Business FAQs

1. What common legal structures are available for conducting a business?
Sole trader, Partnership, Trust or Company.

2. What do I need to set up a sole trader business?
We can set that up for you. This includes ABN, GST (if required), public liability or professional indemnity and insurances as required.

3. What are the advantages and disadvantages of conducting business as a sole trader?
Advantages

  • Control – a sole trader has total control over the business.
  • Goodwill – the sole trader gets to know his or her customers – goodwill may attach to the sole trader personally.
  • Ease of Sale – the simple structure means the business can be easily sold.
  • Simple – minimal set up costs, few formalities and legal restrictions.
  • Losses – available as a deduction, but subject to non-commercial business loss provisions.
  • Capital Gains Tax – 50% discount if business held longer than 12 months. Small business capital gains tax exemptions available.
Disadvantages
  • Admission of New Parties – a structure will be required in order to admit a new party into the business.
  • Finance – the sole trader often finds it difficult to readily access finance without mortgaging personal assets.
  • Liability – the sole trader cannot limit liability; no separate legal entity.
  • Sickness – if the sole trader becomes unwell who does the work?
  • Limited Life – if the sole trader dies the business usually terminates.
  • Tax Rate – marginal personal tax rates apply.
  • Tax Planning – difficult to split income.
4. What are the advantages and disadvantages of conducting a business through a partnership?
Advantages

  • Admission of New Parties – providing the partnership agreement permits, it is usually possible to admit a new partner to the business.
  • Disposal Interest – it is possible for a partner to dispose of his/her interest in the partnership without the business ceasing.
  • Control – partners have control over the partnership business.
  • Tax Planning – consider a partnership of family trusts.
  • Losses – are distributed to partners.
  • Capital Gains Tax – 50% discount if business held longer than 12 months. Small business capital gains tax exemptions available.
Disadvantages
  • Liability – partners are usually joint and severally liable for partnership debts; no separate legal entity.
  • Tax Rate – marginal personal tax rates apply.
  • Perpetuity – new partnership required for tax on change of partners.
5. What are the advantages and disadvantages of conducting business through a company?
Advantages

  • Finance – finance can be raised through the issue of shares.
  • Limited Liability – limited liability applies (unless a director issues personal guarantees).
  • Change of ownership – facilitated by the issue of new shares or the sale of existing shares.
  • Research and Development – eligible for R&D concessions.
  • Franking of Dividends – credit for tax paid at the company level given to dividend recipients.
  • Tax Rate – flat rate of 30%.
  • Employees – PAYG applicable and 100% deduction for superannuation contributions paid.
Disadvantages
  • Complexity – subject to a raft of regulatory controls and hence costs of establishing and maintaining are higher.
  • Control – ultimately the shareholders have control over the business.
  • Splitting of Income – limited opportunities; companies can only distribute dividends so that it cannot “stream” capital gains, foreign source income etc to targeted shareholders.
  • Capital Gains – small business exemption lost on distribution i.e. taxed as a dividend.
  • Limited Flexibility – profits can be paid out through salary, dividends or loans. Loans to shareholders are heavily regulated and can give rise to deemed dividends.
  • Losses – cannot be distributed to shareholders, future deductibility subject to complicated restrictions.
6. What is a trust and how does it operate?
A trust of property is an obligation on the trustee to hold property or income for a particular purpose on behalf of other people. There are a number of different types of trusts:

  • Discretionary trusts
  • Unit trusts (public and private)
  • A combination of a unit and discretionary trust (hybrid)
  • Fixed trusts
  • Testamentary trusts
  • Inter vivos trusts.
Family trusts are typically discretionary trusts with family members as the beneficiaries. Discretionary trusts are so called because the trustee has discretion as to which beneficiaries he or she may pay income or capital. Income can usually be paid to one beneficiary at the exclusion of another. The potential pool of discretionary beneficiaries is usually set out in the trust deed. The essential elements of a trust are:
  • A constituent document (the trust deed) although a trust can be created orally or implied
  • Trust property
  • Beneficiaries
  • Trustee
  • Settlor
  • Obligations in relation to the trust property as set out in the trust deed.
For tax law purposes, a trust is considered to be a separate legal entity; although this is not the case in general law. In any event, the trust is required to determine its net trust income and lodge an income tax return. If the trust has net distributable income, the income will generally be distributed to beneficiaries and is taxed in the beneficiaries’ respective tax returns at the marginal tax rates. Income retained by the trust is generally taxed at the top marginal rate, plus Medicare levy.

