By Brian Willett of Fincare Accounting & Planning

This issue of Finance Matters looks at various ways businesses can save on tax.

Prior to the last budget there were three tax reasons to use a company or trust plus the benefits of asset protection, being that companies and trusts (with companies as trustees) have limited liability for shareholders.

Asset protection still is valid to some extent.  Most applications for credit however will have some level of personal guarantee that needs to be provided.  If you are willing to sign these guarantees (and in most cases you have to if you want to deal with the other organisation) then asset protection is largely lost.

The tax reasons are as follows :

Having a company car.  With certain types of cars and depending on how far you travel, it is still possible to save money by running a car through an entity rather than as a sole trader or partnership.

Superannuation.  Prior to the budget you could get a greater deduction for contributions to superannuation through a trust or company than you could if you were a sole trader or partnership.  Budget changes have evened this out as both are fully deductible to the new level of $50,000.

Lower tax rates.

Companies have a top tax rate of 30%, which is lower than individual rates.  This is still the case however the tax rates are now more generous with the top rate of 45% (+ medicare) starting at $150,000.  The 30% rate for individuals now extends to $75,000, so any benefit of having a company starts at above this level of profit.  Further if you want to draw all the profits out of the company for private use, then you need to pay you marginal rate on the distribution.  (Note : You receive a 30% credit for the tax already paid, so you pay the same rate in total on this distribution as if it was earned as a sole trader).

Trusts (discretionary) have flexibility in how the profits are taxed.  If you have a partnership the ownership is fixed and taxed in fixed proportions.  With a trust you can elect which family member the profits are distributed to and this can be beneficial in years where one spouse isn't working or even with children at university.

To summarise, most of the benefits in operating through a company have been lost, except where you are highly profitable and you leave the profits within the company.  Trusts however still provide a flexible option with profit distribution which makes them extremely valuable to certain businesses.

As per always, no one structure fits all, and professional advice should be sort to ascertain whether you are using the right structure.

Small Business Concessions for CGT on Sale

Many business owners will now be able to use the small business concessions to minimise tax on the sale of their businesses, with the broadening of the rules as to who can use those exemptions.

For the last 6 years since there inception many businesses could not have used these concessions which can save thousands, but were blissfully ignorant that they existed.  Many would have sold and realised they were up for significant dollars in Capital Gains Tax that a simple restructure could have reduced if not eliminated all together.

The moral to the story is that a business structure is not a set and forget situation when the tax laws change as often as they do, and you need to keep revisiting whether the structure you use is still appropriate for you.