There is no one ultimate tax structure that is best for all types of businesses. With so many different tax rules and commercial considerations to take into account, the best tax structure for your business is not necessarily the best structure for another business. The taxpayer who commences or purchases a business usually cannot afford an elaborate tax structure. Whilst they believe the business will succeed they must be careful in early years conserving cash until the business is up and running profitably. So a tax structure should be built over time to take into account the taxpayer’s financial circumstances and the actual growth in that business. As the business expands so should the tax structure. A tax structure may start with a single entity, such as a company or trust. Other entities are added as the business grows Whatever your situation, we at Coull and Prior will carry out a complete review of your business and assets and provide you with a written Report on the structure you should have to maximize the safety of your home and family asset. The Building Process The building process involves initially establishing the basic structure and then ‘adding’ to it as required. Generally, additions will occur as the business grows and new assets are acquired or the business changes. In order to choose the basic structure it is important to consider a number of factors including the client’s circumstances and their plans for the future (both personal and business). Below is a checklist of factors that should be considered when selecting the basic structure. The checklist is followed by a matrix that compares each of the five main business structures. Following the matrix is a number of checklists of the advantages and disadvantages of each of the five main structures. Suggestions for particular types of structures are made later in these notes under the topic headings “Sole practitioner”, “Structures for arm’s length parties” and “Structures for investments”. Checklist of factors to be considered when selecting a structure 1. Does the principal have a spouse, de-facto partner, or children? What are their ages and personal tax rates and the age and personal tax rate of the principal? Full details of the principals personal circumstances need to be know, if, for no other reason, to determine to whom income can be passed to minimise tax. The age of children is important to determine, whether, and how much, income can be passed to them. The older the principal, the more likely superannuation is an issue. If one of the aims is to maximize superannuation contributions, the principal will need to be an employee, and therefore the business owned in a separate entity, which can employ the principal. How close the principal is to age 55 is relevant for the small business 15 years and retirement exemptions. 2. What is the current tax status and potential liability status of these immediate family members? For asset protection purposes, individuals who may be sued or who have significant liabilities should not own assets. They should also not own interests in entities in the structure. 3. Are there any other people, such as close relatives, who are to be part of the business? There may be parents, cousins etc, who may be involved in the business or, who the principal may wish, to benefit from the business. Alternatively, there may be someone who is willing to own the assets separately from the principal and the business structure for asset protection purposes. 4. What assets do the principal and their family own? The business structure should protect any assets that the principal already owns from the creditors of the business. So if the business collapses, the principal’s personal assets, such as the family home, will not be lost as well. If the principal owns significant assets, the business should be operated through a separate entity. 5. What debt does the principal, and the principal’s family, currently have? If the principal, or any member o the principal’s family, have significant debt, then the business should be protected from that personal debt by being operated in a separate entity. 6. What type of business is it? Full details of the type of business need to be obtained to determine what type of income is being derived; business income or personal services income. If it is personal service income, then the operations of the structure will need to comply with the new alienation of personal services income rules in Divisions 84-87 ITAA 1997 if those provisions apply. If they do not apply the structure should still comply with the ATO’s rulings IT 2121, IT 2330, IT 2503 and IT 2639. If business income will be derived, there is much greater scope for legitimate income splitting. Ascertaining the type of business will also determine the GST implications. For example, it might be a business that makes input Taxed supplies and therefore input tax credits may not be available. This information will also determine who should be registered for GST and whether or not GST grouping is desirable. 7. Will the Business have any offshore activities? If the answer is yes, then there may be scope for offshore tax planning. As offshore tax planning is expensive, the size of the business and its anticipated profit are also very much factors to take into account when considering offshore tax planning. 8. Will the Business have significant assets? If the business will have significant assets, then for asset protection purposes, it is best to have the business held by one entity and the business assets held by a separate entity. Personal assets should be held separately from the business entity as well, for the same reason. If the business fails, then the personal and business assets should be protected. The business assets will need to be held in an entity that is connected with the business entity so that they continue to be active assets. If they are not active assets, the small business CGT concessions in … Continue reading Building the best Tax Structures