Ways of minimising tax in the past – Part 3 Business

Part 3 – Businesses– how they paid less tax in the past


How they paid less tax in the past

Australia has a lot of taxes & ways of closing loopholes to make sure people pay tax.

This set of articles is to highlight some of the different types of taxes that different types of income earners (Investors, Employees, Businesses, Sole Traders/Entrepreneurs) might now have to pay. so see part 1 regarding minimising tax for investors minimisetaxpart-1-investors and part 2 regarding employees http://nomoney.com.au/minimisetaxpart2employees

Information is NOT complete – see www.ato.gov.au and/or a professional

Now these articles are in very, very general terms. Each of the laws listed have lots of ins and outs and this is NOT a summary of any set of laws. If you think something has relevance to you -please see a professional (or at least do a lot more reading from the Tax Office website www.ato.gov.au to understand better).

Part 3 – Businesses– how they paid less tax in the past

Using children under 18s to split income

Then: Distribute the tax free amount (currently $6,000) to children

Now: Minors (under 18) are taxed at penalty rates if the income isn’t earned by them.

In the 2010 tax year minors can earn $416 tax free, then pay 66% until 1,307 and top rate (45%) after this.

While this has reduced the amount you can give to minors tax free, because of the low income offset of $1,350 (which is calculated automatically when you lodge you return) – this means minors can earn $3,001 (in the 2010 tax year) without actually being taxed.

For example. On Income of $3,001 the first 416 = $0 tax,

66%  Tax from 1,307-416 = 891 x 66% = 587.40 tax

45% Tax from 1,308-3,001 = 1,694 x 45% = 762.03 tax.

Total tax of $1,349.70 less $1,350 low income offset = $0 net tax payable.

Note: If a minor earns their own income (from a part-time job or interest on their savings account for example) then this is taxed as normal (i.e. $6,000 tax free, then 15% marginal rate, etc.) See www.ato.gov.au with whether interest from a savings account or share investments should be included in the adults name who set it up or the minors name.

Taking money out and calling it a ’Loan’ from private companies (‘Division 7A’)

Then: Running a business through a company and paying personal expenses and treating as a ‘loan’ from the company (and not paying the company back). So instead of paying Sam (owner of A Pty Ltd) salary, Sam pays personal expenses on A Pty Ltd credit card. So Sam owes the company (which increases each year) but doesn’t pay tax because a loan is not ‘income’.

Now: Division 7A –

If a loan agreement is not setup (and loan repayments met) then can require the ‘loan’ to be included as an unfranked dividend in the borrowers tax return. The loan agreement usually has to be repaid within 7 years (25 years if secured by an asset).

Nasty set of rules if you are caught out by them as both the company and the individual are penalised.

Note though that a company can pay personal expenses as long as it is paid back (either via cash or declaring a dividend or paying a salary bonus). Your accountant will assist with this.

Also companies with negative retained earnings (i.e. you put money in to start company and it has made net losses) don’t have to repay until there is a ‘distributable surplus’ (i.e. it starts to have positive equity).

Trust distribute to company to pay flat 30% tax (‘Unpaid Present Entitlement’ becomes ‘Division 7A’)

Then: Ran a business through trust and ‘distributed’ profits for tax purposes to a company (tax advantage of 30% flat rate) and kept money in business (called an Unpaid present entitlement in the accounts of the trust).

Now: Company Unpaid Present Entitlements (i.e. monies distributed to a company from a trust for tax purposes but not distributed in cash e.g. to keep the business going, etc.) are now treated as loans from the company under ‘Division 7A’ rules

Unpaid Present Entitlements owing to a company are treated as a ‘loan’ from the company and is treated under the Division 7A rules (see Division 7A above)

Posted in Business, Tax

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