P r a c t i c e U p d a t e December 2023

Dec 05, 2023

Stage 3 Tax Cuts

The Federal government has reaffirmed its commitment to the so-called Stage 3 Tax Cuts. By way of background, the previous government legislated these tax cuts. They will abolish the current 37 per cent tax bracket, lower the existing 32.5 per cent bracket to 30 per cent, and raise the threshold for the top tax bracket from $180,001 to $200,001. You can see what that means by looking at the table below.

It shows how the personal income tax rates and thresholds will change in the 2024-25 financial year.

Tax RateCurrent 2023/24 ThresholdsTax RateNew thresholds from 1 July 2024


Nil         Up to $18,200                  Nil             Up to $18,200

19%       $18,201-$45,000              19%            $18,201 – $45,000

32.5%    $45,001-$120,000           30%           $45,000 to $200,000

37%       $120,001-180,000

45%       $180,001 and over         45%.          $200,001 and over


The result will be that the first $18,200 you earn will be tax-free (as it is currently), and every dollar you earn between that and $45,000 will be taxed at 19% (as it is presently). But then things change.

From July 1, 2024, every taxable dollar you earn from $45,001 to $200,000 will be taxed at 30%, and every dollar you earn above $200,000 will be taxed at 45%. That’s very different from what currently happens.

On the face of it, lowering the 32.5% bracket to 30% and removing the 37% tax bracket altogether seems like a big win for middle and upper-middle-income earners. But it will be a much bigger win for higher-income earners in dollar terms.

Please reach out to us when these cuts begin in July next year to figure out your tax position.

Advantages of company structure

There are many advantages of operating your business via a company structure, including:

  • Liability for shareholders is limited.
  • It’s easy to transfer ownership by selling shares to another party.
  • The company can employ shareholders (often family members).
  • The company can trade anywhere in Australia.
  • Taxation rates can be more favourable.
  • You’ll have access to a broader capital and skills base.
  • Reduced personal responsibility for any business debts incurred.
  • Legal liability also becomes reduced since a company is a separate legal entity from you as an individual.
  • Company tax rates are lower compared to higher marginal tax rates.
  • It can be much easier to raise finance and capital to grow and expand your business.

 

Director Liability

Chief among the advantages of company structure benefit these is asset protection. Broadly speaking, company owners are protected from creditors if their company fails. However, there are two notable exceptions!

The first of these is where a director offers a personal guarantee. Companies often require financial support to secure loans, leases, or credit facilities to foster growth and development in the dynamic business world. To assure lenders or creditors, directors of companies in Australia may be asked to offer personal guarantees. These guarantees, known as “Directors’ Guarantees”, play a crucial role in ensuring that the obligations of a company are met.

Such guarantees are essential for three reasons:

  • Access to Funding: By providing a personal guarantee, directors can help their companies access financing that might otherwise be difficult to obtain, especially for new businesses.
  • Credibility: A director’s willingness to guarantee a company’s obligations can enhance the company’s credibility and trustworthiness in the eyes of creditors and prospective business partners.
  • Risk Mitigation: For creditors, a Directors’ Guarantee serves as a safety net, ensuring that someone personally takes responsibility for the company’s obligations, reducing the risk of financial loss.

Directors should know that providing a Directors’ Guarantee carries significant personal risk. If the company defaults on its obligations and the director cannot cover the debt, its personal assets may be at risk. Along with director guarantees, owners of companies may also be personally liable under the director penalty notice regime.

As a company director, you become personally liable for your company’s unpaid amounts of:

  • Pay as-you-go withholding (PAYGW)
  • Gods and services tax (GST)
  • Super guarantee charge (SGC).

These amounts that you are personally liable for are called director penalties. The ATO can recover the penalty amounts once they issue a director penalty notice. To be clear, a director is responsible for ensuring the company meets its PAYGW, net GST and SGC obligations in full by the due date.

If these obligations are not met, directors become personally liable for director penalties unless they take steps to ensure the company lodges and pays its:

  • PAYGW by the due date,
  • Net GST (as well as Luxury Car Tax and Wine Equalisation Tax amounts) by the due date and
  • Superannuation guarantee (SG) to employees’ superannuation funds by the due date – if that doesn’t occur, the company must lodge a superannuation guarantee statement and pay the resulting SGC liability.

Talk to us if you are still determining your director’s liabilities.

 

Business Plan

The upcoming Christmas break is an opportune time to review a business plan.

A business plan can be used to:

  • help you start a new business.
  • help you improve the performance of an existing business.
  • attract funding for an investment.
  • communicate business progress to stakeholders.
  • communicate business goals and objectives to internal staff members.
  • attract potential buyers for the business.

