Trawling through the Corporations Act 2001...

[Apocalypse]

Although not property related I am hoping to get clarification on certain issues I am encountering...I am looking to set up a pty ltd company single director/single shareholder to operate an [allied health profession] business. Being somewhat perverse, and in an attempt to increase my knowledge, I am investigating whether or not I can do it ALL myself - from setting up the company, through Incorporator or the like, through to all the taxation/accounting stuff.

Hence I am reading through the Corporations Act 2001. There are a number of things I am not sure about. For instance - in this structure do I need to "employ" myself to do the work, or can I just do it in my role as (sole) director. Would I then need to pay a WorkCover levy on myself?

I note this:
202C Special rule for single director/single shareholder proprietary
companies
A person who is the only director and the only shareholder of a
proprietary company is to be paid any remuneration for being a
director that the company determines by resolution. The company
may also pay the director’s travelling and other expenses properly
incurred by the director in connection with the company’s
business.

It seems pretty broad and would allow for a lot of expenses that would be privately incurred if an employee to become company expenses incurred by the director. Is this an accurate interpretation?

Are there any books/sites around that tell you how to run your own company? Something like a "Company Magic", perhaps....

[Mry]

My goodness, reading the corporations act! What kind of sick person are you?!?

1. Paying yourself out of a company is always an interesting thing. Most people just pay themselves what they want to but in the strictest terms (aka ATO's position), your salary or fees would have to be comparable to what someone else in your position doing the same sort of work for someone else would be paid. Having said that, the ATO is unlikely to attack the wages declared by the sole owner of a company, they are more likely to attack wages paid to associates of the owner. You can pay as much through dividends to the shareholders as you wish but I much prefer paying salaries.

2. I know in Queensland that directors are not required under law to account for their salaries when declaring the salaries of workers to WorkCover. I don't know about other states, you would have to check that.

3. There are certainly more expenses that you can write off in a company structure rather than in your own name, but remember that just because a company says you have to pay it, that doesn't necessarily make it deductible. For example, if the company resolved to pay for your personal home repayments, sure the cash will go out of the company, but you won't get the deduction. Well, actually, you do get the deduction because the payment triggers Fringe Benefits Tax but thats a whole other story.

[tubs]

Why dont you just get an accountant and lawyer to do it all for you? It seems to me that you're going to spend all your time trying to be an accountant and lawyer and none of it actually building your business. Just spend the money and get going on your business. What you pay will be paid back to you many times over, and you wont have the risk of screwing something up.

[Apocalypse]

Why? Why not? Incorporating will just be an expansion of what I already do. I already do all my own personal and business tax, indeed I do my BAS in about 30mins...including all information gathering - my structure is VERY simple. Doing so keeps me mentally a bit sharper, dealing with figures in a way I don't often do now. It also allows me to be familiar with taxation issues so I can be proactive with managing my affairs and analysing/assessing options or opportunities for future directions.

Given the ready availability of resources and onformation online nowadays, it appears relatively feasible with a little application. But appearances can be deceptive hence I'm canvassing for educated and/or experienced opinions...

My "business" being a one-on-one service type arrangement I have no capacity nor indeed desire for increasing my hours but I with an opportunity to switch some of my work as an employee to a contractor basis (am aware of alienation of PSI) I can increase my "bang-for-buck", as it were :)

[Mry]

Doing it by yourself is ok, but I would recommend that once you have made a plan, you could go and see an accountant and ask them a series of questions to ensure what you are doing is fine and if there are any other matters you should be aware of, and is there a better way.

I do like your approach though. Business owners need to be aware of what they are doing and the risks they are taking.

[Apocalypse]

Mry could I get you to clarify a few points?

1) Sole director of a company may perform the company's work in their role as director without having "employ" themselves separatelt as an "employee"?

2) Travelling expenses. It says...The company
may also pay the director’s travelling and other expenses properly
incurred by the director in connection with the company’s
business.

Can this be interpreted as a means of making the home to work trip deductible?


I will be going to an accountant to see if I've got it all right, or to see if there are better ways of doing things.

[Mry]

1) Sole director of a company may perform the company's work in their role as director without having "employ" themselves separatelt as an "employee"?

I think you are asking whether or not directors need to be employed in order to execute their duties. The answer is no, but they can be.

2) Travelling expenses. It says...

Can this be interpreted as a means of making the home to work trip deductible?

This is not an easy area that you can give a "one size fits all" answer. If you were filling out your company review statement and had to mail it to ASIC and drove to the post office, I would claim that, but if it was travel from home after you woke up to work in your regular office, and you did almost no work at home, that would be way open to attack, though I suspect you could get away with it.

