Companies are more rigid and regulated than sole trader, partnership or family trust arrangements.
With additional compliance requirements, companies also need to ensure any money taken is either a wage, a dividend or a loan.
They also pay a flat rate of tax, making the right advice crucial for ensuring correct payment.
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Companies usually pay income tax by PAYG instalments. They must also lodge an annual company tax return, and are subject to tax at the company tax rate, which means that profits are taxed at 27.5%. Once paid, a company can then declare dividends to its shareholders, or the profits can be retained to reinvest into future growth.
The only way a business owner can take money out of a company is to pay themself a wage, take a loan from the business or declare dividends from the profits.
A business owner will commonly take a wage during the year and then receive additional dividends for any profits after their salary has been deducted.
To best protect assets, it’s often a good idea to avoid holding shares personally, but to instead to separate ownership by setting up a family trust that will own those shares. This more effectively protects assets in the event of financial difficulty or legal action, while also offering the flexibility to distribute income for maximum tax-saving efficiency.
A company structure can be a good option for holding your personal investments, but there are both positives and negatives to this approach.
On the plus side, unlike a trust, which must be wound up after 80 years, a company structure can continue forever, making it an ideal vehicle for long-term wealth.
However, the flat rate of tax is 30% – and companies are also ineligible for the 50% CGT discount available to individuals and family trusts.
Nevertheless, it’s worth considering that for an individual on the top marginal tax rate of 49%, the tax outcome is often very similar when comparing a family trust with a company structure – even without accessing the CGT discount.