A business plan is a ‘living’ document, so it should evolve and change—think of it an operating guide for your business throughout the start-up, operations and succession phases.

The elements of a business plan will vary depending on:

  • phase of the business is in (starting, running, selling).
  • the industry a business is in.
  • the use of the plan (e.g. for internal development purposes).

Every business plan will be different but generally include the elements below.

  1. Executive summary

This section provides an overview of the business concept. It should be attention-grabbing and concise—the content will be covered in more detail in future sections. While this is the first section of the plan, it can often help to write it last after the other sections have been finalised. This helps to ensure that the executive summary covers all the key information within the plan. It should define:

  • business vision
  • legal structure
  • products and services
  • customers
  • competitors
  • market and products or services
  • operation
  • financial projections
  • evolution of the business and the industry
  • structure of the business
  • short-term and long-term goals
  1. Product, service and market analysis

In this section, you should highlight your business products and services and describe what makes them unique, such as their:

  • features
  • benefits
  • limitations
  • cost and sale price.

You can also include details of any business plans to introduce new products and services. Your market analysis should describe your target market (e.g., local, international) and target customers. Add in the research you have done about your industry and the market trends. In this section, you will also complete a SWOT analysis (strengths, weaknesses, opportunities, threats).

  1. Sales

Explain your sales forecasts and targets in this section and how you will manage customer records and payments—understanding what sales strategies will work for you and the best channels to market your products or services. You will also need to know your current sales, volume and market share and what you expect them to be for the coming year. You should also identify your break-even point – the sales volume required to keep the doors open.

  1. Operating plan

This section will cover all you know about how you do things in your business—for example, your standard operating procedures and how to ensure the quality of your products and services.

  1. Financial plan

Summarise your key financial details, including:

  • costs for establishing or operating the business.
  • sales needed to break even.
  • projected cash flow.
  • funding arrangements.
  • payment plans.
  1. Action plan

The final section of the business plan should include a set of actions to take before you review your business plan and check your progress. This should be over 6–12 months, based on the business goals outlined in your plan.

Set a regular review date for the actions and the business plan. Assess which actions have been completed, which remain outstanding, and require updating to help your business plan remain relevant.

  1. Review

As noted, the Christmas break is an excellent time to review your business plan to ensure that it’s relevant, achievable and up to date with any changes in your business.

To help you review your plan, ask yourself the following questions:

  • What will the review schedule be?
  • Is the plan up to date?
  • Have the business goals changed?
  • Does the plan still match the business goals?
  • Are market trends changing?
  • Have significant political, environmental, social or technological changes affected your business?
  • Have there been significant changes in your finances or need for capital?

 

Benchmarking your business

Have you benchmarked the performance of your business?

The ATO provides a high-level benchmark tool for business owners to compare their company’s performance to a broader range of similar businesses. There are essentially three purposes behind the ATO Small Business Benchmark Tool. These are:

  1. encourage business owners to perform annual health checks to see if their costs are above or below their peers.
  2. enable businesses to assess whether any discrepancies may be flagged for an audit by the ATO and
  3. to alert the ATO to investigate businesses outside the benchmarking norm.

Financial benchmarking has been a valuable tool for businesses across various industries for decades, as it is an effective way of identifying issues and facilitating sound business decisions.

The ATO says: “When we see a business significantly outside the key benchmark range for their industry, it doesn’t necessarily mean you have done anything wrong. But it indicates something unusual and may prompt us to contact you for further information”.

In conclusion, the ATO Benchmark Tool is a valuable resource for small businesses to see how you’re tracking against businesses of a similar type. Access the benchmarks on the ATO website and contact us if you have any questions.


