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Should I invest through my business

Discussion in 'Accounting, Tax & Legal' started by ktech, 25th Mar, 2019.

  1. ktech

    ktech New Member

    Joined:
    25th Mar, 2019
    Posts:
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    Location:
    Gold Coast
    Hi guys.

    So I've found a couple of articles, but nothing that specifically suits me. (that I can find anyway) .

    I'm self employed earning over $200k pa.

    I invest in shares etc, currently as an individual not through my business.

    Note: I don't have anyone I can set up a trust with for tax purposes.

    Am I more beneficial to keep all my extra money in my business, lowering my personal income tax, and invest as a business?

    Or keep paying the top tax bracket, and getting the CGT discount on my shares?

    Also if company is the way to go, I'm better off creating a new "investment" company and paying a fully franked dividend to said company to protect my assets?

    Or I just had another thought. Should I pay myself a fully franked dividend every six months and invest personally, taking advantage of the lower tax bracket and CGT.

    Sorry! I'm pretty new to running my own business so I apologise if there's any stupid questions haha.
     
    twisted strategies likes this.
  2. Waimate01

    Waimate01 Well-Known Member

    Joined:
    26th May, 2008
    Posts:
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    Location:
    Sydney
    My situation was not dissimilar to your own. My business did well, and a considerable volume of wealth built up inside the company.

    I ended up thinking of myself as having the choice of three different tax regimes:

    - "cop it on the chin" personal, 52% tax (or whatever it was) at the margin, medicare levy, etc, but with the benefit of stepped tax scales and 50% CGT reduction so my 52% becomes only 26%

    - "super" - all the benefits that comes with super, but also all the constraints and the sovereign risk that you'll tie your money up for decades and then they go change the rules. The lowest tax regime, but the most limitations

    - "personal investment company" - tax at 30% (now even less), but no tiers. But, no medicare levy either.

    So, 52%, 15% or 30% - take your pick. I ended up doing all three. Really, anything that causes your personal tax to exceed 30% is best left in your investment company. If your personal tax highest rate is less than 30%, you should be paying more dividend from your investment company. And also put the maximum in super.

    There are other considerations beyond the purely numerical, including:
    - The investment company can't buy food, holidays or toys. It's expenses can only be related to the running of itself. And dividends. And your salary.
    - Always remember CGT is optional - you only have to pay it if you sell something.
    - Get some good accounting advice and make sure your situation is square from a tax law point of view
    - Best not to have investment assets accumulating in a company that is still carrying on an active business and which might get sued, or a company you might want to sell as a going concern
    - Although it's nice to have assets compounding at a lower tax rate, every time you pay a large dividend to cover the purchase of some trinket, it triggers a tax effect. Thus you'll probably find the company has lots of money but you don't.

    I get accounting advice but I'm not an accountant. I ended up in this situation through happenstance rather than any sort of plan. Maybe a family trust would be a better arrangement for you (depending on Bill Shorten).

    Probably best to go pay for a couple of hours of your accountants time.
     
    twisted strategies likes this.
  3. Terryw

    Terryw Well-Known Member

    Joined:
    9th Jun, 2006
    Posts:
    910
    Location:
    Sydney
    A business is not an entity, but something someone does. If you mean a company, then having the company invest creates risk as the company would be trading. Companies also pay high CGT so not ideal for investing direct.

    Who are the shareholders of the company?
    You would generally want another company as the shareholder or a trustee of a discretionary trust. If you are the shareholder seek tax and legal advice on some strategies to slip a trust or company in there.
    The company could then pay a dividend to the company which could lend a trust to invest. Div7A loan agreement.
    Or pay a dividend to a trust which then distributes it to a company who lendests i back.

    "Note: I don't have anyone I can set up a trust with for tax purposes."
    You are not thinking this thru. You could set up a trust so that a company could be a beneficiary. Tax capped at 30%.
    Later you may have family who could potentially extract money out of the company, potentially tax free is set up right.

    seek legal advice.
     
  4. Luke83

    Luke83 Member

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    25th Apr, 2018
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    Location:
    Hunter Valley NSW
    Terry, what are the average costs, both in Setting up a company and trust as described above and in yearly Fees?
     
  5. Terryw

    Terryw Well-Known Member

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    Sydney
    it all depends.
    could be from $1 to $5,000 or anywhere in between. Yearly fees could be $0 to a few thousand.
    probably about $2200 for a lawyer to set up a company and trust. annual fees will be $260 or so in ASIC fees for a company plus accountant fees.
     
  6. Luke83

    Luke83 Member

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    25th Apr, 2018
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    Location:
    Hunter Valley NSW
    So, i need a ABN to get the Domain name i need, do i just sign up for one of these now and move to a Company structure later on (assuming once i get legal advice this is the best way forward)?

    For me i think i need:
    1- a company to own my home business so i can reduce tax ( since i hear Libs want to move tax rate down to 25%, plus i assume i only pay tax on my Profit income ( not Gross income), paying 32% currently on my pay now and i cant go much higher without hitting next tax bracket.
    2- a Entity to invest in long term ( will need this setup in 3 years when mortgage is finished), some form of trust i think so i can compound my interest for years and years and only withdraw when i retire and/or pass it onto the kids ( or atleast direct some funds to them each year).

    I also need to see what are the Negatives when i am older ( approx 55) and want to stop/slow down on working and start living off some of this money and my home business.
     
    Last edited: 7th Apr, 2019
  7. Terryw

    Terryw Well-Known Member

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    Sydney
    Ownership of a domain should be considered carefully. Depending on how big 'you' plan to get.