General
X

We'd love to help you build a successful business and grow your personal wealth. Get in touch to book a free consultation.

    The importance of your business structure

    The importance of your business structureDetermining the correct structure for your business is one of the most important processes you can undertake.

    Many facets of your business and your personal life can be impacted by the choice you make, so it’s crucial that you select the most appropriate structure for your circumstances.At North Advisory, we believe in learning as much as possible about your situation and your needs.

     

    We can provide you with guidance and help you set up your business so that it can truly succeed.

    Gather all the information

    Gather all the information

    The first step in the process is one of discovery. Many people jump too quickly into thinking they know what’s right and don’t take the time to gather the necessary information. But a quick decision can sometimes lead to a negative outcome, so we always recommend looking at all aspects of your life and the business.

    Martin van der Saag, North Advisory’s Founder and Strategic Advisor, explains,

    “You have to analyse the client’s entire set of circumstances to determine what is going to be appropriate for them.

    There’s a lot of information on the web that you can read and think you know what’s going to suit your needs… but it’s like being sick and Googling your symptoms. You are always best off going to a doctor for your diagnosis; it’s the same here.

    We can analyse your needs, outline the benefits of various structures and make a recommendation based on our knowledge. This is where much of our skill lies.”

    As part of the information gathering process, there are many specific factors that should be considered. Martin continues,

    Family is particularly important“Family is particularly important here. With so many different family models we need to have a very clear understanding of your situation. Whether you have a spouse, any dependants, the age of the dependants, whether they live in Australia or overseas… all these factors would have some influence over the type of business structure you might require.

    We also need to find out everything about the business…

    How many owners and who is in control?

    Will you be borrowing money to start the business? How are you going to fund the working capital?

    We need to identify how risky your business is… for example are you working in an industry with little chance of litigation? Or are you in a high-risk industry such as construction?

    Do you have any assets? If you do, we need make sure they aren’t exposed to the liability of the business. The last thing we want is a client to risk losing their personal assets because something happens within the business.Do you have any assets

    We also need to look at how company profits should be distributed to maximise tax efficiencies. There are all sorts of nuances that we need to ascertain and identify so that we can select the most suitable structure.”

    Once we have completed our discovery session, we can help you decide which structure best suits your business and work through the set-up process with you.

    Sole traderSole trader

    This is the business type that most people already understand. A sole trader is a straightforward trading entity and doesn’t need any specific structure set up.

    A sole trader is an individual running a business. It is the simplest and cheapest business structure.

     

    If you operate your business as a sole trader, you are the only owner and you control and manage the business.

    You are legally responsible for all aspects of the business. Debts and losses can’t be shared with other individuals.

    This type of business is extremely easy to start, however the disadvantage with being a sole trader is that any personal assets in your name are exposed to any liability of the business.

    Partnership

    The next step up from sole trader is a partnership.

    PartnershipA partnership is a group or association of people who carry on a business and distribute income or losses between themselves.

    For example, if you and a friend or family member decide to set up a business together, you might operate it as a partnership.

    A partnership is relatively inexpensive to set up and operate.

    The partners share income, losses and control of the business.

    A written partnership agreement is not essential for a partnership to exist but is prudent.

    A partnership agreement should outline how income or losses will be distributed to the partners and how the business will be controlled.

    The key thing with a partnership is that each person is responsible for the decisions made by all business partners. This means you can incur liabilities that you might have not be involved with. Martin explains,

    “Within a partnership, each partner is liable for any risk. This means that any creditor of the business can seek to retrieve funds or assets from anyone within the partnership… regardless of who initiated the original debt.

    Just because you are 50/50 partners, doesn’t mean you have only 50% of the liability. Because of this, a partnership can carry more personal risk as it’s not only your debt.”

    Australian Securities and Investments CommissionCompany

    A company is a recognised legal entity that is run by directors and owned by shareholders.

    The Australian Securities and Investments Commission (ASIC) regulates companies and there are specific registrations that must be completed. We find that this is often the business structure that people believe will suit their needs, but after we do our assessment it might not be the most suitable.

    Martin discusses an example of this,

    “Some industries have high levels of workers compensation insurance and once the company owners start to receive high salaries, there can be significant costs involved.

    To make the process more cost effective there are alternative structures we could incorporate that enable the directors to receive payment without incurring the extra costs.

    It is in this type of unique situation that we can deliver value to our clients.”