The advantages and disadvantages of trusts vary depending on the type of trust it is. Generally speaking, the major disadvantage of a trust structure is that it cannot distribute losses to its beneficiaries. The major advantage, particularly in the case of a discretionary trust, is the ability to split income amongst the pool of beneficiaries. A benefit can be obtained by directing income to members of the family with low marginal income tax rates.

The trust loss regime is more severe than for companies. However, if the discretionary trust elects to become a family trust, this disadvantage can be eliminated.

CGT exemptions available to the trustee can be passed on to beneficiaries.

If the trust is structured correctly, it will provide considerable asset protection against personal creditors.

7. How much can I earn before legally registering for GST?
$75,000 gross turnover.

8. When is my BAS due?
Your quarterly BAS is generally due on the 28th day after the quarter-end date. However, if you lodge electronically through W. W. Vick & Co., you are automatically given a two-week extension (except for the December quarter BAS).

Your monthly BAS is due on the 21st day after the month-end date.

9. How can I get a payment slip if I have lost my BAS or IAS form?
Contact our office on (02) 9266 0881 and we will send you a payment advice by email, fax or mail (whichever suits you).

10. What is the value of my trading stock?
In valuing trading stock, a taxpayer may choose from the following methods:

  • Cost price
  • Market selling value or
  • Replacement value
11. Can I offset capital losses against trading income?
Capital gains tax was introduced with effect from 20 September 1985. Capital losses cannot be offset against trading losses. They can only be offset against capital gains or if there are no corresponding capital gains then they can be carried forward indefinitely.

12. When is my annual review required?
From 1 January 2003, companies no longer complete an annual return. Instead, they are required to complete and lodge an annual review and pass a resolution of solvency within two months of their anniversary date. The annual review filing fee is $212 per company.

You are able to align the anniversary dates of companies with a common officer. There is a lodgment fee of $33 per company.

The annual review form requires a review of the company’s addresses, officers and members. When reviewing the form please ensure that the member’s details are correct.

Any changes must be notified to ASIC within 28 days and late penalty fees will apply.

We will notify you of your annual review requirements and request that you attend to them as soon as they are received.

13. How can I deregister a company?
  • Ensure that all outstanding documents (including annual returns) have been lodged with ASIC.
  • Ensure all outstanding charges against the company have been satisfied. You should make sure of this before applying for deregistration.
  • Complete Form 6010 and include $33 application fee.
14. What is a solvency resolution?
Company directors must pass a solvency resolution within two months of their review date. There are two types of solvency resolution:
  • Positive solvency resolution – this is passed when the directors have reason to believe that the company will be able to pay its debts as and when they occur.
  • Negative solvency resolution – this is passed when the directors have reason to believe the company will not be able to pay its debts as and when they occur.
  • Negative solvency resolutions must be lodged with ASIC on a Form 485 within 7 days of the resolution.
A positive solvency resolution is assumed if the directors of the company have:
  • Paid their review fee.
  • Not lodged a Form 485 within two months and seven days after the company’s review date.
  • Not lodged a financial report in the previous 12 months.
15. Do I need to have my company’s accounts audited?
Proprietary companies are exempt from audit unless one of the following applies:
  • they are classified as large
  • they are owned by a foreign company
  • more than 5% of the shareholders direct the company to be audited
  • ASIC requests the company be audited.
Large proprietary companies have at least two of the three following criteria:
  • gross operating revenue of $10 million or more
  • gross assets of $5 million or more
  • 50 or more employees.
Audit relief is available to large proprietary companies only if the company is “well managed in a sound financial position”. There are minimum requirements to meet this test.