Practice Update May 2024

06 May, 2024
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Practice Update April 2024

08 Apr, 2024
How do Bucket Companies work? What is a Bucket Company? Ensuring a business remains profitable is one of the most important responsibilities of a business owner. So, if the business starts to generate a healthy profit, there needs to be a plan. While maximising deductions has its place in any tax planning strategy, a tax minimisation strategy that solely relies on deductions can result in sacrificing profit to lower tax when other options are available. With you and your family relying on the profits generated by your business to fund your lifestyle, it’s essential to understand the most tax-effective manner for distributing income and the best business structures that allow you to do so. Consider how a bucket company might fit into your overall tax planning strategy. Uses of Bucket Companies A bucket company (otherwise known as a corporate beneficiary) is a company set up as a trust beneficiary. This arrangement allows any income the trust distributes to the bucket company to be payable at the company tax rate, currently 25% (only if it is a base-rate entity), as opposed to the individual marginal tax rate (the top tax rate for individuals for 2023-2024 is proposed to be 47%, including the Medicare levy). They’re called bucket companies because they sit below a trust like a bucket and are used to distribute income to it. It is important to remember that there are rules around family trusts and structures within a family group. Otherwise, family trust distributions tax may apply. How do Bucket Companies work? There are generally three elements present for a bucket company: There is usually a trust with surplus income to distribute. The corporate beneficiary must fall within the definition of ‘beneficiary’ under the trust deed. Consider whether the bucket company is part of a family group. Who should hold the company’s shares? One of the main reasons bucket companies are used is to access the tax benefits they provide, and you should keep this in mind when deciding who holds the company’s shares. If an individual holds the shares, there is less flexibility in how the dividends can be distributed; they will need to be distributed according to the shareholder percentage. However, if another kind of trust holds the shares, the excess profits may be distributed, allowing for less total tax paid. Tax rates of bucket companies The bucket company pays the corporate tax rate, which could be 25% or 30%, depending on the type of company. If the company is a base rate entity, a company tax rate of 25% will apply; however, if it is not, the company tax rate will likely be 30%. Taxing trust income The general principle is that a trust’s net income is taxed by its beneficiaries; individuals and company beneficiaries pay tax on their portion of the trust’s income at the rates that apply to them. The highest marginal tax rate for individuals (not including the Medicare levy) at the time of writing this article is 45% for people with taxable income of $180,000 or more. There is a flat tax rate of 30% for non-base rate entity companies. Due to the discrepancy between the highest marginal tax rate for individuals and the company tax rate, there is at least a 15% savings potential. To illustrate, on an income distribution of $100,000, a corporate beneficiary would pay at least $15,000 less tax. Commit to distributions You must ensure that when you distribute to the bucket company for the financial year, you also distribute the same amount to the company’s bank account before lodging the tax return. In particular, trusts must distribute to corporate beneficiaries; otherwise, the Unpaid Present Entitlement (UPE) rules may be triggered. What can be done with the money in the Bucket Company? So far, in this article, we have looked at how bucket companies can help individuals save tax by paying out dividends at company tax rates. However, this is not the only bucket company strategy available. A bucket company can also hold long-term investments, such as shares, properties, or investments. In this regard, the bucket company becomes an investment company that can generate another source of income for the owner. Companies cannot access the 50% Capital Gains Tax discount, but other compelling reasons exist to use a company structure. Getting money out of the Bucket Company As has been established, the trust distributes the income to the bucket company, which begs the question: How do you get money from a bucket company? There are three ways to extract money from a bucket company: Pay dividends to the shareholders. Because the dividend has been taxed at the company rate, the shareholder will receive a franking credit to the extent that the tax has already been paid. An individual will include the dividend income as taxable income. Any excess franking credits are refundable, or top-up tax may be required depending on the shareholder’s marginal tax rate. A loan from the bucket company. As with any other loan, you must pay back the principal and interest to the bucket company. The loan is a special type called a Division 7a Loan, with requirements you will need to be mindful of. A separate discretionary trust structure can receive the dividends. Whereas the first method requires profits to be distributed according to shareholding and the second method incurs interest, this last method distributes profits according to the Trust deed. For example, using a discretionary trust as a shareholder of the bucket company allows you to make the largest distribution to an individual with the lowest marginal tax rate. Note that there may be other rules to satisfy or consider, such as Section 100A. Will a family trust structure allow a Bucket Company? To function as intended, a bucket company must be an eligible beneficiary of a family trust. As a result, you must read the trust deed to ensure the bucket company falls within the general class of beneficiaries. Additionally, a Family Trust Election may be needed depending on the structure. Consider the family group, which may define or impact who the beneficiaries are. Appropriate bucket Company strategy While bucket companies are generally useful for investors and business owners, and there is no doubt that they can be one of the most tax-effective strategies, they may not be ideal for your unique situation. A bucket company strategy may be of benefit if you are any of the following: A business owner who wants to build a nest egg for their family. A business owner who experiences significant fluctuations in income from one financial year to the next. For business owners coming up to retirement or looking to sell their business and who won’t be earning as much business income moving forward as a result Using a bucket company will not work if caught under the Personal Services Income (PSI) rules. These rules prevent individuals from reducing or deferring their income tax by diverting income they receive from their personal services through companies, partnerships, or trusts. We encourage you to seek professional advice when deciding whether a bucket company suits you.

Practice Update March 2024

04 Mar, 2024
Practice Update March 2024
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