Starting A Business And Tax Advice
It can be a challenging endeavour to launch a new small business. There are a great many factors to consider, such as what it is that you want to sell, as well as the marketing and branding plan that you will employ. But the way in which you organize your company will be one of the most crucial decisions you will have to make. In this section, we take a look at the various corporate structures that are open to business owners in Australia and offer some guidance as to which one could be most suitable for you.
If you are considering venturing out on your own and launching your own company, it is vital that you seek the guidance of a professional regarding the optimal manner to structure and organize your new enterprise. In addition, Australian tax rules can be difficult to understand, therefore it is highly recommended that you seek the assistance of a qualified professional if you want to ensure that you are satisfying all of your obligations under the law.
Beginning a new company venture may be an immensely rewarding experience; nevertheless, it is essential to keep in mind that there are a number of financial and legal issues that need to be taken into account before moving further. In this post, we will offer some tax advice for businesses located in Australia. This advice will cover a variety of topics, including the optimal manner to file tax returns and organize your firm. In addition to this, we will discuss some of the more frequent expenses and deductions that proprietors of small businesses are eligible to claim.
When it comes time to submit your tax return, a competent accountant will be able to offer you guidance that is specifically catered to your unique circumstances and will be able to assist you in ensuring that everything is in order. Therefore, if you feel that the time has come for you to strike out on your own as a business owner, don’t rush into things without first consulting with a professional.
Tax Matters to Think About When Establishing a New Enterprise
The following is a rundown of the tax preparation steps you need to do if you are beginning a new small business. You have decided to start a new business, and you need to be aware of the potential tax consequences.
The subject of which structure to utilize will be the first one for you to think about and consider. For instance, do you organize yourself as a single proprietorship, a corporation, or perhaps a trust, or do you simply go into business for yourself?
Because it is beneficial to be familiar with the distinctions between each type of business structure, we have listed your available alternatives below.
To begin, let’s think about the most basic of the different types of business structures, which is founding a company as a sole proprietor or as a member of a partnership (which is treated for tax purposes as basically a collection of individuals).
The primary benefit of this structure is its ease of use; in addition, there is less bureaucratic red tape to navigate while getting your firm off the ground, and the associated legal and professional expenditures are kept to a bare minimum.
If you run your firm as a sole proprietor, you must report all of the company’s income and expenses on your own personal tax return. Because any tax losses incurred in the early years of trading can typically (subject to certain anti-avoidance rules) be applied at the individual level, against all of your other forms of assessable income, the structure provides an additional benefit in addition to its ease of use. This is especially advantageous in the event that it takes some time to get your business off the ground. This may include income such as salaries and wages, in addition to money from other activities related to the firm.
Alternately, if there is no other source of revenue in the current year, the losses can be carried over and applied against income gained in subsequent years. This option is only available if there is no other source of income in the current year.
Because of this, operating as a sole trader can be a very appealing option for people who have very straightforward tax situations because it provides quick access to loss relief. In addition, when you eventually sell the property, you may be eligible for a discount on your capital gains tax of up to fifty percent, which further contributes to the desirability of this method of investment.
On the other hand, if you start making money from trading, you’ll have to start paying income tax at the highest rate that applies to you, which may be as high as 47 percent for people whose annual income is more than $180,000. In addition, there is no possibility of dividing earnings amongst members of the family, which is a possibility that frequently exists when trust is employed as the vehicle for conducting business.
In addition, establishing yourself as a sole proprietor does not offer you any type of asset protection against creditors or protection in the event that your family should become legally separated. However, this form of protection is something that can be provided through discretionary trusts, which is the topic that we will discuss next.
A commercial organization known as trust is one in which a trustee, which can be an individual or a company, is responsible for running the company on behalf of the trust’s members (or beneficiaries).
Family businesses are frequently structured as trusts so that each member of the family can be named a beneficiary without having any say in the management of the company. This allows family members more freedom.
