Consideration for setting up a tax-effective structure for tradespeople

When choosing a tax-effective structure for tradespeople, it is important to make sure whether there are any rules and regulations governing the industry which may limit the choice of structure to be used.

Common structure of how a trades person may work include:

• A plumber may work alone in providing their services directly to households, or utilise the services of several contractors to do the work under the plumber’s supervision;
• A builder may work as a contractor to engage various contractors to complete the work under the builder’s supervision.

There are a significant number of tradespeople begin and continue to operate as sole traders due to the simplicity and low costs involved when compared with alternative structures, such as in partnership, a company or a trust.

Advantages of operation as a sole trader:

• The tax affairs of a sole trader are usually simple to manage. All assessable income and allowable deductions of the business are include in the business owner’s tax return and assessed at their marginal rate of tax.
• The sole trader has total ownership and control of the business
• The sole trader can borrow or lend money to family members without tax implications, there is no equivalent to Division 7A of the ITAA 1936 for sole traders.

Some trades people may chose to operate a business in partnership with an unrelated party, for example, two builders operate a business together, each party would usually in turn use their own entity as part of carrying on the partnership.

A trades person may operate in partnership with their spouse, husband and wife partnership.

Several important changes to super were announced by the Government, but not all have been legislated as yet.

The Superannuation Guarantee(SG) rate will progressively increase from 1 July 2013. The current SG rate of 9% will continue to apply in 2012/13, increase to 9.25% in 2013/14 and rise progressively to 12% by 2019/20.

The SG age limit of 70 will be removed from 1 July 2013, and employers will be required to contribute to complying super funds of eligible employees aged 70 and older (this has been legislated).

Low income Superannuation Contribution

From 1 July 2012, the Low Income Superannuation Contribution will effectively refund up to $500 of contributions tax to people who earn up to $37,000 in adjusted taxable income.

Change to contributions cap

The Government has legislated that from 1 July 2012, the concessional contributions cap in 2012/13 and 2013/14 for all individuals is $25,000. The Government has also proposed that from 1 July 2014, individuals aged 50 years or older, with super balances below $500,000 may be able to make $25,000 additional concessional contributions over and above the general $25,000 concessional contributions cap.

Increased contributions tax for very high income earners

The Government has proposed that from 1 July 2012, individuals with incomes greater than $300,000 may have certain concessional contributions taxed at 30% (increased from 15%).

The higher rate will not apply to concessional contributions exceeding the concessional contributions cap. These are already subject to the ‘excess contributions tax’ rate.

Reduction to government co-contribution amounts

Further reductions to the co-contribution scheme have been proposed from 1 July 2012. The maximum co-contribution is to reduce from $1,000 to $500, the co-contribution rate is to reduce from $1.00 to $0.50 and the higher income threshold is to decrease from $61,920 to $46,920.