company taxation.

[Marina]

Hi and I hope some one can help.

I have a business that is making a profit and recently had a partnership between my spouse and I. 70/ 30 split.
once you make an election on the split you cannot change it and this is the problem as the 30% for peter this year is too high based on his wages.

Peter is a salary earner and I am not. I envisage a big profit this year in the business and therefore registered a company. I am now in the process of applying for a new abn, tfn and need to register for the gst again for the company.

my question is - say the company makes a $50K profit.. do i pay tax of 30% on that and then split the profit or can i automatically distribute that profit - perhaps $5k to peter and then $45k to me. this will then get shown on the personal tax return.

also what claims can i make now through the company. Our cars are not registered in the company so I guess i will not be able to claim the gst on vehicle expenses, but instead will claim the expense in the personal tax return..

also now expenses such as mobile phone are still in my name.. If i were to claim it into the company do i need to change the account holding name from my name to the comany name in order to claim.

any advice would be appreciated.

I am speaking to accountant next week but would like to educate myself at the same time.
thanks

 

[JamesGG]

Hiya,

A number of issues there. Seeing your accountant to help you out is probably the best move. In the meantime...

Say company does make a $50k profit. Your options could include either paying this out as directors fees or allowances (reducing the company profit, but, increasing personal income and thus personal tax), or, retaining those profits and later paying them out as a (franked) dividend once the company has paid tax on them. Or, of course, you could leave the funds in the company to reinvest into the business.

If you choose to pay a dividend, this needs to be in direct proportion to the shareholdings of the company.

The company could pay you a vehicle allowance, and you might then claim your car expenses against this in your personal returns. Perhaps a similar theory with mobile phones and other such expenses if you don't want to change the account. GST would be irrelevant though, as you suggested.

Cheers

James.

 

[JoyBoy]

In regards to your assets, even though they were under your own name, if they were partnership assets, I believe you can 'rollover' these assets to another related entity (your new company) under certain conditions. This rollover relief will allow you to avoid any CGT implications and allow you to continue depreciating the asset until the new company disposes of it.

 

[Leandro]

James,

Couldn't the company simply pay Marina a wage. If she currently has no other employment she will get the benefit of being in the lower bracket for the first 30k.

Leandro

 

[handyandy]

Hi MArina

What we did in the end is that the company shares are owned/held by a family trust. The family trust has as one of its beneficiaries a different company which is owned by another trust.

What this gives you the ability to do is pay dividends to the trust. If you want the income then you can simply take a distribution from the trust with a 30% imputation. If you don't need the money or it pushes your personal tax up to high then you can make a distribution to the company beneficiary and the company can hold the funds. If you needed those funds then you can simply push it out as a dividend again to the second trust.

In this way you are not building up assets in your operating company which could be at risk due to exposure to clients. You control absolutely how much income you take and able to direct it to the lowest earner.

We use this method to ensure that none of us are liable to more than 30% tax which has already been paid through tax credits. In this way we (4 of us) can take up to about $250k out as distribution and simply not have to pay any additional tax.

This may be a little complicated for you at this stage but certainly worth considering if/when you grow your business.

In regard to your expenses ie phone, car internet access cable tv etc we have as many of these paid for by our operating companies as possible. This again works towards lowering our personal tax by not having to pay after tax dollars for these items and also can claim back the GST (as an operating company)

Cheers

 

[GreatPig]

If you choose to pay a dividend, this needs to be in direct proportion to the shareholdings of the company.

Different classes of shares could be issued to get around this, but the Part IVa dividend streaming provisions would probably need to be considered.

Marina, James has covered the main options I can think of. If you want all the proceeds, your options will depend somewhat on who the company shareholders are. Assuming you are a director, then director's fees may be easiest. May depend on how much it is though. If you want to be an employee, there's a bit extra hassle with PAYG, super, and work cover.

Regarding having a company owned by a trust, I also have that arrangement for the flexibility. However, if you happen to make a loss (which it doesn't sound like you expect to) then the company is subject to similar rules to the trust loss provisions.