You would really need to spell out more of what your travel entailed to an accountant so they can apply the home to work rules and work out what you could claim, and that may be too much to reveal in a public forum.

[Ajax]

Apocalypse,

my understanding is a sole director/sole shareholder company need not pay its director a salary. It may instead loan the director monies from time to time. It can also pay dividends to its shareholder though this is not always beneficial (depends on the shareholders marginal tax rate).

When you purchased the shelf company (unless you incorporated this from scratch yourself) you may have been offered the choice of also purchasing a pre-drafted loan agreement between the sole director (the borrower) and the company. These loans are covered by section 109N of the Income Tax Assessment Act. The borrower (the sole director) needs to pay interest each year on monies loaned by the company to him/her at a rate equal to or greater than the benchmark rate set by the ATO each year under section 109N(2) ITAA otherwise the monies loaned are deemed to be a dividend. The borrower must also repay in full all loans made by the company to him/her within 7 years.


Ajax

[GreatPig]

The borrower must also repay in full all loans made by the company to him/her within 7 years.
Unless they are specifically for real estate purchases, in which case they can be repaid over (I think) 25 years.

GP

[Apocalypse]

Apocalypse,

my understanding is a sole director/sole shareholder company need not pay its director a salary. It may instead loan the director monies from time to time. It can also pay dividends to its shareholder though this is not always beneficial (depends on the shareholders marginal tax rate).

When you purchased the shelf company (unless you incorporated this from scratch yourself) you may have been offered the choice of also purchasing a pre-drafted loan agreement between the sole director (the borrower) and the company. These loans are covered by section 109N of the Income Tax Assessment Act. The borrower (the sole director) needs to pay interest each year on monies loaned by the company to him/her at a rate equal to or greater than the benchmark rate set by the ATO each year under section 109N(2) ITAA otherwise the monies loaned are deemed to be a dividend. The borrower must also repay in full all loans made by the company to him/her within 7 years.


Ajax

Isn't this merely delaying the inevitable? ATO don't seem to mind sole director/shareholder companies as long as all the income is distributed - if its held by the company for any length of time I think they consider it more a tax evasion arrangement.

I can see some benefit in it as a means to access a loan, but unless there is a time in the future where one would anticipate becoming subject to a lower marginal tax rate...

Oh well, off to download and browse through ITAA...

[Mry]

25 years if you put your house up for security. 7 years for unsecured loans.

A company is allowed to retain profits, thats not tax evasion. You may be thinking of Personal Services Income, which is a different story.

This whole topic is a good advertisement for trusts anyway.

[Apocalypse]

Yes, indeed...sorry I neglected it. My business is PSI in nature, hence I was responding as I imagined it would apply to my situation. I did mention this, albeit somewhat obliquely, in my second post in this thread.

I've looked at it and I fail to see how my situation would work better under a trust arrangement than company setup. I would need to setup a corporate trustee anyway, which would be single director/shareholder anyway. Because my business is PSI in nature I can't distribute to anyone else as it would be viewed as tax avoidance. So it would merely be another layer of paperwork for no real gain. Note, my intention is to isolate liability - to do this also I would hope to house other significant assets in a trust, or in the case of our PPOR, in my wife's name. Hence even if someone could come at me as director of the company...I would have no significant assets in my name anyway.

[Mry]

With a trust, there's none of this loan garbage. I really hate that stuff.

Secondly, even if the PSI rules applied, the company/trust with corporate trustee would still provide limited liability. You are breaching ATO provisions, not corporations law. (I would note however if you are running a company where you are providing personal services, you would be in danger of also being sued successfully in your own name as well. So much for asset protection.)

Thirdly, if you failed PSI in a company, that just means you have to distribute all the profits to yourself and you aren't able to claim any company-specific deductions. In a trust failing PSI, all of the income goes to one person anyway. No real change.

Last of all, if you could class some of your income in the trust as non-PSI income, you could distribute that to your wife. You would have to justify the commercial aspect of any amount paid to your wife in a company.

[Ajax]

Apocalypse,

you might benefit from reading up on the definition of personal services income (it's not as broad a provision as it first appears). The Master Tax Guide would be a good place to start.


Ajax

[pennyk]

Apocolypse,

I have a ptyltd company that is for an allied health business. (OT).

In NSW directors need to be covered for workers comp. For me, that's an advantage, because as a sole trader, I had no way of accessing workers comp. You can get it through most of the major insurers and it's not too expensive, so long as you don't have too many claims. For a lot of the contracts I perform, I need to prove I have either workers comp or income protection.

