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share trading and tax with a company structure

Discussion in 'Accounting, Tax & Legal' started by pcj821, 6th Jul, 2010.

  1. pcj821

    pcj821 Member

    Joined:
    18th Nov, 2008
    Posts:
    17
    Location:
    Newcastle, NSW
    Hi there,

    I am having trouble trying to understand how a share trading business is taxed. What I want to know is how tax is calculated come tax time.

    For example lets say that I own a small company and this company buys widgets from China then on sells them to Australian consumers. At the start of the tax year my company has $100 capital and with this capital I buy 100 widgets for $1 each which I then sell for $2 each. My company now has $200 capital, I therefore buy 200 widgets from china. Again, I sell these for $2 each and my company now has $400 in capital. At this point I now buy 400 widgets, but before I am able to sell any of them the tax year finishes.

    By my understanding the company would not have to pay any tax because it has reinvested its profits into its inventory in order to grow. And because inventory is seen as an expense, the company would show no profits.

    So I guess the question that I am asking here is - Does a share trading business in a company structure function the same way come tax time? would its trades be seen as inventory like in the above example? and If I was holding a position equalling all my profit and capital at the end of the tax year (like the 400 widgets) would this be seen as an expense and therefore the business would have no profits to tax?

    Just so you know, I'm not thinking of trading for a year or so yet and I will be consulting an accountant before I start trading. I'm just curious at the moment and an answer to my questions now would help me plan my longer term goals a little better.

    I hope my explanation wasn't to hard to understand

    Cheers
     
  2. Superman

    Superman Well-Known Member

    Joined:
    6th Nov, 2007
    Posts:
    343
    Location:
    Gold Coast, QLD
    You have asked 2 questions.

    1. Taxation of a company
    2. Whether you are in the business of share trading, or whether you are simply a passive share holder who regular trades shares and makes capital gains.

    Q1 - taxation of a company

    A company is currently taxed at a flat rate of 30% on it's taxable income - which is pretty much its profit (for simplicity)

    Using your example, inventory purchased is an expense, however this expense is reduced by the amount (cost price or replacement value) of inventory you have at the end of the financial year. This is the basic accounting principle of cost of goods sold (COGS) which is:

    opening stock + purchases - closing stock = COGS expense

    Apologies for the accounting 101 lesson.


    Q2 - share trader or share holder

    I beleive this question has likely been answered several times on the Invested forums, so I won't repeat it all here.

    A couple of links for your reference:

    ATO: Carrying on a business of share trading

    Invested: http://www.invested.com.au/4/how-ato-classifies-trader-16233/


    I also think that a company is typically NOT the ideal structure for both share trading (business) or share holding (investor) for the following reasons:

    - Flat rate of 30% tax with no CGT discounts available for investments held for more than 12 months
    - Difficult / inflexible in paying taxable profits out to owners / shareholders etc in a tax effective way
    - Difficult in taking money out with out triggering Div7A / debit loan issues

    I would recommend a trust (discretionary / family trust) as the preferred structure which would give you the most flexibility in terms of tax effective means of distributing income.

    You can always set up a company down the track to receive distributions if you are in a situation where any surplus income is going to be taxed at a higher rate (say 37% or 45%).

    Good luck with everything :)

    SM