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  • #982521
    pilkster
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    I’m moving my little eCommerce business from UK to Australia. I’ve been recommended two different structures by my accountant and another accountant whom I asked for a second opinion. I’ve also got myself confused along the way, either that or their advice was unclear.

    The two structures are:

    1. Simple PTY LTD company (which I can understand and relate to and is similar to my current UK setup)
    2. PTY LTD somehow operating a discretionary trust (which baffles me)

    My order of priorities for the business structure:

    1. Limited liability – personal asset protection. Although the cosmetic products my business sells are low risk, there is always the remote possibility that someone will sue the business for some reason (allergic reaction etc). As liability insurance is prohibitively expensive and only gives limited cover for imported cosmetics I need to protect my home and other personal assets to the fullest extent possible with the business structure. This is number one priority and the reason I’m looking at limited liability company rather than sole trader. I’m not too concerned about protecting the company assets, these are relatively low value and easy to rebuild.
    2. Tax efficiency – income splitting etc. Of course I’d like the business to be tax efficient, but this is secondary to the personal asset protection.
    3. Cost efficiency and simplicity. We’re not in ‘big business’ here. Accountancy costs and bookwork need to be minimal.

    Additional questions I’ve come up with from reading around the internet:

    1. Are there potential issues with banks if the accounts are to be operated by a trust? Seems to be some issues around setup and potentially around raising funds etc if required
    2. PayPal may take issue with trusts as opposed to companies, PayPal is (unfortunately) important to my business. If the trust is the entity doing the trading etc. then I could run into issues: http://www.flyingsolo.com.au/forums/starting-business/11413-paypal-trust-entities.html

    An easier way to phrase my question may be:
    What do I risk missing out on if I use only a PTY LTD rather than a PTY LTD and a trust?

    #1137242
    James Millar
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    You miss out on

    1. The ability to split / stream income each year on a varied basis. Probably the most valuable attribute of a discretionary trust.

    2. Trust has no access to the new carry back loss rules.

    3. Trust has no access to R&D concessions

    4. Trust is less commercial – hard to involve arm’s length stakeholders (i.e. better suited to family business)

    5. Trust cannot retain profits at a sheltered tax rate of 30% (company tax rate).
    Pretty big issue if you are trying to grow your balance sheet via retained earnings.

    Either will cost you between $2k to $4k per annum in advisors fees (for compliance needs and maybe basic tax planning). It’s a very important function that needs to be addressed professionally in order to maximise benefits available to you. Don’t let fees be a critical point of comparison between firms.

    Helping build better businesses and better lives with expert financial and taxation advice. [email protected] www.360partners.com.au 03 9005 4900
    #1137243
    PRO
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    JamesMillar, post: 156542 wrote:
    You miss out on

    1. The ability to split / stream income each year on a varied basis. Probably the most valuable attribute of a discretionary trust.

    2. Trust has no access to the new carry back loss rules.

    3. Trust has no access to R&D concessions

    4. Trust is less commercial – hard to involve arm’s length stakeholders (i.e. better suited to family business)

    5. Trust cannot retain profits at a sheltered tax rate of 30% (company tax rate).
    Pretty big issue if you are trying to grow your balance sheet via retained earnings.

    Either will cost you between $2k to $4k per annum in advisors fees (for compliance needs and maybe basic tax planning). It’s a very important function that needs to be addressed professionally in order to maximise benefits available to you. Don’t let fees be a critical point of comparison between firms.

    My accounting and asic fees add up to maybe a grand more than if I operated in my own name.

    If you mean trying to raise funds from outside investors then PTY, but if you mean bank loans with discretionary trust they are pretty straightforward.

    D

    #1137244
    RocketPad
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    pilkster, post: 156524 wrote:
    An easier way to phrase my question may be:
    What do I risk missing out on if I use only a PTY LTD rather than a PTY LTD and a trust?

    Hey mate,

    I personally would go for the ‘Company & Trust’ option over just the ‘Company’ option. I believe the pros (income splitting, no div7a issues, corp trustee for protection, no restriction on how operator uses funds) far out weigh the cons (as ‘PRO’ said, less commercial but do not agree with sheltered tax rate as you could use a bucket company for this).

    To me, a small business run through a Company only is just far more restrictive to the operator. Send me a PM if you want me to detail all my reasoning’s.

    Obviously, just to cover myself, this isn’t advice in anyway, just an opinion.

    *I worked as a tax accountant for a number of years. I setup well over 500 business structures and I feel I have a good understanding of this area.

    #1137245
    pilkster
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    Thanks all. I sat down with an accountant yesterday and went through my options. It seems (for my personal case) that a trust and company is the better option, especially if I want to sell out of the business eventually.

    One last fly in the ointment is paypal but the accountant recommends that I use a group GST/ABN registration which should allow me to use the company ABN for the bank account and paypal account. Still a bit nervous about that to be honest. Anyone got experience with paypal and trusts?

    #1137246
    ONE STOP TAX
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    Try to keep things simple. If you get a separate ABN for the company itself as well and trade with that, then your annual accounting fees and charges will be much higher, because of the company’s separate compliance obligations.

    If I was you, I would go with the Simple PTY LTD company. You still can receive about the same CGT benefits when you sell the business (company’s shares), such as 50% general CGT discount and 50% active asset discount. Because company’s shares fall under active asset category.

    ONE STOP TAX
    http://www.onestoptax.com.au

    Disclaimer: You should always seek professional advice before acting. No responsibility is taken for any loss as a result of any action taken on any information provided in this page.