While I complain about my accountants fees, and will probably change accountants to pay less, they are able to give advice, which I don't think is possible to gain just through reading the legislation. Eg we "loaned" money to the company to "buy" our cars from us. So the company pays all the ongoing costs of the cars, and when fringe benefits time comes around, the fringe benefits tax owing is taken from our loan amount. I don't think that's something you will find in the legislation!!

After running a business for 5 years and seeing both the good and the bad side of running a business, I wouldn't dream of doing it without an accountant. I have other things to worry about, without having to keep up to date with the latest taxation rules, remembering when to send in ASIC forms/ fringe benefits forms etc etc. We do all our own BAS... it takes about 2 minutes on MYOB. the accountant then does yearly return as part of the income tax. In the good times, it helps to have an accountant to know how you can legally shuffle money around, and in the bad times, they are indispensible to know where to from here. Our accountant has provided advice on super, selling the business, new markets to move into, whether or not a company structure was the best for us, export options etc etc. Really consider carefully whether you want to go down this path of trying to do it all yourself.

Are you only getting income (or more than 80% of your income) from one person? Is that why you think you are covered under the PSI legislation. If you are, there are still other ways of getting around the legislation... you provide your own tools, place of business etc etc. (If you are just getting income from one place, I would suggest spreading the risk a bit and getting some other clients.) (our accountant also gave us advice re PSI and the areas we were at risk of coming under that legislation.) There is also a grace period from what I understand (from my accountant!) in coming under the PSI legislation. I think in the first 6-12 mths of setting up, it's accepted that you may only have one big client.

I do pay myself a salary, when I have money to pay it!! But, not all of my income is paid as a salary. We also have payments of loans made to us. So, depending upon what our income is and what else is happening, we can "massage" our income. That's one of the advantages of having an accountant as well. We haven't taken money as a dividend, but that's another option. The advantage of paying a salary comes when you want to apply for bank loans. It helps them to see income for you and stability for the company, I think.

So, big sell for having an accountant. I don't think it's worth wasting time on things that you probably won't do as well as a good accountant who does it all the time. But, good luck with your venture. I hope it works out well for you.

Pen

[Apocalypse]

Apocalypse,

you might benefit from reading up on the definition of personal services income (it's not as broad a provision as it first appears). The Master Tax Guide would be a good place to start.


Ajax

I may be inadvertantly interchanging names. As a physiotherapist my income is derived as a result of personal exertion hence my reference to PSI. However, I've read all the documentation from the ATO I can find regarding the matter and believe I qualify as a personal services business as I clearly pass the test where less than 80 per cent of your personal services income in an income year
comes from each client (YES)and you meet one of the other three personal
services business tests (the unrelated clients test(YES), employment test or
business premises test) So PSI legislation won't apply. The Master Tax Guide looks interesting though.

With a trust, there's none of this loan garbage. I really hate that stuff.

Secondly, even if the PSI rules applied, the company/trust with corporate trustee would still provide limited liability. You are breaching ATO provisions, not corporations law. (I would note however if you are running a company where you are providing personal services, you would be in danger of also being sued successfully in your own name as well. So much for asset protection.)

Thirdly, if you failed PSI in a company, that just means you have to distribute all the profits to yourself and you aren't able to claim any company-specific deductions. In a trust failing PSI, all of the income goes to one person anyway. No real change.

Last of all, if you could class some of your income in the trust as non-PSI income, you could distribute that to your wife. You would have to justify the commercial aspect of any amount paid to your wife in a company.

True asset protection will hopefully come from having significant other assets in trust or in case of PPOR in wife's name. Hence I won't "own" anything of significance...

All income (less expenses) will go to me eventually in either case. My assessment is that through a corporate structure I will have more legitimate expenses than I would operating a merely a sole trader. Including some of those snazzy tricks like the double deductions on laptops and so forth... :D

I've downloaded a heap of Booklets on various topics from Julia Hartman's site: http://www.bantacs.com.au (linked from a post on this forum) some of which have some very interesting ideas in them.

[Mry]

True asset protection will hopefully come from having significant other assets in trust or in case of PPOR in wife's name. Hence I won't "own" anything of significance...

There is no such thing as true asset protection.

Lets say one year your wife left you, your business was sued successfully by a former employee who damaged themselves at your work and your tenant fell through a floor suffering severe injuries leaving them paralyzed for life and they complained about the floor to the rental manager several times and they didn't tell you about it and sues you for it. It sounds implausible, but it just illustrates the point that the assets aren't "protected" per se, they are just spread around so a failure in one area, say the business, doesn't affect another area such as your house, IPs and investments. We hope.

