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STARTING A BUSINESS

 

Often a business owner is very good at what they do (trade or profession) or they have a good product to sell, but perhaps they lack skill and experience in other aspects of running a business.    A well documented business plan is a very good starting point for a new business.  This will help to define exactly what the business is about and will include estimates of market share, projected revenues and costs, options for business premises, the amount and sources of any funding required, cash flow budgets and a summary of strengths and weaknesses.  A simple plan not only helps the owners to focus their effort, but it becomes an important part of attracting financial support.  Please contact me if you would like assistance in preparing a business plan.   When buying an existing business it is very important to perform a thorough investigation of the reported results of the business.  This should include a critical assessment of how much of the business relates to the personal goodwill of seller.  If the existing business is operated through a company structure it is often better to purchase the business rather than the shares in the company, because once you own the company, you own all of its history including any unrecorded or as yet unknown liabilities. First time business owners are sometimes quite nervous about the administration aspects of running a business.  Usually this is nothing more than a fear of the unknown.  I have listed below some of the common issues that need to be handled.  This list is by no means exhaustive and, as particular circumstances will apply to each business, it should be taken as a general guide only.   Obtaining insurance for assets, indemnity, public liability and workers compensation. Putting compulsory superannuation arrangements in place, if employing staff.  This includes superannuation for owners who are employees of the new entity. Choosing an accounting system that matches the business and will enable proper reporting of transactions.  This will be needed to comply with reporting obligations, but it is also a vital tool for monitoring the performance of the business.  

BUSINESS REGISTRATION  

Australian Business Number (ABN)   All entities that carry on business should have an ABN.  Failure to quote your ABN could result in tax being withheld by business customers at the rate of 46.5%.  ABNs are recorded on the Australian Business Register and this can be used to check the details of an ABN.   You are entitled to apply for an ABN if you are:-   A company registered under Corporations Law in Australia, A government entity, or An entity that is carrying on an enterprise in Australia. Further ABN Information is available on the ATO website.   Australian Company Number (ACN).    The Australian Securities and Investments Commission is the government body responsible for the regulation of the Corporations Act.   The ASIC maintains a database of all companies registered in Australia.  Each company has an Australian Company Number or ACN.  The ASIC database includes the names of the office holders (directors and secretaries) and the shareholders.  The ASIC confirms these details every year upon the anniversary of the formation of the company.  The company pays a fee to ASIC for lodging this Annual Company Statement.   Each company name must be unique and if you are contemplating the registration of a new company it is wise to check the National Names Index to ensure that the proposed name will be available.   Changes to company details that occur during the year also need to be lodged with ASIC, usually within one month of the change.  Late lodgement fees apply for failure to lodge documents on time. 

Business Names

  Any entity (individual, partnership, trust or company) that carries on business under a name other their own name must register that name with the relevant State Government body.  In New South Wales this is the NSW Office of Fair Trading.  There is a fee for registering a business name and in NSW it is renewed every 3 years.  Please check the NSW Fair Trading Website for more information.  Other states have similar rules, but these should be checked if you intend to carry on business in more than one state.   You may also wish to consider the registration of a trade mark.

BUSINESS STRUCTURES

  Individuals  

Anyone can earn income as an individual.  You will need to apply for a tax file number (TFN) and you will be asked to quote this to employers and financial institutions in order to avoid tax being withheld at the top personal rate of tax (currently 46.5% including Medicare levy). The majority of taxpayers are salary and wage earners and they lodge their income tax returns using an I Form.   An individual taxpayer can also operate a business.  This is also called being a sole trader.  A person who operates a business needs to apply to the ATO for an Australian Business Number (ABN).  Depending on the type of business and the level of gross sales (turnover) they may also register for the Goods and Services Tax (GST).   A sole trader lodges their income tax return with the ATO using a Form I, and their business income is added to all other sources of income (salary, interest, dividends etc). Individuals are able to claim income tax deductions that relate to their income.    Trading as an individual is the simplest and cheapest business structure to establish, but in high risk industries where you are likely to be sued, your personal assets may be at risk.  If a taxpayer trades under a name other than their own name they must register that business name with the Department of Fair Trading for a small fee, but apart from that there a few establishment costs.  Tax is paid at normal individual tax rates.

