Today we explore the concept of “trusts”  – certainly one of the more complex types of structure to explain!

The complexity surrounding the use of trusts and explaining them is due to the types of trusts available and the elements involved.

Trusts have been a common structure used in small business since the early 1980’s…however the Australia Taxation Office (ATO) have refined the laws regarding trusts in recent years and many of the tax benefits previously associated with trusts (particularly discretionary trusts), are no longer available.

The types of trusts include discretionary trusts (commonly referred to as family trusts), unit trusts and hybrid trusts.

In addition to the type of trust, there are five elements which must be present being: settlor, trustee, trust deed, appointor and beneficiaries.

The benefits of operating as a trust include:

• there may be taxation advantages of operating as a trust (depending on the circumstances of the individual involved)
• there is sometimes the ability to stream income to particular beneficiaries
• in some cases those involved intrusts may have limited liability

Disadvantages of operating as a trust include:

• establishment costs can be high, particularly when a specialised trust deed is required
• capital gains tax (CGT) may be payable when the trust is dissolved (depending on the trust arrangements)

In all honesty, trust arrangements really need to be discussed on a case by case basis as there are so many variables.  I also find that while this is a common structure for small business, very few owners operating in a trust actually understand their circumstances.

If you’d like some help with your business operated as a trust, please complete the Contact page.

Regards

The word “company” often conjures up thoughts of large multi-nationals and members of the stock exchange – but small businesses can also be operated through a corporate structure.

The process of establishing a company is referred to as incorporation, and it is regulated by the Australian Securities and Investments Commission (ASIC).

You should also be aware that there are a few extra responsibilities if you decide to trade through a company. When discussing companies, you will hear terms like director, shareholder, dividend and franking credit – it is extremely important that you gain a good understanding of these terms, as well as your responsibilities, if you are looking at trading via a company.

In addition to holding a Tax File Number (TFN) and Australian Business Number (ABN) – each company is issued with an Australian Company Number (ACN).  Each company is also required to lodge its own income tax return, and it is responsible for paying income tax on its earnings.

The benefits of operating as a company include:

• there is a protection mechanism by way of limited liability ie: shareholders of a company are only liable for any unpaid amount on their shares and personal assets are not at risk
• as a company is a separate legal entity, it can employ both directors and/or shareholders and pay them a wage or salary (unlike the sole trader and partnership structures)
• income tax is paid at a flat rate (currently 30%), which is often less than the applicable rate for individuals
• any spouse, partner or child can be issued with shares which allows income to be diverted to these parties by way of dividends, and;
• due to the regulation surrounding companies, management is often more organised which may result in formalised decision making processes and structured operations

Disadvantages of operating as a company include:

•  a company is expensive to establish and maintain (compared to other structures) – there is an establishment fee and ongoing fees payable to ASIC and often legal and accounting fees are higher due to the complex nature of work to be completed
• the profits of the business are locked into the company until such time as they are paid out to shareholders as dividends, and:
• increased compliance required with government legislation is very time consuming and sometimes owners of businesses operating as a company feel overwhelmed by “red tape”

If you’d like to discuss your business operated as a company, please complete the Contact page.

Regards

Today we continue our “Structure” series, focussing on partnerships.

A partnership can be carried on by two or more individuals or entities – a partnership occurs when the business is carried on by the individuals or entities together, with the intention to share profits.

In most cases the profits are split equally, however it is possible to come to an agreement for a disproportionate split of income (ie: where one partner works in the business more than the others, they should be remunerated accordingly – see the reference to wages below).

Of importance to note is that a partnership, while a separate entity, does not pay income tax in its own right.  A partnership must distribute its income (or loss) according to any agreement and it is the partner who is responsible for payment of any income tax.

The benefits of operating as a partnership include:

• they are easy to set up, the only registrations required are for a Tax File Number, Australian Business Number and Business Name (if applicable) – although a formal agreement is recommended
• as it is the partners who pay income tax, there is the possibility of “splitting” income within a household
• management expertise may be increased where there is more than one individual, as it is likely each will have their own areas of speciality
• it is easier to take annual leave or sick leave when there is a partner to rely on, and;
• pooling financial resources and increased borrowing power can assist the business to grow

Disadvantages of operating as a partnership include:

• each partner in a partnership has unlimited liability
• partnerships often change as a result of death or bankruptcy which can cause disruption to the business and may have capital gains tax consequences
• there is a danger of disagreement between the partners, and;
• each partner is an “agent” of the partnership and can act on behalf of the partnership without the agreement of the other partners

One area that often confuses people when discussing partnerships is that of wages.  A partnership can pay wages to staff who are not a partner in the partnership, but since individuals cannot employ themselves, a partnership cannot pay wages to a partner – they get their remuneration through the distribution of profits only.

If you’d like to discuss your partnership business, please complete the Contact page.

Regards

We’re taking a break from talks about structure today, to reflect on an organisation I was recently introduced to.

Earlier this week I attended our local monthly meeting of BPW (you can read about them here), where we were lucky to hear from the lovely ladies at Days For Girls from Geelong.

As a woman, can you imagine not having access to sanitary supplies and how that might impact on your day to day life?

Throughout the world there are thousands of girls and women who miss days of school and days of work as a direct result of their lack of accessible sanitary supplies.

In some cases these sanitary supplies are days of travel away or simply far too expensive – often, with only a small amount of money available, there is a decision to be made between purchasing sanitary supplies or providing food for family members…that’s not really a choice is it?

Days For Girls aims to overcome this epidemic!  Their MISSION is “Creating a more dignified, free and educated world through access to lasting feminine hygiene solutions” and their VISION is to have “Every girl and woman in the world with ready feasible access to quality sustainable hygiene & health education by 2022”

The Days For Girls charity provides sanitary hygiene kits which are washable and reusable, with most lasting up to 3 years!  The kits are prepared to very strict guidelines by a team of dedicated volunteers – but as usual, there’s always room for more help!

The impact of these kits has produced some alarming figures regarding retention rates of girls in school, their education levels and their likelihood of obtaining employment – all of which has the potential to create a brighter future…

For more information, and to get involved, please refer to their website.

Regards