One of the most significant benefits of managing your company through the use of a discretionary trust is the ability to choose who will receive distributions from the money generated by the trust. When you begin making a profit from your trading endeavours, the trustee will be in a position to disperse the income in the most tax-efficient manner that is permitted under the trust deed. This will often be to the beneficiaries who have the lowest marginal tax rates.
In addition, beneficiaries who, for instance, experience capital losses can have a portion of the trust’s capital gains distributed to them if the trust generates any. Last but not least, the trust has the ability to distribute gains to those individuals or entities who are eligible for a fifty percent discount (usual individuals), rather than to those who are not (companies, for instance).
Holding assets through a discretionary trust has a number of benefits, one of which is increased asset protection. Because the beneficiaries of the trust are not the legal owners of the business, it will be difficult for creditors to get their hands on the assets of the business in the event that one of the beneficiaries runs into financial difficulties. This stands in contrast to other ownership forms, such as businesses (or owning the asset as an individual), where creditors have easy access to the assets of the organization.
One disadvantage of investing through a trust is that any tax losses will be unable to be distributed to the beneficiaries of the trust because the trust is prohibited from doing so. This will typically entail – subject to some sophisticated anti-avoidance requirements – that losses can only be rolled over and applied against future income inside the trust, subject to some complex anti-avoidance laws. This is the only way that losses may be used to offset future income.
Setting up your enterprise as a subsidiary of an existing corporation is still another alternative.
People who run a business are considered to be operating a different legal entity from the firm itself. This indicates that the company is responsible for filing its own tax return and paying tax on its profits at the rate applicable to companies, which is presently 27.5 percent (assuming that the company’s total annual revenue is less than $10 million). After that, the business is in a position to pay franked dividends to its shareholders out of the profits it has earned. The shareholders are responsible for paying taxes on these dividends, but they will receive a credit for the taxes that the corporation has already paid.
The benefit of restricted liability for shareholders is typically cited as the primary motivation for people to adopt a corporate structure for their business. To put it another way, the liability of shareholders for the obligations of the company is capped at the amount of money they’ve contributed to the company in the form of share capital. There is also the benefit of asset protection, which comes from the fact that the shareholders’ assets are shielded from the creditors of the corporation.
Regrettably, businesses are not eligible for the tax break equal to fifty percent of their capital gains. Establishing and managing a business is not only more expensive than the alternatives but also comes with increased requirements to comply with regulations from organizations such as ASIC.
People frequently choose to operate their business through a company that is subsequently controlled by a discretionary trust. This type of mixed structure is becoming an increasingly popular option. This gives both the asset protection and reduced tax rate advantages of a corporation, as well as the capacity to stream revenue (in the form of dividends) to beneficiaries of the trust, both of which are paired with the ability to stream income.
And What Should You Do If You Want To Alter?
The majority of companies undergo change. It is typical for businesses to begin as sole proprietorships; but, when the company expands and achieves greater levels of success, the owner may consider incorporating the company or rolling it over into a trust.
Since the beginning of time, it has been possible for a sole proprietor to convert their firm into a corporation without being subject to the capital gains tax on the assets being transferred. However, beginning on July 1, 2015, the scope of this relief was expanded, and it now makes it possible to avoid paying capital gains tax on the majority of changes to a company’s organizational structure.
Questions and Answers Regarding the Beginning of a New Small Business
I’ve been toying with the idea of converting my pastime into a revenue-generating enterprise. Should I go ahead and establish a corporation?
No, it is not necessary to establish a corporation in order to launch a new company. There are four primary organizational types for commercial enterprises: the sole proprietorship, the partnership, the trust, and the corporation. The vast majority of firms begin as sole proprietorships and only subsequently evolve into partnership or corporation structures.
Does the naming of my company have to adhere to any certain guidelines?
The name of your company, often known as its trading name, is the guise under which your company conducts its business. In the event that you are required to register a business name, the name will be linked to the Australian Business Number that you have (ABN).
