Contact: Vessa Playfair
Deloitte
Director of Communications
+61 (0) 419 267 676
Contact: Kel Fitzalan
Deloitte
Partner
+61 (0) 2 9322 5331
Changes in tax rates for individuals announced by the Treasurer in the Budget are likely to encourage small business operators and contractors to favour partnerships, trusts and other alternative structures over the use of companies, according to Deloitte Tax Partner Kel Fitzalan.
“This year’s changes go much further than the tax rate reductions announced in last year’s Budget, he said.”
In the past, there has been an incentive for small business operators and contractors to incorporate due to the significant differential between the personal and company income tax rates. As this differential has now been narrowed further, taxpayers have fewer reasons for choosing a company structure particularly given all the hassle and cost involved.
Following the changes to personal tax rates, a husband and wife operating a small business should only consider incorporating where their combined income exceeds approximately $300,000 for 2006/07.
On the other hand individual contractors are unlikely to incorporate where their incomes are less than $150,000.
When choosing an appropriate structure in which to operate a business you should always consider the following golden rules:
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Profit repatriation
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Asset protection; and
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Wealth accumulation.
The changes announced may give some small business operator’s and contractors good reason to focus merely on asset protection and wealth accumulation in preference to profit repatriation.
Profit repatriation
Specific income tax legislation restricts ways in which shareholders access their company’s profits (i.e. profit repatriation).
For example, loans made to corporate shareholders or their associates must be documented under a written agreement when made, repayable over a specified period and at an interest rate prescribed just before the income year in which the loan was made. Otherwise the loan is treated as an unfranked dividend. The company also loses an equivalent franking credit and can suffer further company income tax.
Franking credit trading legislation also provides the Commissioner with the power to impose similar penalties in respect of all but the most common form of dividend.
Even the simple process of paying salaries to shareholders has compliance costs associated with it.