  Companies

  The other common form of business structure is a company.  Companies can be either private (Pty Limited) or Public (Limited).  In Australia, companies are covered by the Corporations Act which is administered by the Australian Securities & Investments Commission (ASIC).  Each company has its own Constitution which sets out the scope of its operations and how the company is to be organised and managed.   A company is a legal structure that separates ownership of a business and business assets (and business debts) from the individuals who own the company.  A company has legal status of its own - it can enter into contracts, it is capable of suing other parties and is capable of being sued.   A company has an amount of issued capital represented by shares.  The owners of these shares "own" the company.  In the case of a private company, there can be from 1 - 50 shareholders.  If any one person owns more than half of the issued shares they will control the company.  The shareholders in a company can be any type of entity (individuals, trusts, companies, superannuation funds).  Shares can be transferred from one shareholder to another entity by completing a share transfer form.  Each "share" or unit of ownership in a company has an issue price.  Commonly this is $1.00 per share, but it can be any value.  The issue price is the amount that the initial shareholders (and any subsequent fresh allotments by the Company) are required to contribute in order to take up their shares.   A limited liability company (most companies) is designated by including the word "Limited" in their name.  This means that in the event of a winding up, the liability of members is limited to the issue price of their shares.  This can act as a protection of the personal assets of the shareholders and directors, but it should be noted that lenders and major creditors will usually require security and/or personal guarantees before advancing money to a limited liability company.  Directors may also become personally liable for company debts if they trade knowing that the company is insolvent.   A company can carry on business and is subject to income tax on its assessable income less allowable deductions.  Companies pay tax a flat rate of tax (currently 30%) on their taxable income. If a company earns a profit for the year it may choose to distribute this profit to its shareholders by way of a dividend.   Australian companies require at least one resident director and one resident secretary, although this can be the same person.  People intending to take on a role as a company officer should be fully aware of their duties and responsibilities under the law before consenting to act.   Companies are a more expensive structure to establish and maintain.  A Pty Limited company costs a little over $1,000 to establish and there is an annual filing fee payable to the ASIC.  There is also the cost of preparing financial accounts and income tax returns. 

Partnerships

  Any group of entities (individuals, companies, trusts) can together form a partnership for the purpose of earning income or carrying on a business.  For example it is common for accountants to form partnerships as their business entity.   Partnerships are often governed by a partnership agreement.  This is a legal document that sets out how the partnership will be conducted.  This is particularly important for determining how new partners will be admitted and how retiring partners will be paid out.   A partnership agreement is not essential to having a partnership.  The registration of a business name in joint names and / or the operating of a joint bank account are sufficient evidence to establish that a partnership exists.   A partnership does not pay tax in its own right.  All income is distributed to the partners and each partner includes their share of the net partnership income in their own income tax return and they pay tax at their own rate.    A joint venture is similar to a partnership, but is generally for a specific project and therefore a limited amount of time. A simple partnership is easy to establish and is not costly to maintain, however is does not generally provide limited liability protection to the owners.

 Trusts  

A "trust" is established when a person (called the settlor) gives an amount of money to another party (the trustee) to hold in trust for a nominated person or group of people (called beneficiaries).   A trustee of a trust is a separate legal entity and it can own assets, incur liabilities, carry on a business or own property.  The rules of the trust are set out in a legal document called a trust deed.  The trustee can be a company or individuals.   There are several different types of trusts.  A discretionary trust is one where the income of the trust is distributed to the beneficiaries at the total discretion of the trustee.  A fixed trust is one where the income of the trust is distributed to the beneficiaries in fixed shares.   Providing a trust distributes its income each year it does not pay tax.  Failure to distribute income results in the trustee being liable to tax at penalty rates.  Income distributed to minors (persons under 18 years of age) is taxed a special rates, with a much lower tax free threshold.   There are also special types of trusts created by particular circumstances.  A superannuation fund is a special trust set up to provide retirement benefits for its members.   When a person dies any assets that exist at the date of death are then held in trust by the executor of the deceased person pending distribution to their beneficiaries.  In the case of a deceased estate, it is possible for the trust to earn income before the assets are distributed to the beneficiaries.  Income earned during this period of administration is taxed as if it were the income of an individual (ie using the normal individual tax rates).  This situation can continue for a period of up to three income tax returns after the date of death.   It is possible for a person to specify in their will that they wish to have a trust established upon their death.  This is called a testamentary trust.  The advantage of a testamentary trust is that it can distribute income to minor beneficiaries (ie persons under the age of 18) while still enjoying the normal tax free threshold and individual tax rates.   Trusts have a similar set up cost to that of companies.    

