Company (Pty Ltd)

Because a Company has its own INDIVIDUAL IDENTITY which is separate from your own it is much more complex. This separate identity enables it to be sued and to sue. It is able to own assets in its own name and can use those assets as a base for borrowing.

A company is usually created using a standard format with shareholders numbering between 1 to 50 & having 1 or more directors. Any quantity or value of shares may be nominated but only a part of them needs to be actually issued.

Advantages

  • Generally protection from personal liability
  • Lower Tax rate.
  • Able to retain after tax earnings
  • Trading losses may be carried forward
  • Can own a Business/Franchise in its own name

Disadvantages

  • Cost of set-up between $950 to $1,500
  • Some personal liability to Directors if negligent etc.
  • Rigid distribution of profits in proportion to shareholdings
  • Capital Gains Tax position needs great care and no 50% discount is available as for individuals and trusts.
  • Australian Securities and Investments Commission controls.
  • Formality of financial presentation results in higher annual costs.

ADVANTAGES

1 (a) Limited Liability

A Pty Ltd (private) company has liability limited to the value of the issued shares.

1 (b) Tax Rate

At present the tax rate is 30% which is less than the top marginal rate of 48.5%. A company does not pay Medicare or similar levies. After paying tax this leaves 70% to be retained by the company.

1 (c) Retained Earnings

These may be distributed to shareholders as dividends in subsequent years. If the company has paid tax on these earnings the Dividend Imputation Credits may be available to the shareholder.

1 (d) Trading Losses

May be carried forward subject to several tests relating to Continuity of Ownership and/or The Same Business test

1 (e) Owning a Business

Contracts which are completed in the Company name generally do not require to be renegotiated if the ownership of the company is passed on by selling your share. After you sell your shares the company still retains its liabilities and assets and the net value of these is generally expressed as the sale value of your shares.

DISADVANTAGES

2 (a) Set up Cost

Self explanatory

2 (b) Director's Liability

A director may be personally liable to creditors in the following situations:

  1. Company continues trading while insolvent
  2. Failure to remit PAYG and some other withholding taxes
  3. Tax offences of the company

One method of restricting liability is for one party to hold the shares and the spouse to act as Director. If the spouse has no assets then the effect is to minimise the impact of any liability.

2 (c) Distributions of Profits (Dividends)

Profit is generally distributed in direct proportion to the shareholdings. It is possible, however, to create different types of shares giving each type a different right. Using this arrangement you are able to vary the dividend rates on each type of share. This may differ from year to year.

These areas require professional advice as your personal situation is unique.

SPECIAL CONSIDERATIONS FOR COMPANY STRUCTURES

As can be seen from the foregoing a company structure is extremely variable. One of the side effects of this is that they have been used extensively in tax planning. The Tax Office has set in place a number of guidelines to limit obvious abuse and a general overview is set out below.

1. Loan Accounts [specifically those where you owe money to the company]

The effect of letting the company pay tax on its income & then not declare dividends is to leave your money in the company. If you choose to withdraw this money and use it personally then you are borrowing money from the company. If you do not have a written loan agreement and pay a market rate of interest on this loan (preferable on a daily balance basis) there is a real possibility that the Tax Office will do one of two things;

  • Charge you Fringe Benefits Tax (at the highest marginal rate) on the imputed value of that interest.
  • If they believe you are not able or likely to repay the loan they may deem the loan to be a dividend and tax you personally.

Neither of these alternatives is desirable as they defeat the tax benefits of using the company format in the first place.

You are advised to get professional advice covering the above point.

Reducing your loan account from the company

  • Apply franked dividends against the balance of such a loan account.
  • Increases wages to directors/shareholders (keeping them "reasonable" to avoid penalties) and applying the balance to the debit balance loan accounts.
  • You may sell business assets into the company at market value preferably set by an independent person.

2. Salaries to Directors/Shareholders and/or Relatives (Sec. 109)

A common method of diverting income is the use of paying amounts from the company, typically:

  • Director's fees
  • Wages
  • Management/Consulting Fees
  • Retirement/Redundancy payments

In all instances payments as above must be reasonable and carefully documented. Sec. 109 is applied where as excessive payment is made after consideration of all the surrounding facts relating to that payment. If the payment is deemed excessive the Tax Office will disallow the deduction to the company and treat the income of the recipient as a dividend. This effectively double taxes the payment. Proper recording procedures and professional advice regarding acceptable value of each payment is absolutely essential.