    TrustsFinal business structure

    The final business structure we can consider is a trust. Again, Martin explains,

    “A trust is basically a relationship between two entities. There is a ‘trustee’ which we usually recommend be a company, then there is a ‘trust’ which is a document that says the trustee will manage the assets of the trust for the benefit of the beneficiaries.

    We often use trusts when making our recommendations to clients and there are two different types that are very useful.

    First is a discretionary family trust. This allows the trustee to distribute the business income on a discretionary basis. The income is distributed amongst the beneficiaries however they see fit. In this instance the power rests with the trustee.

    Then there is a unit trust. This is more suitable for businesses that will be owned by one or more family interests. You can trade units just like you can trade shares of a company.

    We like to work a lot with trusts; they are more complicated but there is so much more flexibility and the benefits can outweigh the additional complexity.”

    Continued help

    Once your business structure has been established, North Advisory can continue to help you through the evolution of your business.

    We can assist with Self-Managed Superannuation Funds (SMSF) where you can enjoy many tax advantages and we can support you with your personal wealth management.

    Contact our team to discuss how we can add value to your personal situation today. Read more business accounting articles.

    The ATO has clarified that any benefit arising from travel by taxi, and not a ride-sourcing service, by an employee is exempt from fringe benefits tax (FBT) if the travel is a single trip beginning or ending at the employee’s place of work.

    In particular, the exemption is limited to travel in a vehicle licensed by the relevant state or territory to operate as a taxi. It does not extend to ride-sourcing services provided in a vehicle that is not licensed to operate as a taxi, such as Uber.

    Any benefit arising from taxi travel by an employee is also an exempt benefit if the travel is:

    • a result of sickness of, or injury to, the employee, and
    • the whole or a part of the journey directly between any of the following:
      • the employee’s place of work
      • the employee’s place of residence, and
      • any other place that it is necessary, or appropriate, for the employee to go as a result of the sickness or injury.

    If you have any questions regarding the above matters, please do not hesitate to contact us.

    Norman Ruan
    Accountant
    T: 02 9984 7774
    E: normanr@northadvisory.com.au

    Read more about business tax.

    The Bill containing the three-stage personal income tax cuts package completed passage through parliament and is now law.

    The Treasury Laws Amendment (Tax Relief So Working Australians Keep More Of Their Money) Bill 2019 has received assent as Act No 52 of 2019 and fully implements the measure announced in the 2019 Federal Budget. The measure amends the tax law to lower taxes for individuals, including changes to the low and middle income tax offset (LMITO) from 2018/19 and the low income tax offset from 2022/23. The Bill also amends the personal income tax rates and thresholds from 2022/23.

    ATO administration of amendments

    The ATO is making system changes to ensure amendments to the LMITO will be taken into account for 2018/19 tax returns that have already been lodged such that taxpayers will receive the appropriate refunds reflecting their entitlement to the increased LMITO, according to income level and tax paid. The changes to the offset will also be taken into account for those yet to lodge their 2018/19 return.

    If you have any questions regarding the above matters, please do not hesitate to contact us. Read more Personal Wealth Management articles.

    Norman Ruan
    Accountant
    T: 02 9984 7774
    E: normanr@northadvisory.com.au

    The ATO will take strong actions against false clothing and laundry work-related expense claims this Tax Time.

    Assistant Commissioner Karen Foat said although many Australians claim clothing and laundry expenses, it is unlikely that half of all taxpayers are required to wear uniforms, protective clothing or occupation-specific clothing to earn their income.

    The ATO is concerned about the number of people claiming deductions for conventional clothing. Some retail workers claim normal clothes because they are told to wear a certain colour, or items from the latest fashion clothing line. Others think they can claim normal clothes because they only wear them to work.

    The ATO reminds taxpayers that an official dress code does not qualify as a uniform. A claim cannot be made for normal clothing, even if an employer requires the taxpayer to wear it, or only wear it to work.

    Taxpayers who cannot substantiate their claims should expect them to be refused, and may be penalised for failing to take reasonable care when submitting their tax return.

    If you have any questions or concerns about your work-related clothing, laundry and dry-cleaning expense deduction claims, please do not hesitate to contact us. Read more Personal Tax articles.

    Norman Ruan
    Accountant
    T: 02 9984 7774
    E: normanr@northadvisory.com.au

    Company tax cuts

    For 2018/19 income year, companies with an annual aggregated turnover under $50m will have a reduced tax rate of 27.5%. To be eligible for the reduced rate, the company must be a base rate entity.