All just my understanding. I'm not an accountant.

Cheers,
GP

 

[Leandro]

Different classes of shares could be issued to get around this, but the Part IVa dividend streaming provisions would probably need to be considered.

Marina, James has covered the main options I can think of. If you want all the proceeds, your options will depend somewhat on who the company shareholders are. Assuming you are a director, then director's fees may be easiest. May depend on how much it is though. If you want to be an employee, there's a bit extra hassle with PAYG, super, and work cover.

Regarding having a company owned by a trust, I also have that arrangement for the flexibility. However, if you happen to make a loss (which it doesn't sound like you expect to) then the company is subject to similar rules to the trust loss provisions.

All just my understanding. I'm not an accountant.

Cheers,
GP

As you would be an employee of a company which you and your husband own, you wouldn't need to worry about work cover (unless you are going to claim against your own policy). You would need to pay yourself super after you reach $450 per month in wages.

 

[Leandro]

Hi MArina

What we did in the end is that the company shares are owned/held by a family trust. The family trust has as one of its beneficiaries a different company which is owned by another trust.

What this gives you the ability to do is pay dividends to the trust. If you want the income then you can simply take a distribution from the trust with a 30% imputation. If you don't need the money or it pushes your personal tax up to high then you can make a distribution to the company beneficiary and the company can hold the funds. If you needed those funds then you can simply push it out as a dividend again to the second trust.

Now isn't this Creative Accounting!

Andy, in your last step if you "needed those funds you can simply push it out as a dividend to the second trust". Would this step attract any further tax to be paid by the company or the inidividual? i assume that the company wouldn't pay any more, but an individual would if their income hits more than 75k.

 

[GreatPig]

unless you are going to claim against your own policy

Might you not do that if you injured yourself in the course of working for your own company and the expenses were high?

If not, would your private health fund cover the expenses if they knew it was a work-related accident and you had no work cover?

GP

 

[Leandro]

Might you not do that if you injured yourself in the course of working for your own company and the expenses were high?

If not, would your private health fund cover the expenses if they knew it was a work-related accident and you had no work cover?

GP

I guess it depends on what you were doing, if you are working in a business that is potentially risky, you would need to look into insurance. I am not sure if that would be company or personal insurance. BUT, i thought marina wasn't actually doing anything for the business, simply wanted to help take the profits out with minimal tax. I may be wrong.

 

[handyandy]

Now isn't this Creative Accounting!

Andy, in your last step if you "needed those funds you can simply push it out as a dividend to the second trust". Would this step attract any further tax to be paid by the company or the individual? i assume that the company wouldn't pay any more, but an individual would if their income hits more than 75k.

If you exceeded a 30% flat tax calculation then you would be paying more tax. What I mean by the flat tax calculation is taking into account each to the tax thresholds and calculating backwards at what point the 30% tax would be exceeded.

Thus in my case the actual distribution we can take per person is about $78k which has an imputation credit of $33428 giving a grossed up amount of $111428.

If you drew down more than the $78k per person than the marginal tax rates would apply namely 40c per $1 up to $150k grossed up etc. But remember that any additional dollars we draw would still have the 30c imputation credit thus we would only be liable for the difference, namely 10c per $ up to a gross of $150k and 15c per $ > $150k.

Cheers

 

[GreatPig]

BUT, i thought marina wasn't actually doing anything for the business

I gather though that if you are an employee of the family business receiving a salary or wage, then you need to at least look like you're doing something for the money to avoid it just being considered giving company funds to family members.

Thus in my case the actual distribution we can take per person is about $78k which has an imputation credit of $33428 giving a grossed up amount of $111428.

Individual gross income matches the flat 30% rate at $112,174 pa including Medicare levy for the individual. That's a total tax of $33,652.

At the 40% marginal rate, you'd actually be paying an extra 11.5% tax thanks to the Medicare levy (or 12.5% if you also had to pay the surcharge).

GP