FAQ's
 
1. What common legal structures are available for conducting a business?
2. What are the advantages and disadvantages of conducting business as a sole trader?
3. What are the advantages and disadvantages of conducting a business through a partnership?
4. What are the advantages and disadvantages of conducting business through a company?
5. Briefly explain what a trust is and how it operates?
6. What is the value of my trading stock?
7. Can I offset capital losses against trading income?
8. What expenses can I claim against my rental property income?
9. The Business Planning Process - Is It Important For My Business?
10. What a Business Plan Should Cover
11. When is my annual review required?
12. When can I deregister a company?
13. How does a company deregister?
14. What is a solvency resolution?
15. Do I need to have the company's accounts audited?
16. How do I set up a Self-Managed Superannuation Fund (SMSF)?
17. What are the benefits of a Self-Managed Superannuation Fund?
18. What kind of investments can I hold in a Superannuation Fund?
19. What is the sole purpose of a Superannuation Fund?
20. What are the current tax rates for resident individual taxpayers?
21. What is the current Medicare levy rate?
22. When does the Medicare levy surcharge apply?
23. What is the current company tax rate?
24. What is the current fringe benefits tax rate?
25. What tax rate applies to the income of a superannuation fund?
26. When does the superannuation surcharge apply to superannuation contributions?
27. What are the current aged-based superannuation deduction limits?
28. What is the current superannuation guarantee charge percentage?
29. What are the new payment and reporting rules for superannuation guarantee amounts?
30. What is the superannuation choice all about?
 
1. What common legal structures are available for conducting a business?
  • Sole trader
  • Partnership
  • Trust
  • Company

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

Advantages
 
Control - a sole trader has totalcontrol over the business.
Goodwill - the sole tradergets to know his or her customers - goodwill may attach to the soletrader personally.
Ease of Sale - the simple structuremeans 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 businessloss provisions.
Capital Gains Tax - 50% discount ifbusiness held longer than 12 months.Small business capital gains taxexemptions available.
Disadvantages 
 
Admission of New Parties - a structure will be required in order to admit anew party into the business.
Finance - the sole traderoften finds it difficult to readily access finance without mortgagingpersonal assets.
Liability - the sole trader cannotlimit liability; no separate legal entity.
Sickness - if the sole trader becomes unwell who does the work?
LimitedLife - if the sole trader dies the business usually terminates.
Tax Rate - marginal personal tax rates apply.
Tax Planning - difficult to split income.

3. 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 anew partner to the business.
Disposal Interest - it ispossible for a partner to dispose of his/her interest in the partnership without the business ceasing.
Control - partners havecontrol over the partnership business.
Tax Planning - consider a partnership of family trusts.
Losses - aredistributed to partners.
Capital Gains Tax - 50%discount if business held longer than 12 months. Small business capitalgains tax exemptions available.
Disadvantages
 
Liability - partners are usually joint and severally liable for partnershipdebts; no separate legal entity.
Tax Rate - marginalpersonal tax rates apply.
Perpetuity - new partnershiprequired for tax on change of partners.

4. What are the advantages and disadvantages of conducting business through a company?
 
Advantages
 
Finance - finance can be raisedthrough 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 saleof existing shares.
Research & 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 - PAYGapplicable and 100% deduction for superannuation contributions paid.
Disadvantages
 
Complexity - subject to a raft of regulatory controls and hence costs ofestablishing and maintaining are higher.
Control - ultimately the shareholders have control over the business.
Splitting of Income - limited opportunities; companies can only distributedividends so that it cannot "stream" capital gains, foreign sourceincome 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 orloans. Loans to shareholders are heavily regulated and can give rise todeemed dividends.
Losses - cannot be distributed toshareholders, future deductibility subject to complicated restrictions.

5. Briefly explain what a trust is and how it operates?
 
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; and
  • Inter vivos trusts.
Family trusts are typically discretionary trusts with family members as the beneficiaries. Discretionary trusts are so called because the trustee has a 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; and
  • 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.

6. 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
Note that a different method may be used for each item of trading stock.

7. 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
8. What expenses can I claim against my rental property income?
 
Expenses incurred in earning gross rental income, which are allowable deductions, include:
  • Costs of obtaining finance
  • Telephone, postage & stationery
  • Travel, rent collection and property inspection expenses
  • Agent management and letting fees
  • Insurance
  • Bank fees
  • Secretarial and bookkeeping fees
  • Interest on monies used to acquire property
  • Depreciation on furnishings, stoves, hot water system etc
  • Advertising
  • Legal fees relating to rental agreements
  • Water and council rates
  • Land tax
  • Repairs (not initial repairs) and maintenance (includes gardening, lawnmowing etc)
  • Construction costs write off (based on original cost of construction)

9. The Business Planning Process - Is It Important For My Business?
 
A business plan is a thorough overview of where a business is now, how it is currently positioned, where it wants to go and how it is going to achieve its goals and ambitions.
 
