debts.
Figures based in 2017FY rates.
Please feel free to call the Tax & Accounting experts at CXC Financial Partners on 1300 925 081 to discuss whether this service is right for you.
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All contents presented within this document are not to be construed as personal financial advice, taxation advice, a recommendation or an offer or invitation to buy, sell or hold a financial product. It is for general informational purposes only.
While every attempt has been made to ensure the accuracy of this information at the time of compilation, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors or omissions (including responsibility to any person by reason of negligence) is accepted by CXC FP, its officers, employees, agents or authorised representatives.
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