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  • #981970
    Computerguys
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    I operate a small business from home which nets roughly $25,000 a year. My wife is retiring this year with a pension of about $50,000 per year, tax-free because she is over 60. I operate as a Sole Trader, one person business with an ABN and registered for GST. If I close down my ABN and open a new one in my wife’s name only, she could then be the new owner of the business. By the ATO’s rules and standards, can I draw a small salary from the business while continuing to run it? If my time is not adequately paid for on the salary I get, can I operate as a volunteer/hobbyist helping out my wife’s business? I was thinking of earning only about $300 per month as the sole employee. I wouldn’t have to register for WorkCover or pay for superannuation, according to the rules in Victoria. If the ATO audited us while operating in this manner, would they find anything about the arrangement to be objectionable? I would not be declaring myself to be her dependent.

    #1133988
    Jodie McLeod
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    Hi Computerguys,

    Welcome to the forums on behalf of the Flying Solo team!

    I’m sure you’ll have some financial gurus jumping on here soon to help with your question.

    In the meantime, be sure to head to our New Members section, where you can tell us a little more about yourself and your business.

    Hope to see you around the forums,

    Jodie

    #1133989
    Divert To Mobile
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    Hi Computerguys,

    Its obvious you have done your research into the thresholds for super and withholding tax to maximise retained income from the business.

    Before committing to any changes I think you should do a little research into discretionary (family) trusts. There are costs involved but if you shop around you will find major variances between accountants who can provide the necessary compliance to asic. In particular take note of its flexibility to distribute income.

    Best of luck,

    Steve

    #1133990
    Past-Member
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    Hi – you really need to talk to an accountant or the ATO. A sole trader has to declare themselves an employer if ’employing’ anyone and fill in the associated forms even if you don’t earn enough for super in a month.

    It’s more complicated than you have stated.

    Steve has mentioned discretionary trusts. That’s an entirely different matter and one I would urge you to discuss with your accountant.

    Best wishes.

    #1133991
    Healthy Personal Finances
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    Hi,
    If you were to become a genuine employee, then the ATO would expect to see a job description, an offer of employment and a employment contract.
    This would state your role, your hire date, your salary, etc.
    You would then need to complete the required paperwork such as the TFN declaration and submit to the ATO.
    Yes – you would be earning less than the minimum required to trigger the superannuation guarantee charge.
    If the business becomes in your wife’s name, then she is ultimately held responsible for the business and any profits of the business get declared in her tax return each year.
    Hope this helps
    Stacey & Richard

    #1133992
    ray_223
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    You may also need to pay capital gains tax if selling your business.
    I wouldn’t put anymore thought into it without consulting an accountant.

    #1133993
    al.giffard
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    Hi Computerguys,

    As previous posters have said, it’s important that you consult an accountant before going too much further down this path. You can’t change the past, so it’s much better to get good advice before implementing anything.

    The first thing to consider is Capital Gains Tax (CGT). Your business is a CGT asset, so when you transfer it to your wife, you may have to pay tax on any gain you’ve made on the business. The “market value substitution rule” means your gain is worked out using the market value of the business, not what your wife pays you for it (ie, not the ‘sale price’). The small business CGT concessions may help to reduce your CGT, depending on your circumstances.

    Secondly, whether your arrangement would be effective depends on what sort of business it is. The main consideration is whether the business’s income is from your personal efforts or skills. If so, the income may be personal services income and attributable to you – regardless of whose name the business is in.

    In terms of paying yourself a wage from the business, there’s no specific problem there. Also no real issue (tax wise) ‘volunteering’ for the business or paying yourself less than your worth.

    Depending on the sort of business you’re operating, a discretionary trust (aka, family trust) might be a good idea – but does come with additional costs. It gives you the flexibility to distribute income to different people each year, and can also provide some asset protection.

    Finally, the tax law includes “General Anti-Avoidance Rules”, the general gist of which is, if you do an arrangement for the sole or dominant purpose of obtaining a tax benefit, the ATO has the power to disallow you that benefit (and, in the process, hit you with penalties). Something to consider.

