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FAQs - Tax Structures

 

I am setting up my own small business, what are the available tax structures I can use?

  1. Sole Trader: A sole trader is the simplest business structure. The structure is inexpensive to set up because there are few legal and tax formalities.

    If you operate your business as a sole trader, you trade on your own and control and manage the business. You are legally responsible for all aspects of the business - debts and losses cannot be shared.

    The business income is treated as your individual income and you are solely responsible for any tax the business must pay. This means that, after claiming a deduction for all allowable expenses, you include all your business income with any other income and report it on your individual tax return.

    As a sole trader, you are responsible for your own super arrangements. You may also be able to claim a deduction for any personal super contributions you make. Before you can claim a deduction, you have to notify the fund of your intention to claim the amount as a deduction and wait until the fund confirms that you can claim the amount as a deduction. Once you receive this confirmation, you can claim the super as a personal deduction on your tax return.

  2. Partnership: For tax purposes, a partnership is an association of people who carry on a business as partners or receive income jointly. A partnership is relatively inexpensive to set up and operate. A formal partnership agreement is common, but not essential.

    If you operate your business as a partnership, control or management of the business is shared. Income and losses are shared among the partners. Each partner is responsible for the debts of the partnership, even if you did not directly incur or cause the debt.

    A partnership is not a separate legal entity and doesn't pay income tax on the income it earns. Instead, you and each of your partners pay tax on the share of net partnership income you each receive.

    While the partnership doesn't pay tax, it does have to lodge an annual partnership tax return to show all income earned by the partnership and deductions claimed for expenses incurred in carrying on the partnership business. The tax return also shows each partner's share of the net partnership income

    As a member of a partnership, you are responsible for your own super arrangements because you are not an employee of the partnership. You may also be able to claim separately a deduction for personal super contributions you make. If you have any eligible workers, you must pay a minimum of 9% of their ordinary time earnings as super guarantee contributions on their behalf.

  3. Company: An incorporated company is a distinct legal entity, regulated by the Australian Securities & Investment Commission (ASIC).

    A company is a complex business structure, with higher set-up costs and administrative costs because of additional reporting requirements.

    A company's operations are controlled by its directors and the company is owned by its shareholders. A company provides some asset protection but directors can be legally liable for their actions and, in some cases, the debts of a company.

    A company can register for GST if it is carrying on an enterprise. It can do this on the ABN application form. A company must be registered for GST if its annual GST turnover is $75,000 or more. The registration threshold for non-profit organisations is $150,000.

    If the company has any eligible workers, it must pay a minimum of 9.25% of their ordinary time earnings as super guarantee contributions on their behalf. This includes you, if you are a director of the company, and any other company directors.

  4. Trust: A trust is an obligation imposed on a person - a trustee - to hold property or assets (such as business assets) for the benefit of others. These others are known as beneficiaries.

    Setting up a trust can be expensive, as a formal deed is required and there are formal yearly administrative tasks for the trustee to undertake. A trust deed outlines how the trust is to operate.

    If you operate your business as a trust, the trustee is legally responsible for its operations. A trustee of a trust can be a company, providing some asset protection.

    If the trust is carrying on an enterprise, you can register for GST as trustee of the trust. You can do this using the ABN application form. A trust must be registered for GST if its annual GST turnover is $75,000 or more.

    Whether or not a trust is liable to pay tax depends on what type of trust it is, the wording of its trust deed and whether any of the income the trust earns is distributed to its beneficiaries.

    Where the whole of the net trust income is distributed to adult resident beneficiaries, the trust is not liable to pay tax. The trust may be able to access some tax concessions.

    If the trust has any eligible workers, it must pay a minimum of 9.25% of their ordinary time earnings as super guarantee contributions on their behalf. This may include you as the trustee if you are also employed by the trust.

  5. Joint Venture: A joint venture is when 2 or more businesses combine resources, knowledge and skills to achieve a goal. It is similar to a business partnership, with one key difference: a partnership generally involves an ongoing, long-term business relationship, whereas a joint venture is based on a single business transaction.

    All joint ventures are initiated by the parties' entering a contract or an agreement that specifies their mutual responsibilities and goals. The contract is crucial for avoiding trouble later; the parties must be specific about the intent of their joint venture as well as aware of its limitations. All joint ventures also involve certain rights and duties. The parties have a mutual right to control the enterprise, a right to share in the profits, and a duty to share in any losses incurred.

    For the Commissioner to be satisfied that a joint venture exists for GST purposes, the first feature, ie sharing a product or output, must be present.

    A joint venture must lodge an annual tax return in the same way a partnership would.
Last Updated on Friday, 04 October 2013 01:49
 

 

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