It is a blueprint of an organisation's past, present and future. A business plan is critical to the success of any venture and is an indispensable management tool that can be used in a variety of situations.
10. What a Business Plan Should Cover
 
Your business plan must include an overview of the following key issues:
  • sufficient detail and overview to enable the reader to get a complete and accurate picture of the business;
  • your awareness of the risks associated with your plans and how you will minimise such risks;
  • flexibility and contingency plans if key assumptions are not met; and
  • trends and development in your particular operating environment and in the market place.
More specifically, your Business Plan should cover the following in detail: 
  • An executive summary and summary of objectives;
  • A detailed description of your business;
  • An analysis of your market place and various market growth and positioning strategies;
  • A review of your product or service and the development of this to your market;
  • A picture of your key management people and ownership information;
  • Funding requirements and the application of those funds;
  • Financial analysis of past results and future projections;
  • A position statement or SWOT analysis;
  • General operational matters unique to your business or industry; and
  • A summary of external influences and opportunities (such as government export grants)
11. 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 2 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.

12. When can I deregister a company?
 
You can apply to deregister a company if:
  • all members of the company agree to deregister;
  • the company is not carrying on business;
  • the company's assets are worth less than $1000;
  • the company has paid all fees and penalties payable under the Corporations Act 2001;
  • the company has no outstanding liabilities; and
  • the company is not a party to any legal proceedings.

13. How does a company deregister?
  • 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 2 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 2 months and 7 days after the company's review date;
  • Not lodged a financial report in the previous 12 months.

15. Do I need to have the 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; or
  • ASIC requests the company be audited.
Large proprietary companies have at least 2 of the 3 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.
16. How do I set up a Self-Managed Superannuation Fund (SMSF)?
 
There are a number of trust laws and legislative requirements relating to setting up a self managed superannuation fund (SMSF). If you wish to set up your own fund please contact us for further information.
 
Obtain a Trust Deed
 
The first thing you need to do is to have a trust deed.
 
The deed must be dated and properly executed. Content contained in the deed is important in determining the structure and operation of the fund.
 
Appoint Trustees
 
All superannuation funds are required to appoint trustees. Trustees are responsible for ensuring the fund is properly managed and that it complies with the Superannuation Industry Supervisory Act and other legal obligations. To be a SMSF all fund members must be appointed as trustees of the fund. A SMSF can not have more than four members.
 
To be a single member fund the trustee of the fund must be a body corporate and the member is one of only two directors of a single member body corporate. A SMSF can also be created if the member is one of only two trustees, of whom one is the member and the other is a relative of the member.
 
Other Considerations
 
Trustees should open the fund's bank account (or other appropriate investments) in the name of the fund.
 
The assets of the fund should be kept separate from any assets owned personally by any of the trustees or from those belonging to a business (where partners in a business set up the SMSF).
 
Trustees need to establish an appropriate investment strategy for the fund.
 
Trustees need to be aware that there are numerous administrative obligations that must be met throughout the life of the fund.
17. What are the benefits of a Self-Managed Superannuation Fund?
 
The following are some of the advantages of a SMSF.
  • They can have greater investment freedom;
  • Members feel their monies are safer being invested by them as trustee;
  • Members can actively participate in the management of the fund;
  • There are reduced formal reporting requirements; and
  • They can be an advantageous investment vehicle for individuals considering tax and estate planning.
Setting up a SMSF is not for everyone. People considering a SMSF must familiarize themselves with the requirements and obligations of running a fund. We are able to provide you with basic fact sheets released by the ATO.
If you wish to set up your own SMSF please contact us for further information.

18. What kind of investments can I hold in a Superannuation Fund?
 
A key area of responsibility for trustees of SMSFs is investment management. SISA places certain duties and responsibilities on trustees when making investment decisions. They aim to protect and increase member benefits over time for retirement purposes.
 
Investment Strategy
 
Trustees are required to prepare and implement an investment strategy for the SMSF. The strategy must reflect the purpose and circumstances of the fund.
 
An appropriate investment strategy will set out the investment objectives of the fund and detail the investment methods the fund will adopt to achieve these objectives.
 
Trustees must make sure all investment decisions are made in accordance with the documented investment strategy of the fund and should seek investment advice or appoint an investment manager in writing if in any doubt.
 
Investment rules are one of the most important requirements of SISA and failure to comply with the rules could result in trustees being fined and/or the fund losing its compliance status.
 
Prohibition of loans/financial assistance to members or a member's relative
 
Trustees are prohibited from lending money or providing financial assistance from the fund to a member.
 
Prohibition of Borrowings
 
SMSFs are prohibited from borrowing money except in some limited circumstances.
 
Limitations on Acquisition of Assets From a Related Party
 
Trustees are prohibited from acquiring assets for the superannuation fund from a related party of the fund. Limited exceptions to this rule exist, if:
  • The asset is an in-house assets and would not result in the level of in-house assets of the fund exceeding 5% of the fund's assets;
  • The asset is a listed security (e.g. shares, units or bonds listed on an approved Stock Exchange); or
  • The asset is business real property.
19. What is the sole purpose of a Superannuation Fund?
 
