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Self-employment in Australia is on the increase with individuals electing to control their destiny and financial assets by working for themselves. This is especially popular in knowledge-intensive and service industries. Better educated and older workers, in particular, are attracted to the flexibility of self-employment and are better able to assume the responsibility that goes with that choice.

 

How a taxpayer structures their business depends on individual circumstances and it is important to get it right at the start to avoid costs down the track (capital gains tax, stamp duty and legal fees).

 

An individual operating a business alone will often operate as a sole trader. The concept is easy and there are minimal costs. But what other options do taxpayers have?

 

Partnerships are a common structure for many husband and wife businesses and are simple and inexpensive to establish. Partnerships enable losses to be distributed to the individuals and offset against other income and are, therefore, often used in primary production businesses. However, partnerships offer no asset protection so the individual partners are liable for the debts of the partnership. It is always recommended that partners have a “partnership agreement”.

 

A company is the most common business structure and is appropriate where capital gains is not likely and where the small business capital gains tax concessions will not apply. Companies have the so-called benefit of “limited liability” but most directors will be asked for personal guarantees (ie when borrowing money from a bank) which negates the benefit.

 

Family discretionary trusts are an attractive structure for operating a business. Trusts (with a corporate trustee) ensure that personal assets are protected from potential claims made against the business. Trusts offer asset protection, the ability to distribute income to adult children, and provide discretion in the distribution of income so as to reduce tax. The 50% capital gains tax discount applies to assets held for more than 12 months. Trusts can also take full advantage of the small business capital gains tax concessions.

 

A disadvantage of trusts is that losses are “locked” in the trust so individual taxpayers are not able to get an immediate benefit from any such loss.

 

A unit trust (with a corporate trustee) offers flexibility where the business may admit partners. The units in the trust would be held by a family trust/s.

 

Corporate beneficiary of the family trust

A corporate beneficiary should be considered where the business is doing really well and individuals are on marginal tax rates more than the company tax rate of 30%. The post-tax income would remain in the company and can be used to invest in the kind of assets that will not attract capital gains tax.

 

A self-managed superannuation fund is not allowed to conduct a business although the fund is able to own the business premises. Remember that the fund is not allowed to borrow money to finance any investments.

 

It is always recommended that you consult with your tax advisor before making any investment.