Business structures: Should I run my business as a sole trader?

One of the first questions I get asked by someone who wants to start their own business or buy an existing business is: 'whose name should i put it under?' The first question they really should be asking is 'what do you think of my business plan?' but let's assume it was prepared already and save this discussion for another time.

The easiest business structure is to register the business under your own name and be a sole trader.

Advantages

• Easy to start-up and cheapest to maintain as you usually just need an ABN and a business name.
• Less reporting requirements because your business is reported on your own tax return.
• In some situations, losses from your business can be used to offset against your other income on your tax return.
• You are not an employee of the business so you do not have to pay superannuation, Workcover or payroll tax on your cash drawings from the business.
• It is relatively easy to close your business or change your legal structure to suit the growing needs of your business.

Disadvantages

• As the business is under your own name, it means that all your personal assets (such as your home) can be called upon to pay for your business obligations. This means you have unlimited legal liability which is a bad thing if your business can't pay its debts or bills.
• There is very limited opportunity for tax planning because your business profits must be declared on your own tax return and you have to pay tax at your personal tax rate. You cannot split income to your non-working spouse to take advantage of their lower tax bracket for example.
• Succession planning is relatively more difficult because your business will generally grind to a standstill say if you have a bad accident (knock wood) and you are not around to make business decisions.

Hopefully the above information provides you with some food for thought but you will probably notice that the disadvantages outweigh the advantages of being a sole trader. If you are thinking of buying a business or starting a new one, please contact me first because it's always better to get things...

3 things employees need to know about FBT

From my last post we know that Fringe Benefits Tax (FBT) is paid by your employer but that doesn't mean you should ignore it completely as an employee. There are still a few things you should at least be aware of because it might cost you if you are not careful.

1. The ATO knows about your fringe benefits!
   If you receive more than $2,000 of reportable fringe benefits every year from your employer then it will show up on your annual payment summary. Although you do not pay income tax on this amount, it still counts towards calculations for things like the Medicare levy surcharge, repayments for Higher Education Loan Program (HELP or HECS for us oldies), working out various tax offsets, child support assessments and income testing for Centrelink benefits so keep all these in mind.
   
   
2. Religious and not-for-profit employers get FBT exemptions!
   Depending on who you work for like charities or hospitals or schools, you could receive up to $30,000 of your salary in exempt fringe benefits each year. This effectively means you don't pay income tax on up to $30,000 of your salary and your employer doesn't care because they don't have to pay FBT on it either.
   
   
3. Salary packaging can save you money!
   Not everyone gets the chance work in charities or save lives in hospitals or educate our future leaders in schools, but no matter where you work there are opportunities for you to salary package certain fringe benefits which your employer does not have to pay FBT on. This means your boss would be more than happy to negotiate a salary sacrifice arrangement with you because they always want to make you happy especially if it costs them nothing. And you get the benefit of paying less tax.
   

If you are thinking of bringing up salary sacrifice with your boss, or if you run a business and want to offer salary packages to your key staff, then contact me first to make sure that the arrangements are made in the most tax effective manner otherwise someone has to foot the 46.5% FBT tax bill. That someone will probably...

What is FBT and how does it affect my business?

FBT stands for Fringe Benefits Tax and it is a tax on employers who provide certain non-cash benefits to their employees (and relatives of their employees). This tax was probably introduced many years ago to deter employers from giving their employees excessive perks which was previously not shown on their tax returns.

Common fringe benefits provided to employees are:

• Use of cars owned by the business for private purposes
• Providing entertainment such as food and drink (including a Christmas party)
• Giving employees stock or other goods for free or at a discount
• Providing employees and their families with housing or accommodation
• Giving employees free loans or with lower interest rates.

There are many more benefits listed in the legislation but the above are the most common. If you employ people in your business and think that any of the above might apply then please contact me to see what we can do to minimise or avoid paying this tax which is currently set at a nasty 46.5%!