    Instant asset write-off increased, extended and allowed for medium-sized businesses

    The $20,000 instant asset write-off for small business has been increased to $30,000 from 2 April 2019. The scheduled end date of the write-off has been extended from 30 June 2019 to 30 June 2020.

    Also, there is another limit of $25,000 which is available from 29 January 2019 to 2 April 2019.

    For medium-sized business, which is defined as being over $10m in aggregated turnover but under $50m, an entitlement to a $30,000 instant write-off is allowed until 30 June 2020. The assets must be purchased after 2 April 2019.

    Single touch payroll

    Entities who are employers are required to report the following information to the ATO from 1 July 2019:

    •  withholding amounts and associated withholding payments, on or before the day by which the amount is required to be withheld
    •  salary or wages and ordinary time earnings information on or before the day on which the amount is paid, and
    •  superannuation contribution information on or before the day on which the contribution is paid.

    There are some exceptions to the single touch payroll allowed for employers who only make payments to closely held employees.

    Non-compliant withholders to be denied tax deductions

    From 1 July 2019, businesses will no longer be able to claim deductions for payments to their employees where they have not met their PAYG obligations. This includes where the employer is required to withhold PAYG from gross payments, but fail to report or remit it to the ATO.

    PAYG withholders will be required to ensure that all lodgements are made on time to avoid large penalties with denied tax deductions.

    Additionally, the deduction for businesses on certain payments to contractors which have not met PAYG obligations will be denied unless a genuine mistake has been made.

    Taxable payments reporting system

    Beginning with the 2018/19 income year, the following industries have introduced a taxable payments reporting system:

    •  Couriers
    •  Cleaners

    Starting from 1 July 2019, the taxable payments reporting system will be extended to include the following industries:

    •  Security services
    •  Road freight
    •  IT services

    Entities who engage contractors, or subcontractors, will need to provide additional reports to the ATO. This treatment has the same requirements as salary and wage employees.

    Similar business test

    A company is now allowed to claim a prior year loss against business profits as long as it satisfies the similar business test from 1 July 2015. This test adds on to the same business test, which was less flexible to pass.

    The former same business test is failed unless the company carries on the same business and has not derived income from any new kinds of business or transactions. The new test makes it easier for companies to pass where early investors have entered the company ownership.

    As the legislation takes effect as of 1 July 2015, companies in this position have an opportunity to amend income tax returns from the 2015/16 income year. Also, a company going back and amending their tax return to include the company loss deduction would do so in that prior year at a higher company rate. However, careful analysis of the company loss is advised.

    Fodder storage assets allowed immediate write-off

    For primary producers, a new law has been enacted which allows fodder storage assets to be immediately written off.

    Fodder storage assets may include silos and hay sheds, and are used to store grain and other animal feed. The immediate write-off will apply if the asset is purchased and first installed ready for use on or after 19 August 2018.

    R&D tax incentive change not law

    The research and development (R&D) tax incentive was due to be amended for income years starting 1 July 2018. Under the announcement, the incentive would have been based on an uplift of the entity’s corporate tax rate in the particular income year.

    However, changes relating to a company’s “R&D intensity percentage” have not become law. All rules as they related to R&D have not changed for companies.

    If you have any questions regarding the above points raised, please do not hesitate to contact us.

    Martin van der Saag
    Partner
    T: 02 9984 7774
    E: martinv@northadvisory.com.au

    Norman Ruan
    Accountant
    T: 02 9984 7774
    E: normanr@northadvisory.com.au

    Read more about business tax.

    The Commissioner has given notice that it will collect data from cryptocurrency designated service providers, under notice, to identify individuals or businesses who have or may be engaged in buying, selling or transferring cryptocurrency during the 2014/15 to 2019/20 financial years.

    The purpose of this data matching program is to ensure that taxpayers are correctly meeting their taxation and superannuation obligations in relation to cryptocurrency transactions and ownership. These obligations may include registration, lodgment, reporting and payment responsibilities.

    Please contact this office if you have any questions in respect of cryptocurrency. Read more Financial Industry articles.

    Martin van der Saag
    Partner
    T: 02 9984 7774
    E: martinv@northadvisory.com.au

    Dividend imputation

    The Australian Labor Party (ALP) has announced an intention in government to change franking credits from a refundable to a non-refundable tax credit from 1 July 2019.

    A “Pensioner Guarantee” would be included in the franking credit change for individuals in receipt of an Australian Government pension or allowance. Also, self-managed superannuation funds with at least one pensioner or allowance recipient before 28 March 2018 will also be exempt from the changes (ALP website).