    #1137247
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    ONE STOP TAX, post: 157127 wrote:
    Try to keep things simple. If you get a separate ABN for the company itself as well and trade with that, then your annual accounting fees and charges will be much higher, because of the company’s separate compliance obligations.

    If I was you, I would go with the Simple PTY LTD company. You still can receive about the same CGT benefits when you sell the business (company’s shares), such as 50% general CGT discount and 50% active asset discount. Because company’s shares fall under active asset category.

    ONE STOP TAX
    http://www.onestoptax.com.au

    Disclaimer: You should always seek professional advice before acting. No responsibility is taken for any loss as a result of any action taken on any information provided in this page.

    What about having to pay 30c in the dollar tax from the first dollar, rather than being able to take advantage of the tax free threshold and personal tax rates. That would more than make up for any extra accounting costs.

    D

    #1137248
    ONE STOP TAX
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    For all 30c tax the company pays, you will be credited in your personal tax return, called “franking credits”, only after the company distributes profits to its shareholders. No difference at the end and you still get benefit of full tax free threshold!

    ONE STOP TAX
    http://www.onestoptax.com.au

    #1137249
    pilkster
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    Hmm. I was told that I couldn’t receive the CGT benefits (sounded like 50% general CGT discount and 50% active asset discount) without the trust.

    I was also told that other than an additional $500 at setup there would be no real difference in ongoing accountancy costs for trust&company vs company alone.

    Seems like I’m going to have to do an accountancy degree myself to form my own informed opinion!

    #1137250
    PRO
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    ONE STOP TAX, post: 157135 wrote:
    For all 30c tax the company pays, you will be credited in your personal tax return, called “franking credits”, only after the company distributes profits to its shareholders. No difference at the end and you still get benefit of full tax free threshold!

    ONE STOP TAX
    http://www.onestoptax.com.au

    Sorry, should have been clearer with what I was getting at. Yes but that is only for shareholders, not a great idea to have the family all as shareholders unless you want to start getting tricky with different classes of shares allowing different dividends at different times.

    Also holding shares in personal names is not great from asset protection perspective, Pty Ltd provide protection downwards but with the shares being assets of the shareholders, creditors can get at the shares. I would almost always recommend that if you have to trade through a company that shares are held by a discretionary trust.

    #1137251
    ONE STOP TAX
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    If you mean company’s creditors, they never can get access to shareholders shares, except in very rare cases, when shareholders are same as directors and with the order of court to lift the company’s veil because of fraud or sham.

    Yes, family size matters and some times it may be a good idea to run the business by the company and have a family trust in place to hold its shares, rather than to run the business trough a trust and have a company on top of that as trustee.

    #1137252
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    ONE STOP TAX, post: 157154 wrote:
    If you mean company’s creditors, they never can get access to shareholders shares, except in very rare cases, when shareholders are same as directors and with the order of court to lift the company’s veil because of fraud or sham.

    Yes, family size matters and some times it may be a good idea to run the business by the company and have a family trust in place to hold its shares, rather than to run the business trough a trust and have a company on top of that as trustee.
    No. I mean shareholder’s creditors. Coy protection is one way.
    I do civil litigation, trying to pierce structures comes with territory.

    #1137253
    ONE STOP TAX
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    pilkster, post: 157140 wrote:
    Hmm. I was told that I couldn’t receive the CGT benefits (sounded like 50% general CGT discount and 50% active asset discount) without the trust.

    I was also told that other than an additional $500 at setup there would be no real difference in ongoing accountancy costs for trust&company vs company alone.

    Seems like I’m going to have to do an accountancy degree myself to form my own informed opinion!

    I can’t comment on how they are going to charge you but about 50% general CGT discount, yes it is true that companies can’t get this discount when they make a capital gain; but when you sell your shares in the company it is you, as individual, that make a capital gain not the company. About 50% active asset, it only depends if the asset is classified as active asset and meet other conditions; Potentially available for all types of entities.

    #1137254
    ONE STOP TAX
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    PRO, post: 157160 wrote:
    No. I mean shareholder’s creditors. Coy protection is one way.
    I do civil litigation, trying to pierce structures comes with territory.

    But the initial question was about limited liability & personal asset protection because of possibility of being sued by business customers. I can’t hypothetically assume that there may be other creditors in a person’s life to put his assets at risk.

    #1137255
    James Millar
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    RocketPad, post: 156713 wrote:
    Hey mate,

    I personally would go for the ‘Company & Trust’ option over just the ‘Company’ option. I believe the pros (income splitting, no div7a issues, corp trustee for protection, no restriction on how operator uses funds) far out weigh the cons (as ‘PRO’ said, less commercial but do not agree with sheltered tax rate as you could use a bucket company for this).

    To me, a small business run through a Company only is just far more restrictive to the operator. Send me a PM if you want me to detail all my reasoning’s.

    Obviously, just to cover myself, this isn’t advice in anyway, just an opinion.

    *I worked as a tax accountant for a number of years. I setup well over 500 business structures and I feel I have a good understanding of this area.

    Only one problem – bucket companies were basically rendered useless by Bamfords case and the subsequent tax ruling in 2010. So in that regard a corporate beneficiary can’t easily offer a sheltered 30% tax rate.

    Helping build better businesses and better lives with expert financial and taxation advice. [email protected] www.360partners.com.au 03 9005 4900
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