Changing from a Sole Trader to a Company or Trust
When deciding on the most appropriate business structure we look at 4 main items
1-asset protection
2-income tax minimisation
3-capital gains tax minimisation
4-succession planning
Asset Protection
Do you have assets that are worth protecting from creditors eg family home, rental property?
Lets say your home is owned 50:50 by you and your spouse and it's worth $1,000,000 and your loan is $400,000
Total equity is $1,000,000 - $400,000 = $600,000
Your 50% share = $300,000
I would argue that it is worth spending the money to add the extra layer of protection to protect your $300,000
Once off cost to setup a trust with company trustee is $2,200
Once off cost to setup a company is $1,650
Annual running costs include- ASIC fee $292, company management fee $220. Annual tax return fees will increase (from $2,200)
Running your business through a company OR family trust with a company trustee offers 'limited' asset protection in that the company is usually sued first. Assuming the company is unable to pay its debts then the creditor may be able to sue you personally but in most cases they can't.
Income Tax Minimisation
Sole Traders
Sole traders are taxed on business profits at individual marginal tax rates. So the more you earn the more you pay
-Tax (plus 2% medicare levy) on $50,000 of income is $7,800
-Tax (plus 2% medicare levy) on $80,000 of income is $18,000
-Tax (plus 2% medicare levy) on $120,000 of income is $32,000
-Tax (plus 2% medicare levy) on $180,000 of income is $56,000
Companies
Base rate entities (BRE) are taxed at 25%
-Tax on $50,000 of income is $12,500
-Tax on $80,000 of income is $20,000
-Tax on $120,000 of income is $30,000
-Tax on $180,000 of income is $45,000
All other companies are taxed at 30%
Trusts
Generally trust income is distributed to family members
There are rules around who can receive what but generally trust profits can be distributed to individual beneficiaries on the lowest tax bracket
Income Tax Minimisation
Sole Traders
Sole traders are taxed on business profits at individual marginal tax rates. So the more you earn the more you pay
Tax (plus 2% medicare levy) on $50,000 of income is $7,800
Tax (plus 2% medicare levy) on $80,000 of income is $18,000
Tax (plus 2% medicare levy) on $120,000 of income is $32,000
Companies
Base rate entities (BRE) are taxed at 25%
All other companies are taxed at 30%
Trusts
Generally trust income is distributed to family members
There are rules around who can receive what but generally trust profits can be distributed to individual beneficiaries on the lowest tax bracket
Capital Gains Tax Minimisation
Sole Traders
Sole traders are taxed on capital gains at individual marginal tax rates
You may be entitled to reduce the capital gain by
- the 50% CGT General Discount provided the asset is held for more than 12mths
- the 50% active asset test (small business only)
For example- If you were to sell your business or client list for say $200,000 your would pay tax on the capital gain being $200,000 less cost of $0 (assuming you started the busines from scratch)
Companies
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Trusts
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