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Business Tax Structuring
The structure under which your business will operate is one of the first of many tax-related decisions business owners will need to make. It’s also the most important because numerous ramifications follow.
There are many different tax and commercial considerations to take into account when choosing the best entity and tax structure for your business. For a new business, a tax structure should be set up correctly from the outset to avoid expensive costs such as stamp duty and any future unnecessary capital gains tax to rearrange your structures or when you sell your business/assets.
Having the right structure can ensure:
- Your assets are better protected
- Your average rate of tax is managed
- Eligibility to tax incentive programs is maximised
- Personal liability risk is reduced
- Cost effective alternatives are considered from the start
- Compliance with legal requirements.
There are four main structures to consider.
You declare your business income as part of your personal income tax return at the individual tax rate. Pay As You Go (PAYG) instalments are payable to the ATO and you’ll be required to pay quarterly. Either way, you generally need to budget for these instalments to avoid nasty surprises. It is also the least used structure of the four due to the exposure to personal liability and lack of flexibility in tax outcomes.
Each partner pays tax on their share of the partnership’s income. PAYG instalments are applicable, as are individual tax rates. Asset protection is particularly important for partnerships, particularly if other partners have taken steps to protect their assets from the business and you haven’t. Equiti considers Asset Protection a high priority for this structure. Partners in a Partnership can also be Trusts or Companies.
Whilst a trust is not required to pay income tax, the beneficiaries of the trust who receive distributions are liable to pay tax at their individual tax rate. Trusts are an effective means of distributing income amongst family members. Trusts also offer owners asset protection as the trustee of the trust can be a company giving you reduced exposure to business risk.
As a separate legal entity, a company will pay tax and be liable at current company tax rates of 27.5% or 30% , depending upon operational status. When a company pays dividends to shareholders, the shareholder also pays tax (subject to who the shareholder is) although the shareholder receives credits for the tax the company has paid (franking credits). Companies also offer owners asset protection opportunities plus reduced exposure to business risk.
Whatever your situation, we will complete a review of your goals and objectives and advise you on the structure that best suits your circumstances.