What common legal structures are available for conducting a business?
- Sole trader
What are the advantages and disadvantages of conducting business as a sole trader?
- Simple, inexpensive to run
- Access to CGT small business concessions
- Business losses can be offset against other income, subject to condition is met
- Losses can be easily carried forward
- Easy to restructure to a company using CGT rollover relief
- Taxpayer can borrow money from, and transfer money to family members without any tax implications
- Personally liable for all debts
- No income splitting
- Income assessed at own tax rate
- The substantiation rules must be complied with for car and travel expenses
- New structure is required when admission of new parties
What are the advantages and disadvantages of conducting a business through a partnership?
- Inexpensive to set up than company or trust
- Income splitting between partners
- 50% CGT discount can be obtained by partners
- Small business CGT concessions apply
- Partnership lossess can be offset partner’ other income
- New partner can be easily admitted
- Trading stock and depreciable asset rollover relief available on admission of partners
- Liabilities are jointly and severally
- No asset protection generally
- Profit can not be retained and must be assessed at personal tax rates
- New partnership required for tax on change of partners
What are the advantages and disadvantages of conducting business through a company?
- Limited liability protection
- Lossess may be transferred within the group
- Company can employ the taxpayer and can arrange salary package
- 30% flat rate of tax
- Franked dividends available
- Profit can be retained
- Small business concession available subject conditions are met
- Complex to run and expensive to set up
- 50% CGT discount not available
- Lossess can not be distributed to individuals
- Income and capital can not be distributed in a flexible manner
- Directors can be liable for the company’s debts in certain circumstances
- CGT may apply to changes of shareholdings
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
- Inter vivos trusts.
Family trusts are typically discretionary trusts with family members as the beneficiaries. Discretionary trusts are so called because the trustee has 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
- 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.
What is the value of my trading stock?
In valuing trading stock, a taxpayer may choose from the following methods:
- Cost price
- Market selling value
- Replacement value
- Note that a different method may be used for each item of trading stock.
Can I offset capital losses against trading income?
Capital gains tax was introduced with effect from 20 September 1985. Capital losses cannot be offset against trading losses.
They can only be offset against capital gains or if there are no corresponding capital gains then they can be carried forward indefinitely.
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
- Bank fees
- Secretarial and bookkeeping fees
- Interest on monies used to acquire property
- Depreciation on furnishings, stoves, hot water system etc