2nd Quarter 2014

There are real advantages in choosing a structure best suited to the way you want to operate your business. It’s important you understand these advantages and responsibilities as they may affect the way tax applies to your business, the protection of your assets, your operating costs and how other businesses deal with you.

SOLE TRADERS

If you operate your business as a sole trader, although you may decide to have employees, you trade, control and manage all aspects of your business. This is the simplest form of business structure.

Things to consider

• The structure is relatively inexpensive and easy to set up and maintain. Relatively easy to change your legal structure if the business grows, or if you wish to wind things up.
• You have full control of the business and are legally responsible for all aspects of the business. There is no division between business assets or personal assets, which includes your share of any assets jointly owned with another person.
• You receive the full benefit of profits made by the business and keep all the after-tax gains if the business is sold.
• If you have no employees, you usually have to do all the work.
• Your access to finances is usually limited to your own resources.
• Limited opportunity for tax planning. Debts and losses cannot be shared and you cannot split business profits.
• You can lose personal assets such as your home, contents and vehicles if the business goes into debt. Your liability is unlimited which means that personal assets can be used to pay business debts.

Taxation obligations

You are not considered an employee of your own business and are free of any obligation to pay payroll tax, superannuation contributions or workers' compensation on income you draw from the business. However you must make super contributions, PAYG withholding payments and workers compensation payments for any eligible workers you employ including apprentices.

Sole traders are taxed as individuals. As a sole trader, you must report the business income you earn (after expenses) on your personal tax return, along with any other income you earn (such as salary or wages, interest, dividends). You pay the same tax as any other individual and you are also entitled to the tax-free threshold (the first $18,200 you earn in an income year) if you're an Australian resident.

COMPANIES

A company is a separate legal entity capable of holding assets in its own name and conducting business in its own right. Shareholders own the company while directors run the company. In many cases company directors are also shareholders, along with company employees. If you operate your business as an incorporated company, the business is a distinct legal entity that is regulated by the Australian Securities & Investments Commission (ASIC). A company is a more complex business structure.

Things to consider

• Usually, the set-up and administrative costs for a company are higher than for other business structures. However a company structure is commercially well understood and accepted, easy to sell and pass on ownership.
• Ability to raise significant capital. A company has far greater access to capital for the running of the business.
• Profits can be reinvested in the company or paid out to the shareholders as dividends and a company can carry forward losses indefinitely to offset against future profits. However a company cannot distribute losses to its shareholders.
• Limited liability for shareholders/owners. Shareholders are not liable for the debts of the business.
• Increased asset protection. A company’s assets belong to the company and the company is liable for debts incurred which makes this type of business structure appealing to high-risk business ventures. Generally, the owner’s assets cannot be accessed to pay for any company debts or liabilities. However, there are some exceptions. Financial institutions may require a personal guarantee against loans or overdrafts. A personal liability may arise if debts are caused recklessly, negligently or fraudulently.
• A company can also sue and be sued.

Taxation obligations

The tax requirements for a company are quite different to that of a sole trader business structure. It has its own tax income liability which is totally separate to individual income tax. A company pays income tax at a flat rate of 30% on taxable income which may be an advantage for businesses with high profit levels.

Your company must lodge an annual company tax return to report its income and deductions, and the income tax it is liable to pay. All companies must pay their own income tax. If you receive wages or director's fees from your company, you need to include them in your individual tax return and pay tax on them at the individual’s tax rates.

Your company must make super contributions and workers compensation payments for any eligible workers it employs, including you as a company director.

AUSTRALIAN BUSINESS NUMBER (ABN)

It’s best to get an ABN for your business if you are in business. If you don’t, other businesses have to withhold 46.5% from their payments to you.

All businesses need a TFN. Sole traders use their individual TFN. Partnerships, companies and trusts need a separate TFN for the business.

Before you go about applying for an ABN it’s important that you understand what business structure you have or will be operating under (i.e. sole trader, partnership, company or trust) and which registrations you require.

If you plan to run your business through a company structure, you need to register your company with the Australian Securities and Investments Commission (ASIC) who will issue your company with an Australian Company Number (ACN) before you can get your ABN and tax registrations.

When applying for your ABN, you need to request registration for Goods and Services Tax (GST) and Pay as you go withholding (PAYGW) if required as this is not automatic.

GOODS AND SERVICES TAX (GST)

To register for GST, you must already have an ABN. You must register for GST if you are carrying on a business or other enterprise and your current or expected GST turnover is $75,000 or more (for non-profit organisations the threshold is $150,000 or more). If your GST turnover is less than $75,000, registering is optional. If you provide taxi travel, you must register for GST regardless of your turnover. This applies to both owner drivers and people who lease a taxi.

It is your responsibility to register for GST within 21 days if your turnover exceeds the threshold, or is likely to exceed it. If you are not registered for GST, then you cannot charge GST on the goods and services you provide or claim a credit for GST paid on business purchases.

PAY AS YOU GO WITHHOLDING (PAYGW)

You must register for PAYGW if you need to withhold an amount from a payment. The most common payments you need to withhold amounts from are payments you make to your employees, your directors and businesses that do not quote their ABN to you.

If you operate your business structure as a sole trader or a partnership and you draw amounts from the business, this is not a wage and you do not have to withhold from these drawings. You make some provision for your income tax liability through PAYG instalments. However, if you have other employees, you must withhold amounts from payments you make to them under PAYGW.

If you operate your business structure as a company or trust with a corporate trustee, it is likely you are either an employee or director of that business. If the company or corporate trustee pays you a wage or directors fees, it has the same responsibility to withhold amounts from these payments and send the withheld amounts to the Australian Taxation Office (ATO).

Please do not hesitate to contact us in relation to any of the above. We are more than happy to help you with all your registration needs and take the hassle away from you.

SMSF AUDITORS

Each income year, a self-managed super fund (SMSF) trustee must appoint an independent approved SMSF auditor to perform a financial and compliance audit of their SMSF's operations before they lodge their SMSF annual return.

From 1 July 2013, trustees should check with the auditor they intend to appoint to make sure they are registered with the Australian Securities and Investments Commission (ASIC) and have been issued with an SMSF auditor number – even if they have appointed this auditor for previous years.

They must appoint their auditor no later than 45 days before the SMSF annual return is due for lodgement.

SMSF auditors who are not registered with ASIC cannot undertake SMSF audits.

SMSF MARKET VALUE REPORTING

For the 2012–13 income year and any later years of income, SMSFs are required to use market value reporting for their financial accounts and statements.

SMSF SUPERVISORY LEVY

The SMSF levy will increase from $191 to $259 per annum from 2013-2014. Payment will also be brought forward so it is collected and levied in the same year. The bring forward component will be phased in over 2 years.

The New Compliance Data Sources Program enables the Department of Human Services to identify social welfare recipients who may not have disclosed income and assets to the Department of Human Services by obtaining details from the Australian Business Register. This register includes the name and address of business owners and company registration details.

The details will be electronically matched with specific Department of Human Services data holdings, to identify non-compliance with income or other reporting obligations. Records exceeding 5,000 individuals will be matched.

The Department of Human Services, Centrelink Master Program data base holds approximately 7 million unique records. The Australian Business Register data base holds in excess of 10 million unique Australian Business Number (ABN) records.

Based on investigation criteria the department expect to examine less than 10,000 records, of which less than 1,000 cases are likely to be referred for review or investigation.

Source: Australian Government Gazette C2013G01342