When running a business as a sole proprietor, you only need to register the name of your company if it is different from your complete name. If you don’t change it, the name of the company that you run will be your complete name.
You only need to register your business name if it is not comprised of your first and last names, along with those of your business partner, if you are going to be operating as a partnership. A trust operates under principles that are analogous to those of a partnership.
When you create your company, you will be required to register a company name if you intend to conduct business under the guise of a corporation.
How can I determine whether or not someone else is using the name of my preferred company?
You will need to do some research to see whether or not anybody else is already marketing comparable goods or services under a name that is quite similar to your suggested name.
You can use the website of the Australian Securities and Investments Commission (ASIC) to determine whether or not the name you have in mind for your business is already taken.
You shouldn’t use the name you’ve picked if you discover that someone else has already trademarked it or a name that’s quite similar to it.
Verify everything by looking it up online as well as in the phone book or other local directories. If a search through all of these channels reveals that your selected company name is not being used by anybody else, you should be free to move forward with setting up shop. On the other hand, if by some sad accident another person is using the same name, you may at least demonstrate that you made a genuine effort to identify a match in the event that they do.
Before launching my company, do I need to register it with the government?
When you register your company, you are letting the Australian Taxation Office (ATO) know that your company will be subject to certain tax duties and may be eligible for certain tax benefits. When you begin the process of legalizing and registering your company as soon as possible, it will be much simpler to adhere to any restrictions that may be implemented in the future.
Learn more about registering your new enterprise and getting it off the ground by consulting the recommendations provided by the ATO.
When you are getting your new business off the ground, you have the option of simultaneously registering for an ABN, a business name, and tax registration. If you want to do business online with the ATO, you might need to get an AUSkey first.
Check that all of the items on the checklist provided by business.gov.au for beginning a business in Australia have been completed before moving on.
Should I establish a separate bank account if I plan to operate my business as a sole proprietor?
Yes, it will make life a lot simpler for you and your accountant, mostly due to the fact that it enables you to segregate the income and expenses associated with your business from the income and expenses associated with your personal life.
There is no legal obligation for you to register a business bank account if you are running your enterprise as a sole proprietorship. You can, as an alternative, use an account you already have with a bank that is under your own name. If, on the other hand, you intend to use the same account for both professional and personal transactions, you will need to make sure that any personal payments or costs are clearly denoted in your cashbook.
However, if your firm is structured as a partnership, company, or trust, it is required by law to have a separate bank account in order to comply with tax regulations.
Typically, the name of this distinct company account will be something along the lines of, for instance, “Dan Banfield doing business as Dan Banfield Copyrighters.” This is due to the fact that the bank statements of your company are typically the most important source of information for your accountant to consult when compiling your company’s financial statements at the conclusion of your first year in business.
Which would be a better choice: a lawyer or an accountant?
You have the option of preparing your own tax returns or working with an accountant. Request referrals from family and friends who are already running their own business, and look for an accountant who has experience working with other small firms. By advising you on what you can claim and how you can claim it, your accountant should be able to save you both money and stress.
It is also a good idea to speak with a business attorney about your plans for the company, particularly if you want to sign a lease or any other type of legal document. Depending on the nature of your company, a legal professional may recommend that you purchase public liability insurance in addition to other types of protection.
Should I get in touch with the Australian Tax Office (ATO)?
Helping and advising new businesses is one of the responsibilities of the Australian Taxation Office (ATO). You can contact the Australian Tax Office via telephone at 13 28 66 if you have any queries regarding the taxation of businesses, and the website of the Australian Tax Office is helpful for answering fundamental questions regarding the beginning of a new firm.
There is also a helpful list that connects all of the tax concerns that may come up for you when you begin the process of starting your business. You should be able to find the answers to any queries you may have on a particular business tax problem here.
