Company Vs Personal Tax Confussion

[Nicole0609]

I am a sole Trader that has a Trust & a Company for my company structure however I have never put any profit into my company, therefore I personally take the profit and have been paying off my mortgage.

I had a very good financial year and today my accountant let me know how much tax I can expect to pay for the 09/10 financial year and I'm in shock. I am getting taxed at 41.5% which is just crazy.

I know this is because I have little expenses and have not put profit through the company, but am I doing the wrong thing?

I have my own mortgage and work from home, but I do not claim rent for office so it does not reduce my taxable income. My accountant is against me claiming rent because of Capital Gain or something?? Another thing I don't really understand.

It is better to pay off my mortgage as quick as possible and get hit with high tax rate or put my money into the company and have a loan agreement with the company to obtain funds and pay off my mortgage in minimal installments? This way to me means I have interest on the loan with the company and I'm stuck with my mortgage longer.

I understand that with the company I can disperse my income over 80k so it is capped at 30% and that to do this I physically have to open a bank account in my company name and have the money sit in that account, but besides that I am lost understanding how I then access the profit from the company.

My accountant said a lot of things about Deemed Dividends, division 7a & loan agreements over 7yr or 25yrs all of which i can not get my head around.

Mostly its the loan agreement to access money that confuses me. Is anyone able to explain this to me?

[yourvirtualboard]

You already have an accountant and they are telling you the various things you've raised - all you need to do is let them know you don't have it all clear just yet and can they explain it all again so that you are clear (they shouldn't charge you extra for this). Better still they should recommend what you should be doing to minimise your tax liability - if they can't do that for you or want to charge extra for this, change accountants and I'd recommend a few on this forum that have always had positive contributions to queries.

[CruzAccountant]

You've said a few key words, and I could see where you stand. I think lack of explanation makes it difficult for you to understand.

You may need to ask your accountant to explain it to you again, or at least get the advice in writing.

If you're still not satisfied, then I'd go looking for another accountant.

[SmallBusinessWorks]

Hi,

It sounds like you do need to get a good understanding of what is going on. it sounds like you have a discretionary trading trust, if so all the income from the trust is distributed through to beneficiaries. (in this case you)

A lot of Accountants love discretionary trusts but if you don't have enough people to distribute income too (and so lower the tax bracket) they can be a huge disadvantage over a simple company struture where at worst you can retain profit in the company at 30% tax rate.

As mentioned above the most important skill an Accountant has is the ability to explain complex tax issues in simple easy to understand language, if you can not get this explanation at your current Accountant go elsewhere.

Also as already mentioned all Accountants should explain their work for no additional cost (at least in my opinion!)

[JamesMillar]

In short your accountant sounds like he is on the money. Perhaps he hasn't explained it clearly enough and perhaps you don't really like what he is telling you (understandable as it is) - but the reality is that recent developments in Div 7a have made the effective use of the old company dumper pretty difficult.

You will probably not be better off with an approved loan agreement because (a) the Div 7a loan rate is always at a premium over standard rates and (b) the repayment schedule will require redrawn of the funds within a short period anyway (7 years unsecured or 25 secured - which may not be an option if the property is fully encumbered).

The bad news is...and sit down for this....if you make profits you pay tax. Sometimes at pretty high rates too. Your accountant sounds like he knows the law so by all means get a second opinion but don't shoot the messenger. I'm sure he would rather give you good news and low tax bills.