[EP 052] Talking Tax and Business Structures – Top tips on where you might be going wrong (Part 1)

Ben Walker, the founder and CEO of the accounting firm Inspire, joins us on this episode to talk to us about the key differences between the 3 main categories for business structures – sole trader, company and trust.

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Episode Highlights:

• Ben’s life mission
• Cashed Up: 7 steps to pull more money, time 
and happiness out of 
your business by Ben Walker & Harvee Pene
• Reasons why organisations pay more tax than they need to
• 3 main categories of business structures
• 3 differences between each type of structure
• Sole Trader Structure
• Company Structure
• Trust Structure
• A New Innovative Product
• Income Perspective – Company vs Trust
• Sale of the business vs sale of the shares
• Capital Gain – Company vs Trust
• Business Sale Perspective – Company vs. Trust
• Watch out for part 2!

Ben’s life mission:

To inspire others to create a business that gives them the freedom to put family first and to make a positive difference in the world

A lot of business owners get into business because they want freedom of time or money usually to give back to their families. – Ben Walker

I recall a few years ago looking at some ABS statistics that talked about the owners of small businesses. When compared to the number of hours that they were putting in, they were actually earning less than the minimum wage. – Joanna Oakey

Cashed Up: 7 steps to pull more money, time 
and happiness out of 
your business by Ben Walker & Harvee Pene (Click here to learn more about this book or grab your own copy now!)

We believe in everyone paying their fair share. But what we see is that business owners often pay thousands, if not tens of thousands more tax than they need to be.

The problem is accountants aren’t picking up on all of this stuff that they can do to help their clients the most. My personal belief is that’s because accountants are usually focused on billing hours and that’s how they make money.

– Ben Walker

Reasons why organisations pay more tax than they need to:

• Poor business structures
• Small business tax concessions not being used
• Accountant is not asking the right questions to clients

We actually have a list of 56 strategies that we use to save tax. And so for every client, before we finish their tax returns, we run those scenarios past each job. – Ben Walker

3 main categories of business structures

• Sole trader
• Company
• Trust

3 differences between each type of structure

• Tax rate
• Ability to plan for tax
• Asset protection

Sole Trader Structure

• You can pay up to 47% tax
• Very little ability to plan for tax
• Zero asset protection

At Inspire, we actually don’t recommend anyone trade as a sole trader. – Ben Walker

Company Structure

• Tax rate is 27.5% if your turnover is up to $25 Million
• Tax rate is 30% if your turnover is more than $25 Million

Trust Structure

I usually write that trust actually don’t pay tax and write a 0% there. That doesn’t mean that if we structural as a trust then we get out of paying tax completely. That’s not the case. But trusts give their profit to other family members or entities in the family group and then those people or entities pay the tax for the trust.

The differences between company and trust are usually references. It’s the way that you take the money out.

– Ben Walker

A New Innovative Product

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If you’re interested simply head over to our website at aspectlegal.com.au and check out our legal on tap pages or head over to our contact page and submit a form to let us know that you would like more information.

Income Perspective – Company vs Trust

• In a company structure, it is taxed within the company.
• For a trust, income is distributed to the individuals (beneficiaries) and taxed at that individual level (in relation to the beneficiaries).

Sale of the business vs sale of the shares

Sales out of company structures are more likely to be a business sale rather than a share sale for smaller businesses. For the large businesses, maybe it’s a 50/50. There’s a high likelihood that we’re able to push through a share sale in those instances.

Capital Gain – Company vs Trust

If companies sell assets that they own (such as a business), they don’t get the 50% capital gains discount even if they own or have been running the business for more than 12 months. Compare that to a trust though. If a trust sells the business, they get access to that 50% discount for capital gains tax if they own the asset for more than 12 months.

In summary:

If you’re going to choose a company structure to operate out of, and if you’re going to sell in the future, the best way for them to sell generally is to sell the shares in the company rather than for the company to sell the business.

But from a buyer’s perspective sometimes that’s not as attractive, so you might reduce your pool of buyers or you might have to make some other concessions in negotiations in order to get that outcome.

But trusts on the other hand, the only thing you can do if you’ve got a discretionary trust that’s part of the trading entity of the business is to sell the business because there’s all sorts of issues in changing the beneficiaries. Effectively, it has to be a business sale and therefore the individuals who make the capital gain from that sale get access to this 50% CGT concession.

Business Sale Perspective – Company vs. Trust

If you want the greatest flexibility in terms of sale, a trust structure is a really good to adopt when running a business. But if you have a company structure, you can get the same results in terms of the tax outcomes by a share sale. With a share sale, the beneficiaries of that capital gain are the people who are actually the shareholders of the company.

Watch out for part 2!

Join us again next week for the second half of our interview with Ben. In part two. Ben and I talk about the practical reality of running these different structures and how complex business structures can cause business sale and purchase transactions to fall over completely. We also discussed the concept of superannuation and multi-layer structuring.