Tax Planning Advice to Get You the Biggest Return Possible
With June 30th just around the corner, we won’t have much longer to wait before the end of the fiscal year. Therefore, now is a good time to take a look at both your expected taxable income (the assessable income of your business, minus any allowable deductions) for the current financial year 2020-21; and your projected or expected taxable income for 2021-22, as they will both help guide your tax planning strategy. Your expected taxable income can be found by subtracting any allowable deductions from your business’s assessable income.
A helpful hint is to determine your income band and the amount of tax you are expected to owe by consulting the individual tax rates (sole trader) or business tax rates published by the Australian Taxation Office.
Talk to your accountant about the following things to take into account if you anticipate having a bigger income during the current fiscal year in comparison to your predictions or expectations for the subsequent fiscal year:
- You can save money in the long run by paying for some of your bills for the year 2021-22 in the current fiscal year, such as your rent, insurance, or subscriptions to professional groups. The current tax year permits the deduction of up to 12 months’ worth of costs incurred during the following year.
- Taking use of depreciation strategies such as temporary full expensing, which allows you to immediately deduct the business portion of the cost of qualifying depreciating assets that are first held and first used or placed ready for use for a taxable purpose between October 6, 2020, and June 30, 2022. (check the ATO website for full details).
- Review the situation and consider delaying some of the billing for the current tax year if it makes sense to do so.
- Increasing the number of your voluntary payments to your superannuation.
- a review of your creditors and the cancellation of any debts that cannot be collected (find out more about deductions for unrecoverable income).
- Taking into account and deducting, if applicable, any start-up costs, such as hiring an attorney or accountant to advise you on the form of your business and paying fees related to establishing that structure (e.g. ASIC company registration fee).
If you believe that you will have a larger income for the following fiscal year (2021-22), you should discuss the following with your accountant:
- If it is feasible to submit any invoices for work that is planned to be completed in the following fiscal year during the current fiscal year, you should determine whether or not it is appropriate to do so.
- During the current tax year, paying for your expenses when they are really owed to you as opposed to making any prepayments for such charges.
- purchasing any necessary assets or pieces of equipment for the firm during this year. If you go ahead and make the decision to buy assets for your company, you should do so with the requirements of your company in mind. For instance, you may need to buy a truck for deliveries to help extend your business operations in order to meet certain business goals or because doing so is in accordance with the business strategy that you have developed.
- When trying to save money on taxes, you should try to avoid making purchases of business assets. When it comes to taxes, the majority of the time, you’ll end up spending one dollar to save thirty cents (*based on the typical tax rate for businesses).
- In the event that your company incurs a loss, you may have the option to claim a deduction for it in a subsequent year, use it to offset other losses in the current year, or carry back your tax loss. Learn more about the financial losses that businesses face.
Expenses You Can Claim
Your company is eligible to submit a tax deduction claim for business-related travel expenses, regardless of whether the trip lasted only one day, lasted overnight, or lasted for many nights.
Expenses you can claim include:
- fares for the train, tram, bus, taxi, or ride-sourcing services;
- when you use a rental automobile for business purposes, you are responsible for paying car hire fees as well as any additional expenditures incurred (such as gasoline, tolls, and parking);
- meals, in the event that you would be gone for the night.
In order to be eligible for reimbursement for overnight travel expenditures, you need to have a permanent residence in a location other than where you are now working, and your job must require you to be away from home overnight.
You are required to claim your deduction in your income tax return using the amount that does not include the goods and services tax (GST) if you are eligible to receive input tax credits for the GST.
Expenses You Can’t Claim
When claiming reimbursement for business travel expenses, you can only do so for the business-related component. You must exclude any private expenses, such as:
- a vacation or visit to relatives or friends that is sandwiched between two professional trips;
- the costs incurred as a result of you or one of your employees bringing a member of your family along on the trip;
- trinkets and other presents;
- sightseeing and entertainment;
- visas, passports or travel insurance;
- incurred travel costs as a result of migrating to a new location or living distant from your current residence;
- travel is undertaken before you started running your firm.