Tax planning allows your organisation to legally minimise the amount of taxes it owes Commonwealth, State and/or local Governments. It provides crucial advice for issues related to a business, including what structure makes the most sense for your situation. Here we look at tax planning in detail and why it is so important for your organisation.

What Does Tax Planning Address?

Tax planning advice assists in a number of situations, including when you:-

• Need to consider the overall structure of your business;
• Are reconsidering the overall structure of a business because of a change in circumstances such as changes to tax laws that significantly impact the viability or suitability of your present business structure;
  
• Have a change in ownership, or undergo a merger or amalgamation of two or more businesses;
• Need advice on how to structure a proposed transaction, project, or asset acquisition from a tax standpoint;
  
• Are likely to achieve a large taxable income position for a particular income year and need to determine how best to legally reduce the amount of tax payable before financial year-end;
  
• Experience personal changes such as retirement or divorce; and
  
• Need to put succession planning into effect. 



It helps you remain proactive towards your taxes, so you are always paying only what you legally owe.

Why is Business Structure Important?

Your business structure helps define what is required of you and what you can and cannot do for both tax purposes and in your function. This includes:-

• Any licenses your business must have  to operate;
  
• The rate of taxes you pay;
  
• Your position within the organisation, such as the owner or an employee;
  
• Your potential exposure to risk and personal liability;
  
• How much control you have of your business; and
  
• Ongoing costs and required paperwork for your business.

If you choose the wrong business structure, it may lead to:-

•  Limitations on your operation;
  
• You becoming personally liable for losses and any debt;
  
• Forgo a degree of control you have; or
  
• You paying more tax than is necessary.

What are the Different Business Structures?

There are four basic business structures to choose from:

1. Sole trader

This is the easiest structure that involves a simple, inexpensive setup. However, it also leaves you legally responsible for the business, including debts and losses. Because of this, it can put you personally at risk for money owed by the business with no protection from losses incurred. In general, as a sole trader you:-

• Maintain full control of your decisions and assets;
• Have a simple set up and often lower on-going administration costs;
• Require fewer reporting requirements;
• Include your sole trader business income and expenses in your individual tax return;
• Don’t need a separate business bank account (but you should have one anyway!);
• Must keep all your financial records for at least 5 years;
• Have unlimited liability, putting your personal assets at risk
• Cannot split business profits or losses with family members;
• Are personally liable to pay tax on your business income;
• Are not an employee. Rather, you are the business owner; Can hire people to work for the business; and
• Have to register for GST if you have or are likely to have an annual GST turnover of $75,000 or more.

As a sole trader, you also must remain compliant with workers' compensation insurance and superannuation contributions for your employees and contractors if they are deemed employees. 

2. Partnership

This structure requires two or more parties to distribute income or losses. You can set up partnerships in one of three ways:

(i) General partnership (GP):- Equal partners that share responsibility including unlimited liability;

(ii) Limited partnership (LP):- Partner liability is limited to how much money they contributed to the partnership and can include passive investors not involved in the day to day management of the business; or

(iii) Incorporated Limited Partnership (ILP):- This limits liability, but requires one general partner with unlimited liability.

Partnerships mean you:-

• Can set up easily and affordably;
• Have minimal reporting requirements;
• Have to apply for a partnership Australian business number;
• File lodgments under a separate tax file number for the partnership;
• Share control and management with your partner(s);
• Only pay taxes on your share of the net partnership income you receive;
• Need to lodge a partnership tax return each year;
• Are responsible for your own superannuation arrangements; and
• Have to register for GST if you have or are likely to have an annual GST turnover of $75,000 or more.

You must also comply with the partnership laws governed in your relevant state/territory.

Company

This structure creates a separate legal entity with the same rights as an individual. This means a company  can incur debt, sue, and be sued.

You are not personally liable for debts which means your financial obligations are reduced to paying the company any unpaid amounts owing on your shares in the company.* 

You are not completely off the hook financially though. If you are found to be in breach of your legal obligations under fiduciary law or the Corporations Act 2001, you can be held personally liable for losses your breach  might cause. Company structures mean you:-

• A more  expensive and complicated setup;
• Must comply with legal obligations under the Corporations Act 2001;
• Have a business that is a separate legal entity;
• Have a more complex business structure to deal with;
• Need to have an  understanding of the Corporations Act 2001 so as to avoid issues with compliance;
• Are not in control as you have director and shareholder rights and interests to consider;
• Have limited liability;
• Do not automatically own the company’s earnings;
• Need to lodge a stand-alone company income tax return each year;
• Have to complete an annual company review and pay an annual review fee to ASIC;
• Have to complete an annual declaration of solvency as required under the Corporations Act 2001;
• Have greater  access to capital; and
• Have to register for GST if you have or are likely to have an annual GST turnover of $75,000 or more.

Other obligations you have as a company director include:-

• Notifying  ASIC within 28 days of any key changes to company details such as change of address;
• Keeping financial records; and
• Understanding and complying with all your obligations as a director.

* Subject to terms of the company constitution

Trust

A trust places an obligation on a person or “trustee” who holds property or assets on behalf of a beneficiary. This means there is a separation of the legal ownership from the beneficial ownership of an asset. This is a more costly option not only for set up but also for operation. Trusts require you to:- 

• Have a formal trust deed that outlines the rules for governance and how the trust is to operate; and
• Perform formal yearly administrative tasks.

Also, the trustee is legally responsible for business operations. You can set up the trustee as a company for asset protection.

A trust is established under state law and generally has a maximum lifespan of 80 years. 

From a tax perspective:-

• The trustee generally carries the responsibility of filing returns with the ATO; and
• A beneficiary who becomes presently entitled to receive and retain a distribution of net trust income is responsible for paying tax at their respective marginal tax rate.

On occasions, the trustee may become liable to be assessed and pay income tax on the whole or part of the trust’s net income in their capacity as trustee. This may arise where no beneficiary is presently entitled to receive a distribution from the trust.

Considerations in Choosing a Business Structure

When choosing a business structure, consider the following factors:-

• How to limit your liability;
• How much control of the business operations you wish to maintain;
• The transferability of interests;
• Succession planning for when you leave the company, pass away or pass the company on to a relative, co-director or key employee;
• Estate planning surrounding the business;
• Legally permissible income splitting allowances;
• Restructuring ability; and
• Tax considerations such as effective rates of taxation, allowable deductions,  losses and the ability to carry forward losses into future years.

These factors will dictate the type of structure you should choose.

Tax planning also ensures you don’t spend a dollar to get half back as a tax deduction. Negative gearing is leveraged to determine if there are opportunities presented with potential for capital gains in the future by losing money in the short term.

Bonitas Partners Pty Ltd views tax planning as part of effective financial management to ensure you get to keep more of what you make. Through effective tax planning, you have peace of mind knowing you can more easily meet both your business and personal goals.