It was previously mentioned that a complying superannuation fund is essentially a regulated superannuation fund that meets the operational standards of SISA.
 
Complying superannuation funds are taxed concessionally (i.e. a complying fund is taxed at a rate of 15% while a non-complying superannuation fund is taxed at 47%).
 
The object of the sole purpose test is to ensure that regulated superannuation funds are maintained for the purpose of providing benefits to fund members upon their retirement or their dependents, in the case of a member's death.
20. What are the current tax rates for resident individual taxpayers?
 
The new tax rates commencing 1 July 2005 are as follows:
 
Taxable Income $
0 - 6,000
6,001 - 21,600
21,601 - 63,000
63,001 - 95,000
95,000 + 28,200
 
Tax Payable $
Nil
Nil + 15% of excess over 6,000
2,340 + 30% of excess over 21,600
14,760 + 42% of excess over 63,000
+ 47% of excess over 80,000
 
The new tax rates commencing 1 July 2006 are as follows:
 
Taxable Income $
0 - 6,000
6,001 - 21,600
21,601 - 70,000
70,001 - 125,000
125,000 + 39,960
 
Tax Payable $
Nil
Nil + 15% of excess over 6,000
2,340 + 30% of excess over 21,600
16,860 + 42% of excess over 70,000
+ 47% of excess over 125,000
 
The tax rates for the year ended 30 June 2005 are as follows:
 
Taxable Income $
0 - 6,000
6,001 - 21,600
21,601 - 58,000
58,001 - 70,000
70,001 +
 
Tax Payable $
Nil
Nil + 17% of excess over 6,000
2,652 + 30% of excess over 21,600
13,572 + 42% of excess over 58,000
18,612 + 47% of excess over 70,000
21. What is the current Medicare levy rate?

The Medicare levy rate is 1.5% of taxable income, subject to certain exclusions and reductions.

http://calculators.ato.gov.au/scripts/axos/axos.asp?CONTEXT=&KBS=medicare.XR4&go=ok
22. When does the Medicare levy surcharge apply?


The Medicare levy surcharge is imposed at 1% of the total of taxable income and reportable fringe benefits if the taxpayer, the spouse and all dependants are not covered by private hospital insurance and the following thresholds are exceeded:

Status
 
Surcharge Threshold
Single (no children)
$50,000
Couple (no children)
$100,000
Single/couple (with children)
$100,000
(+ $1,500 per child after first)
 23. What is the current company tax rate?

 
 24. What is the current fringe benefits tax rate?

48.5% of the grossed up taxable value of the fringe benefit.
 
25.What tax rate applies to the income of a superannuation fund?

15%.
 
26. When does the superannuation surcharge apply to superannuation contributions?

From 1 July 2005 the imposition of the superannuation surcharge will no longer continue.
 
For 2005 and prior years the superannuation surcharge applies on surchargeable contributions where a taxpayer's adjusted taxable income exceeds the surcharge threshold.

Adjusted taxable income is broadly taxable income plus superannuation contributions plus reportable fringe benefits.
 
Surchargeable contributions are broadly deductible employer contributions and certain rolled over eligible termination payments.

The surcharge thresholds and rates for the year ending 30 June 2005 are as follows:

ATI Surcharge

$ %

0 - 99,710 Nil

99,711 - 121,075 [(ATI-99,711) /1,709.20]

121,076 + 12.5


The surcharge thresholds and rates for the year ended 30 June 2004 are as follows:

Adjusted Taxable

Income (“ATI”) Surcharge

$ %

0 - 94,690 Nil

94,691 - 114,980 [(ATI-94,691) /1,399.31]

114,981 + 14.5
 
27. What are the current aged-based superannuation deduction limits?

The aged-based superannuation deduction limits for the years ended 30 June 2005 and 30 June 2006 are as follows:

Age 2005 Limit 2006 Limit

$ $

Under 35 13,934 14,603

35 to 49 38,702 40,560

50 and over 95,980 100,587

 

A Self-employed person's deduction for superannuation contributions paid is limited to the lesser of:

· $5,000 plus 75% of the excess over $5,000; and

The person's aged-based limits (per above)
 
28. What is the current superannuation guarantee charge percentage?

9%.
29. What are the new payment and reporting rules for superannuation guarantee amounts?

From 1 July 2003 employers will be required to pay superannuation guarantee amounts quarterly, by the 28th day after the end of the relevant quarter.

From 1 January 2005 employers will no longer be required by law to report to your employees in writing. However, the following may be provided to employees:

• The amounts of contributions you have made; and
• The number of the superannuation provider and, if possible, their contact phone number.

Also if known:

• The employee's account or membership number.
 
30. What is the superannuation choice all about?

For a comprehensive discussion regarding the commencement and operation of Choice of Super Fund rules, please click on the link below:

http://www/icaa.org.au/inc/inc_printview.cfm?id=A111289407