Superannuation Funds  

A superannuation fund is a special type of trust, established to provide retirement benefits for members.  The rules of the fund are governed by a trust deed.  Superannuation funds are regulated by the Superannuation Industry Supervision Act (SIS Act) and funds receive concessional tax treatment, providing they comply with the provisions of the SIS Act.    If a fund has less than 5 members it can elect to be a self managed superannuation fund (SMSF).  The ATO administers SMSF's and the annual return information is combined with the Form F taxation return.  SMSF's have less onerous reporting obligations, but they are restricted in that all members of the fund must also be trustees.   If a fund has five or more members it is regulated by the Australian Prudential Regulation Authority (APRA) and the fund needs to lodge both an income tax return and an annual return with APRA.   Members are in either of two broad phases.  The accumulation phase - during which time members are accumulating funds through employer and / or employee contributions together with the earnings on those funds.  The other phase starts when a member reaches retiring age and elects to take their benefits in the form of a regular income stream (called a pension).  This is called pension phase.   During the accumulation phase, contributions that have been made by an employer or member contributions for which a tax deduction has been claimed are taxed in the fund at the rate of 15%.  Net investment income is also taxed at the rate of 15% during the accumulation phase.  If the fund has invested in shares or managed funds that carry with it an imputation credit this is allowed as a refundable offset against tax otherwise payable.  Since company dividends are franked at the rate of 30% most funds pay less than 15% tax as the excess imputation credits are offset against the 15% tax on other types of income.   When a member reaches pension phase the tax on investment earnings drops to nil as the assets are being used to fund a pension.  The pension received is taxable to the member, but comes with a 15% tax offset.  Any member contributions made during the accumulation phase where no tax deduction has been claimed (called undeducted contributions) are not taxable to the member.  The amount of undeducted contributions included in the pension amount is determined by reference to the ATO life expectancy tables at the commencement of the pension.   Upon reaching "retirement age" (currently 55 if you were born before 1 July 1960 or phasing out to 60 if you were born after 1 July 1964) you can choose to take your superannuation benefits as either a lump sum or as a regular income stream (pension) or a combination of both.  There are many new changes for exempting payments for payments to beneficiaries over 60 years old from 1 July 2007.

 Services for Businesses

Planning ahead. Keeping all your accounts up to date and compliant can be a daunting task. This is why we have provided information and collected here for you some of the many documents that may help you to keep your business on track. Because we aim to be hands on with our clients, we plan, organise and structure your Company Taxes throughout the year with a review in June. This ensures the most favorable outcome and cost effective process of tax return preparation.

*Services provided by Australian Investments /Accounting include: Company Tax Returns:At Australian Investments/ Accounting we prepare a full variety of tax returns from basic to highly complex. Company Secretarial:As a part of our Company secretarial work we check company statements, ensure ASIC is kept up to date with any changes to details as well as preparing any necessary forms or paperwork. Activity Statements:We have a range of options regarding preparation and lodgment of IAS and BAS. This includes you preparing the return and either lodging it yourself or getting us to lodge it electronically, as well as a full prepare and lodge service. Fringe Benefit Tax:We prepare Fringe Benefits Tax Returns and advise on salary packaging to minimise FBT. Business Development, Appraisal & Financing: We offer a wide range of services surrounding the development, appraisal and financing of your business. Contact us for prices on Business tax returns.

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