    Negative gearing

    Under an ALP government, negative gearing will only be allowed on newly constructed residential properties after 1 January 2020 (ALP website).

    All prior investments would be grandfathered, meaning that income losses on an asset class are able to be offset against other assessable income.

    It has been suggested that any negative income amounts would be allowed to be carried forward and offset against a future capital gain on the asset (Ref: MinterEllison, p 5).

    However, investors with many rental properties may be able to “stagger” the gearing levels across currently held assets in the same class. Specifics relating to how the new policy would work with regards to split loans, redraw or credit facilities are to be determined.

    CGT discount

    From 1 January 2020, the ALP has proposed to halve the capital gains tax discount from 50% to 25%. This change in the discount rate will apply for all assets purchased after 1 January 2020 that are held for longer than 12 months (ALP website).

    The media release goes on to say that all purchases made prior to 1 January 2020 will be fully grandfathered. There has been no announcement regarding any consequences this development may have on employee share scheme acquisitions.

    Limit on deductions for managing tax affairs

    The proposal in its current form is a $3,000 limit per taxpayer per year for managing tax affairs. This may include preparing and lodging tax returns and activity statements, and obtaining tax advice from a recognised tax adviser.

    Other areas which have been seen as controversial in the media relate to tax agent charges in large “one-off” events, such as divorce, inheritance or retirement (Ref: CPA In the Black). Also, there has been no further guidance on whether the deductibility of general interest charge on a tax debt will also be limited to $3,000 per year.

    Discretionary trust distributions tax

    A prior announcement made by the ALP in opposition intends to introduce a 30% standard minimum rate of tax to adult beneficiaries for discretionary trusts. There intends to be no change to the trust taxing rules for non-discretionary trusts, such as testamentary trusts or fixed unit trusts (ALP website).

    Extension of budget repair levy

    Following the 2019 Federal Budget, the ALP confirmed that, in government, they will bring back the temporary budget repair levy of 2%. ALP shadow treasurer stated the levy would remain in place until the budget surplus was 1% of gross domestic product, anticipated to be 2023 (AFR story, 3 April).

    The 2% levy would apply to individuals who are above $180,000 in taxable income.

    Australian Investment Guarantee

    The ALP leader confirmed in the 2019 budget reply speech a commitment to the Australian Investment Guarantee (AIG). The AIG will be an immediate write-off of 20% for any new eligible asset costing more than $20,000.

    Further information on eligible assets would be made available later, but are intended to include machinery, plant and equipment, including upgrades. It is announced that investments in buildings (capital works) would be excluded, as well as motor vehicles.

    Superannuation contributions

    The federal opposition has committed to changing certain rules relating to superannuation contributions (ALP website). These include:

    • providing superannuation guarantee payments of 9.5% for paid parental leave, and
    • phasing out the $450 per month minimum income threshold for superannuation guarantee.

    Catch-up concessional contributions

    Labor has announced their intention to repeal the catch-up concessional contributions, introduced in the 2016/17 income year (2018 ALP National Platform, p 15).

    Under the enacted legislation, individuals with a total superannuation balance of less than $500,000 are able to make additional concessional contributions. Eligibility to make additional contributions apply where an individual has not reached their concessional contributions cap in previous years, with effect from 1 July 2018. Unused amounts will be carried forward on a rolling basis for a period of five consecutive years from 1 July 2018.

    Other announcements

    • Maintaining the company tax rate of 25% for businesses with aggregated turnover under $50m, scheduled to commence in the 2021/22 income year.
    • Managed investment trust tax rate to be reduced from 30% to 15% in a “Build to rent” scheme, commencing 1 January 2020.
    • Removal of thin capitalisation calculations for debt deductions, leaving international entities with only the worldwide gearing ratio test to apply.
    • Reducing non-concessional contributions cap from $100,000 to $75,000.
    • Reducing threshold for Div 293 tax from $250,000 to $200,000.
    • Banning new limited recourse borrowing arrangements in self-managed superannuation funds.
    • Reintroducing recently repealed legislation surrounding deductibility for salary and wage earners to make additional deductible superannuation contributions. In the past, only self-employed individuals could make personal deductible superannuation contributions.

    If you have any questions or concerns about how the Australian Labor Party tax policies may impact on you, please do not hesitate to contact us. Read more Financial Industry articles.