Thats what Asset Protection is about.

I am impressed with how you are proceeding with your studies.

Ah, you know the laptop double deduction trick. Well, the less said about that in a public forum the better...

[TomL]

There is no such thing as true asset protection.

Lets say one year your wife left you, your business was sued successfully by a former employee who damaged themselves at your work and your tenant fell through a floor suffering severe injuries leaving them paralyzed for life and they complained about the floor to the rental manager several times and they didn't tell you about it and sues you for it. It sounds implausible, but it just illustrates the point that the assets aren't "protected" per se, they are just spread around so a failure in one area, say the business, doesn't affect another area such as your house, IPs and investments. We hope.

Thats what Asset Protection is about.


Yep, and even if you are completely in the right - have all the correct protection mechanisms in place etc, it could all still come down to who has deeper pockets, better legal team etc.

You do what you can to protect yourself, and if everything comes crashing down - start again.

T.

[Apocalypse]

Apocolypse,

I have a ptyltd company that is for an allied health business. (OT).

In NSW directors need to be covered for workers comp. For me, that's an advantage, because as a sole trader, I had no way of accessing workers comp. You can get it through most of the major insurers and it's not too expensive, so long as you don't have too many claims. For a lot of the contracts I perform, I need to prove I have either workers comp or income protection.

While I complain about my accountants fees, and will probably change accountants to pay less, they are able to give advice, which I don't think is possible to gain just through reading the legislation. Eg we "loaned" money to the company to "buy" our cars from us. So the company pays all the ongoing costs of the cars, and when fringe benefits time comes around, the fringe benefits tax owing is taken from our loan amount. I don't think that's something you will find in the legislation!!

After running a business for 5 years and seeing both the good and the bad side of running a business, I wouldn't dream of doing it without an accountant. I have other things to worry about, without having to keep up to date with the latest taxation rules, remembering when to send in ASIC forms/ fringe benefits forms etc etc. We do all our own BAS... it takes about 2 minutes on MYOB. the accountant then does yearly return as part of the income tax. In the good times, it helps to have an accountant to know how you can legally shuffle money around, and in the bad times, they are indispensible to know where to from here. Our accountant has provided advice on super, selling the business, new markets to move into, whether or not a company structure was the best for us, export options etc etc. Really consider carefully whether you want to go down this path of trying to do it all yourself.

Are you only getting income (or more than 80% of your income) from one person? Is that why you think you are covered under the PSI legislation. If you are, there are still other ways of getting around the legislation... you provide your own tools, place of business etc etc. (If you are just getting income from one place, I would suggest spreading the risk a bit and getting some other clients.) (our accountant also gave us advice re PSI and the areas we were at risk of coming under that legislation.) There is also a grace period from what I understand (from my accountant!) in coming under the PSI legislation. I think in the first 6-12 mths of setting up, it's accepted that you may only have one big client.

I do pay myself a salary, when I have money to pay it!! But, not all of my income is paid as a salary. We also have payments of loans made to us. So, depending upon what our income is and what else is happening, we can "massage" our income. That's one of the advantages of having an accountant as well. We haven't taken money as a dividend, but that's another option. The advantage of paying a salary comes when you want to apply for bank loans. It helps them to see income for you and stability for the company, I think.

So, big sell for having an accountant. I don't think it's worth wasting time on things that you probably won't do as well as a good accountant who does it all the time. But, good luck with your venture. I hope it works out well for you.

Pen

Wow. Thank you for the detailed post! I'd love to ask you a heap of questions but I respect your right to decline, or to do so via PM if you were inclined...

[Apocalypse]

There is no such thing as true asset protection.

Lets say one year your wife left you,Hmmm...I believe Family Court looks through all these structures when doing property settlements... your business was sued successfully by a former employee who damaged themselves at your work No employees, no plans to have any. WorkCover would probably apply, as well as Professional Indemnity/Public Liability insurance. and your tenant fell through a floor suffering severe injuries leaving them paralyzed for life and they complained about the floor to the rental manager several times and they didn't tell you about it and sues you for it. Self manage IP. Landlord insurance in place. It sounds implausible, but it just illustrates the point that the assets aren't "protected" per se, they are just spread around so a failure in one area, say the business, doesn't affect another area such as your house, IPs and investments. We hope.

Thats what Asset Protection is about. Granted. My individual replies aren't meaning to be smart arsed...just illustrating the mechanisms in place to manage and reduce the risk.