    Standard Disclaimer: All of the above is just general advice provided as a guide. As I mentioned, you should consult an accountant first.

    Cheers,

    Al.

    #1133994
    Computerguys
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    al-bsm, post: 152615 wrote:
    Hi Computerguys,

    As previous posters have said, it’s important that you consult an accountant before going too much further down this path. You can’t change the past, so it’s much better to get good advice before implementing anything.

    The first thing to consider is Capital Gains Tax (CGT). Your business is a CGT asset, so when you transfer it to your wife, you may have to pay tax on any gain you’ve made on the business. The “market value substitution rule” means your gain is worked out using the market value of the business, not what your wife pays you for it (ie, not the ‘sale price’). The small business CGT concessions may help to reduce your CGT, depending on your circumstances.

    Secondly, whether your arrangement would be effective depends on what sort of business it is. The main consideration is whether the business’s income is from your personal efforts or skills. If so, the income may be personal services income and attributable to you – regardless of whose name the business is in.

    In terms of paying yourself a wage from the business, there’s no specific problem there. Also no real issue (tax wise) ‘volunteering’ for the business or paying yourself less than your worth.

    Depending on the sort of business you’re operating, a discretionary trust (aka, family trust) might be a good idea – but does come with additional costs. It gives you the flexibility to distribute income to different people each year, and can also provide some asset protection.

    Finally, the tax law includes “General Anti-Avoidance Rules”, the general gist of which is, if you do an arrangement for the sole or dominant purpose of obtaining a tax benefit, the ATO has the power to disallow you that benefit (and, in the process, hit you with penalties). Something to consider.

    Standard Disclaimer: All of the above is just general advice provided as a guide. As I mentioned, you should consult an accountant first.

    Cheers,

    Al.

    Thanks to everybody for all the great responses. I don’t quite understand how one goes about setting up a home business as a discretionary trust, doesn’t one have to operate with an ABN? As a sole trader or partnership?

    As for capital gains, if one cancels an ABN the business ceases to exist. This is just a modest home-based business. Why would capital gains tax have to be paid, and how would one know how much the capital gains are worth? The business isn’t being sold from one partner to another. It is being discontinued while a new business is being created, with a different name, owner and ABN.

    I calculated how much annual tax would be saved, if I am paid $300 per month. Assuming a net profit of $25,000, the overall savings would be about $600 per year in how much the business owner would be paying in taxes. Does this constitute a deliberate tax avoidance scheme as far as the ATO is concerned?

    #1133995
    Divert To Mobile
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    Hi Computerguys,

    The location of the business is not important, a trust is just a different style of entity, or structure and can of course have an ABN.

    Its not your responsibility to pay more tax than you are legally obliged to under the tax act. Structuring your affairs in a way that minimises your tax liability is prudent.
    Sacrificing income to super is a strategy that can reduce the amount of tax payable. Thats legal.

    Steve

    #1133996
    al.giffard
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    Hi again Computerguys,

    I’d suggest the main consideration is whether the income is from your own personal services. If it’s not, there could certainly be benefits in restructuring. If the business is making $25,000 profit, the benefits may well be more than $600 per year – though like most things in tax, this depends on your circumstances (and specifically, your marginal tax rate).

    A quick note on ABNs, it might help to think of the business and the ABN as two completely separate things. An ABN is just a number that identifies who is operating a business, or who owns the business. The ABN actually identifies the business owner – not the business.

    CGT could still be an issue, because it does seem like you may be transferring whatever assets earns the income to your wife. It’s unlikely to be enough of an issue to prevent you from restructuring the business, but it’s worth getting advice on this and, if it does apply, factoring it into your calculations.

    You can certainly minimise your tax, and should do so – but certain arrangements can fall foul of the anti-avoidance rules. Arrangements done predominantly for a tax benefit have some risk (see the ATO’s detailed booklet at http://www.ato.gov.au/corporate/content/67145.htm).

    I hope that helps.

    Al.

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