Tax payable on business profits

[Pushka]

Thanks Mry, just been musing over these posts and am wondering why small companies like ours don't do this every year just to minimize their profits. Is it because there were limits on how much could be placed in super (and will be again after 01 July). It just seems too good to be true in a way that we can funnel our potential profits into super

Any thoughts on this will be much valued.

Ours has done this for years! Maybe we have a good accountant? Now that he has returned to his practice - he left for a couple of years but is now back again, thankfully!

 

[Petal]

Well I will be very interested to talk to our accountant tomorrow about this. I will post and let you guys know how it all pans out

 

[Pushka]

Good luck! I know our (former) accountant was really peeved that he had been totaly gazumped by the excellent advice provided by Mry and Depreciator from this forum, but their advice saved me around $12000 in tax this last financial year! How good is that!!!!

 

[davea]

isnt the age contributions still in effect for this FY? so in affact you can only contribute up to that amount?

the 1 million that can be contributed is an AFTER tax amount, just like the 150k will be from years on...

however this thread has really been great, really interesting read...

 

[gooram]

isnt the age contributions still in effect for this FY? so in affact you can only contribute up to that amount?

the 1 million that can be contributed is an AFTER tax amount, just like the 150k will be from years on...

Check out the ATO links HandyAndy posted earlier on this thread.

 

[davea]

Check out the ATO links HandyAndy posted earlier on this thread.

yeah that is 07-08 is 50k, so up until saturday, its only the age limits...

 

[gooram]

Mry and others,

What would you say about the business buying an investment property as a way to offset business profits? Obviously this couldn't be done this year but looking to the future.

Is a business actually eligible to claim losses on IPs?

What are the implacations of this, i.e. it introduces some risk to the business, if for example it defaults on the loan?

Any other considerations would be most appreciated.

Thanks,
Gooram

 

[Mry]

What would you say about the business buying an investment property as a way to offset business profits?

For asset protection reasons, I would not buy a rental property in a structure that is also running a business. I would put the IP in a place where the person can get the benefits of negative gearing without exposing it.

 

[gooram]

For asset protection reasons, I would not buy a rental property in a structure that is also running a business. I would put the IP in a place where the person can get the benefits of negative gearing without exposing it.

I agree that it introduces risk wrt asset protection, but is it not worth the tax saving to the company?

If the IP is in the name of an individual then I don't see any benefit wrt to tax savings, except that possibly the individual gets a larger dividend to put towards funding more IPs.

 

[Mry]

Situation 1
If a company made say $85k in profits and it could buy an IP that created a $10k a year loss, then it would pay $75k as a salary to you.
Situation 2
If the company made $85k in profits, paid it to you, you bought the IP and incurred the $10k loss, you would then pay tax on an income of $75k.

In each situation, the tax you pay is exactly the same, except the individual will pay a lower rate of tax on the eventual sale if they get the discount and the asset is protected far more than having it in the business to begin with. Its a no brainer to me.

Of course your situation should always be analyzed by your accountant etc etc.

 

[lk1]

Okay, now I am more concerned than ever about our accountants advice. I was under the impression that since we were self employed (started a company through a family trust structure last year) we didn't have to make contributions to super. When I double checked this with accountant a few weeks ago, he said we did have to make the 9% contributions so we made the payments. Since we are only 33 , we would have preferred to take it as income/distributions. Any idea why he would have advised this?

 

[Mry]

No idea lk1. Perhaps they didn't know how you were paying yourselves, or they preferred you pay salaries instead. You'd have to ask them.

 

[lk1]

We are taking wages and paying tax through PAYG - would this be why? If so, how should we be paying ourselves to avoid paying super?

 

[Pushka]

If you are paying yourself through PAYG (ie each month you send off the tax deducted from yourselves from salary) then you are deemed as employees. And the 9% applies. If however, you take your salaries as Directors Fees or through a Trust (and probably have to send in a quarterly Instalments tax to the ATO) then you dont need to take out the 9%.

 

[lk1]

Thanks for the replies Mry & Pushka. I spoke to the accountant & he said the same thing. I will do things differently this year and take as drawings rather than wages - would prefer to have more control over our investments at our age rather than tie up money in super for 30+ years.

 

[Mry]

Directors Fees also attract the super charge. However if you pay bonuses as directors fees, they don't attract the 9% super guarantee charge.

 

[gooram]

Can I just confirm that in the 2006/2007 financial year, the company does not have to pay tax on directors super contributions. And the company can pay this straight out of the company account into the directors super accounts. i.e. the company does not pay the money to the individuals then the individual has to make the pre-tax contribution?

Does anyone have an ATO link that I could refer to?

Thanks!

 

[secret squirrel]

workers comp people compare directors fees and wages to AWOTE (average weekly on target earnings) so if not over that you are ok. no extra workers comp to pay. remember as well 9% super only payable up to certain limits and maybe better dividend or trust distribution as no super on it. got to make sure it is return on investment and u paid yourself a reasonable wage. easy to argue most times.