I am impressed with how you are proceeding with your studies.Hmmm, brain's turning to mush though trying to process all the data. Of course, if I spent as much time studying it as I did formatting these replies I'd probably have everything in place now...

Ah, you know the laptop double deduction trick. Well, the less said about that in a public forum the better...
A lot of people on this forum do courtesy of DaleGG and his books - Trust Magic and the Property one. I think the Tax Office even recognises it...employer reimbursement of an FBT exempt item; otherwise deductible; employer claims expense, reimbursement not income, employee gets to depreciate...

[pennyk]

Apocalypse,

Happy to answer questions either on forum or via PM. I'd be happy if it meant you avoided some of the pitfalls we've had!!

Some things I thought of today also are related to GST. I assume, as a physio, you need to be registered anyway to practice. But in order to charge GST you need to be registered, or a member of your professional association. you also need to know what to charge GST for and what not to. eg treatment is nearly always GST free, but writing a report is often GST-able, even for the same client. It's very easy to make mistakes in this area!

For OT's to get professional indemnity, they need to be Accredited OT's. I assume with physios, you just need to be registered. I'm insured with AON, and whilst that's not who APA recommend, I used to insure a physio with them and I think it was less expensive with better features. Workers comp I'm with QBE, and I've found them very good. I've had 2 claims for employees and they have been efficient and very easy to deal with.

Are you going to be setting up as a regular physio practice, or will you be doing something specialised?

Penny

[Apocalypse]

Thank you pennyk

I am currently employed publically part-time (yay for FBT exempt PBI status!), also run my own sole trader (mini) private practice (about 10 clients per week; and also am employed privately in another town. What's happening is my private employment is taking a dramatic change of direction - rather than the standard employee relationship I am switching to essentioally a contractor basis, where most of the service fee will come to me as income - basically only less operating costs - premises rental, administrative support, etc, at arms length values. Pretty much what I would incur if I were to "set up shop" myself. This is due to the principal being pregnant, the other physio being pregnant, and only me left. Unable to sell business, unable to employ anyone else (no interest in either cases - people don't wanna come to the country, even near metro regions...So if I were to leave, the business would fold. So the benefit to the principal is basically survival of her business, in the interim.

I am registered for GST already (for my small private stuff). I use AON for prof. indemnity also. No specialisation, just a bit of everything...

I plan to continue my current "split" for a while. So my situation hopefully wont be too much more complex than it already is...hence my ambition to be fully independant...

I gather your set up is possibly more complex - you mention sole trader initially, then talk of the company buying your "cars" (plural) as well as having employees also? In regards to the company "buying" your cars - could you describe in a little more detail what this involved?

[Aceyducey]

Mry,

Carry your most important assets in your head and in your close relationships and culture them constantly.

That way you have security throughout your lifetime.

Cheers,

Aceyducey

[pennyk]

hi Apocalypse.

My business did start off more simply and then I started employing people and selling products.... and then it all went pear shaped! and now I'm pretty much going back to contracting for others. I still have the company, but mainly because we are still paying off debts and loans etc. If I could I would close down and go back to being a sole trader. The main advantage I see of having a company is being able to access workers comp.

So, will the principal return to the business? and if so, what will you do then?

My husband works in the business too. When we formed a company, the business "bought" our cars at market rates. They didn't actually pay us any money though. This was entered into the company account as a loan from us, to buy our cars. So, now the business pays all the operating expenses of the cars, because they belong to the company. So, when we do our fringe benefits return, we need to account for the running cost of the cars. we have kept a log for at least 3 months to say what % the car is used for personal use. There is then a fringe benefit tax bill, which is incurred by us personally. But because we have "loaned" the business money, the tax bill is taken from our loan to the company and we don't pay any money. one of the advantages of this has been getting loans, as not having cars increases our serviceability.

Hope that helps,

Pen

[Apocalypse]

When the principal returns (in what capacity though...) things will stay the same. If I were to go set up shop elsewhere all on my lonesome the end result in terms of profit would be about the same. Personally, in our field I reckon goodwill attached to a practice is virtually zero, so I view these things as more a cashflow creation - hence it's as good here for me as elsewhere. She effectively wont be "making" too much out of me, but she would still hope to employ someone additionally in the future. She is at least maintaining the value of her business to an extent. I guess for me it's a reward of sorts for length of service etc and my contribution towards improving the client base, including a lot of more lucrative industrial stuff.

I'm sorry to hear of your business's fruit-like affliction...why did things go wrong? I certainly have no ambition to become an employer - hopefully this will keep things simple enough. Anf if I understand why things are happening perhaps I wont get out of my depth...