How to structure this business?

Discussion in 'Business Accounting, Tax & Legal' started by sailalias, 30th May, 2009.

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  1. sailalias

    sailalias Member

    Joined:
    1st Jul, 2015
    Posts:
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    Location:
    Perth, WA
    Hello good people,

    Interested in hearing your personal opinions / general advice on the best way to structure the following - at this stage I'm thinking 2 companies and 1 discretionary trust:

    Discretionary Trust

    |

    Parent Company (holding company? trustee company?)

    |

    Online Business

    Already earning a salary of ~$100k and would like to minimise the tax on the profit from the online business, hopefully not having to pay the marginal rate of personal income tax after already paying 10% GST and the 30% company tax rate. Is this where a discretionary trust is useful? Want the parent company to own the online business and have the option of the parent company owning other businesses, investments etc. in the future. From a public perspective the online business should appear independent from the parent company. The online business needs to be a Pty Ltd and the parent company to also be a Pty Ltd.

    Is it possible for only one person to have this stucture without any other directors, shareholders, employees, family members? Also, what tax liability is incurred if the online business was sold?

    Hope this makes sense, appreciate any response.
     
    sailalias, 30th May, 2009
    #1
  2. Simon Hampel

    Simon Hampel Founder Staff Member

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    Unless you have a partner (wife/husband/etc) you wish to distribute income to (or plan to do so in the future), then a trust is likely to be overkill.

    Why not just start a Pty Ltd for your online business with you as shareholder? Provided it is a genuine business and not a personal services business (not likely a problem for most online businesses), then you can choose to have the company pay 30% tax on the income.

    Note that if you want to take the money out of the company and use it for personal purposes (eg buying a house), it will be taxed in your hands at your marginal rate anyway. If your goal is tax minimisation and you aren't married, then you may need to look at negative geared investments in your own name to reduce your taxable income - a trust isn't going to help unless you have someone else in a lower income bracket you can distribute to.

    A general structure that might work if you are looking to hold investments and run a business, and want to have the most flexibility as to where the profits get paid (ie pay to lowest income earner), and also give you some asset protection is the following:

    Trust with Corporate Trustee which owns shares in a Pty Ltd company which does the trading. All investment assets are held by the trust.

    Eg:

    My Trustee Pty Ltd as trustee for My Trust No. 1

    My Company Pty Ltd (shareholder = My Trustee Pty Ltd as trustee for My Trust No. 1)

    ... make sure My Trustee Pty Ltd does not carry on a business - only acts as trustee for the trust. You can start as many Pty Ltd companies for trading purposes as you need, with their shares owned by the trust and you as director.
     
    Simon Hampel, 30th May, 2009
    #2
  3. sailalias

    sailalias Member

    Joined:
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    Location:
    Perth, WA
    Thanks very much Sim - the general structure suggestion you mentioned at the end is what I think I am looking for.

    It seems a shame that for an individual wanting to start a company, assuming it makes enough money, they pay 10% GST, 30% company tax, and then get hit with a marginal personal income tax rate of up to 45%.. Are there any other ways to avoid paying so much personal income tax without negative gearing to reduce taxable income? Is there any difference between allocating the money from the company as a salary compared with allocating it as a dividend? Is it correct that if the money was allocated as a dividend, the 30% company tax already paid results in a franked dividend, therefore the amount of personal income tax is reduced?
     
    sailalias, 30th May, 2009
    #3
  4. Simon Hampel

    Simon Hampel Founder Staff Member

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    It's not quite as bad as you make it sound.

    1. if you register for GST, you can claim part of your GST costs back. Not typically necessary unless you earn over $75,000pa

    2. 30% company tax only applies to profits. Wages and other expenses paid are calculated before tax, so reduce the company tax paid.

    3. If you pay a dividend from the company having already paid company tax on the profits, then you do get a franking credit for the tax already paid.

    In general there are two basic approaches to tax minimisation: 1. have income earned by someone else (eg spouse) on a lower tax bracket, and 2. use losses from other valid sources (ie investments) to offset income and lower your taxable income (negative gearing). There are other strategies too - but these are the two simple ones.

    At the end of the day, the more money you make the more tax you pay. Or put another way, the more tax you pay, the more money you must have earned.

    Don't get too stressed about how much tax you pay - just concentrate on making money. Having too much money is a much better problem to have than not having enough!
     
    Simon Hampel, 31st May, 2009
    #4
  5. Superman__

    Superman__ Well-Known Member

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    Location:
    Gold Coast, QLD
    Great advice all round from Sim.

    When I talk to people about this kind of stuff, I get them focussed on actually making some profits first, and then worry about how to reduce the overall tax on the profits.

    Only other thing I would add is that superannuation is another tax effective way to accumulate wealth. But this is a whole other subject.

    I may post some tax planning options for small business owners soon.

    Good luck with the online business Sailalias.
     
    Superman__, 31st May, 2009
    #5
  6. Chris C

    Chris C Well-Known Member

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    I look forward to reading them! Hopefully you can post them up in the next few days so that all us small business owners can look to apply them before the end of the financial year.

    :D
     
    Chris C, 1st Jun, 2009
    #6