    Norman Ruan
    Accountant
    T: 02 9984 7774
    E: normanr@northadvisory.com.au

    Single Touch Payroll (STP) has changed where every employer will be required to use the system from 1 July 2019. If you are still using a manual system to pay your staff, you will need to change soon.

    If you haven’t started using STP yet, you will need to do the following before 1 July 2019:

    • update your payroll system so that it can complete STP requirements, or
    • engage with us to complete these payroll reporting requirement for you.

    What is STP

    Employers will need to report the following through their payroll system:

    • payments made to individuals and amounts withheld from those payments
    • payments of salary or wages and ordinary time earnings (OTE), and
    • employee superannuation contributions.

    Also, other amounts such as “sacrificed ordinary time earnings amounts” and “sacrificed salary and wages amounts” will be reportable. The objective of these additional reporting requirements ensures that superannuation guarantee is not reduced by amounts salary sacrificed. These amounts, along with ordinary time earnings and superannuation contributions can be reported either separately or combined. Either way, the ATO has stated that they will be aware of an employee’s overall package from which they work out their superannuation guarantee.

    Payments not made through the payroll system (eg contractor payments, payments of superannuation income, payments of dividends, interest and royalties, etc) are excluded.

    PAYG payment summaries

    There will no longer be a requirement to provide employees with PAYG payment summaries at year end.

    Essentially, the employees will be able to see their payment summaries at year end online from myGov and also they will be available on the Tax Agent Portal.

    For more information, please do not hesitate to contact us. Read more business accounting articles.

    Martin van der Saag
    Partner
    T: 02 9984 7774
    E: martinv@northadvisory.com.au

    Norman Ruan
    Accountant
    T: 02 9984 7774
    E: normanr@northadvisory.com.au

    Officially, the $30,000 instant asset write-off has been passed by both houses of parliament on 4 April 2019.

    This means that from 7:30pm AEDT 2 April 2019 to 30 June 2020, assets purchased less than $30,000 will be entitled for an immediate write-off.

    The instant asset write-off means that a small business can claim a complete deduction for assets costing less than the threshold. In the past, assets of this size needed to be written off over a number of years under depreciation rules.

    There have been a number of changes for assets first used or installed ready for use during the 2018/19 income year. The threshold for immediate deduction is as follows:

     

    Purchase date or date asset first used (or installed ready for use) for a taxable purpose Threshold
    1 July 2018 to 28 January 2019 $20,000
    29 January 2019 to 2 April 2019 (7:30pm AEDT) $25,000
    2 April 2019 (7:30pm AEDT) to 30 June 2019 $30,000

    Significantly, an increase of the threshold to $30,000 may mean that your small business depreciation pool can be written off for the 2018/19 income year.

    The entire balance of the pool will be available to be fully deducted in the 2018/19 income year if the pool balance before the calculation of depreciation is less than $30,000.

    If you would like to go through the matter with us further, please do not hesitate to contact us. Read more business accounting articles.

    Martin van der Saag
    Partner
    T: 02 9984 7774
    E: martinv@northadvisory.com.au

    Norman Ruan
    Accountant
    T: 02 9984 7774
    E: normanr@northadvisory.com.au

    With the 2019 federal budget, the treasurer announced that the federal government intends to increase the low and middle income tax offset (LAMITO). If enacted, the increase would begin in the current 2018/19 income year. The announcement also confirms that the LAMITO would only run for four years, from the 2018/19 to the 2021/22 income year.

    The table of the current law next to the proposed changes, as it relates to the 2018/19 and following income years, is below:

    Taxable income

    Current law

    Proposed change

    Less than $37,000

    $200

    $255

    Between $37,000 and $48,000

    Increase 3c per $1, capped at $530

    Increase 7.5c per $1, capped at $1,080

    Between $48,000 and $90,000

    Maximum $530

    Maximum $1,080

    Between $90,000 and $126,000

    Reducing from maximum at 1.5c per $1

    Reducing from maximum at 3c per $1

    Above $126,000

    $0

    $0

    In both scenarios, taxpayers between $48,000 and $66,667 will have a reduced Low Income Tax Offset with the maximum level of LAMITO.

    At this stage, the proposed changes are at announcement phase and have yet to be introduced into parliament. However, it has been stated by the current federal opposition that they intend to legislate the proposed change.

    We will keep you informed of any changes as they are announced.

    If you have any questions, please do not hesitate to contact us. Read more Personal Tax articles.

    Norman Ruan
    Accountant
    T: 02 9984 7774
    E: normanr@northadvisory.com.au