Business Structure

Choosing the right business structure to maximise the return and to minimise the legal and economic risk for the owner(s) is important. Choice of structure can significantly affect the tax liability arising from various transactions.

Sole trader
A sole trader is subject to income tax on all sources of assessable income whether from business, salary and wages and/or investment. Such individuals are taxed at their relevant marginal tax rate (plus Medicare levy).

Income derived by an individual taxpayer would not be assessable to the extent they are conducting a hobby. Where the taxpayer demonstrates the characteristics of running a business such as profit motive, maintenance of records, repetition of transactions, establishment of business premises, creation of a business plan, etc (refer to TR 2019/1, TR 97/11, TR 2005/1 and TR 2008/2) income from such activities will be assessable.

Consideration should also be given as to whether income derived should be assessed on a cash or an accruals basis.

Provided that certain conditions are met, which includes having an “aggregated turnover” of less than $10 million from 1 July 2016, a sole trader may be classified as a “small business entity” and entitled to a number of small business concessions. The “aggregated turnover” threshold is modified to $5 million for eligibility for the tax discount for individuals or an incorporated small business.

Company
For tax purposes, a company includes a body or an association corporate or unincorporate, but does not include a partnership or a non-entity join venture.

A company is treated as a resident of Australia if one of the following applies:

• it is incorporated in Australia
• it carries on business in Australia and has its central management and control in Austraia, or
• it carries on business in Australia and has its voting power controlled by shareholders who are residents of Australia.

Subject to special rules, the taxable income of associations, clubs and body corporates are taxed as if they were companies. Shareholders are assessed on the dividends they receive from the company, including any franking tax offsets. Shareholders who are individuals are taxed on dividends at their marginal rate (including Medicare levy where applicable) and can claim any tax paid by the company on the profits underlying the dividends as a franking tax offset. Individual shareholders are also entitled to a refund of excess franking credits where their basic tax liability is less than the amount of the tax offsets available.

Partnership
For tax purposes, a partnership includes an association of persons (other than a company or a “limited partnership”) carrying on business as partners or a limited partnership. This incorporates the definition of a partnership. This incorporates the definition of a partnership under general law. The tax law definition also includes an association of persons who are in receipt of income jointly.

Under general law and state-based legislation, a partnership exists between persons carrying on a business in common, with a view to profit. Whether the relationship is a partnership depends on the mutual assents and intention of the parties, including their conduct. The existence of a partnership agreement normally provides evidence of the existence of a common law partnership. The general definition is extended for taxation purposes and the partnership rules apply where income is derived jointly. Receipt of income jointly usually applies to the joint owners of property who share the rental or investment income produced as joint tenants or tenants in common. For tax purposes, each partner is taxed at their marginal rate on their share of the net income (and losses) of the partnership, except where partners do not have control over their partnership entitlement.

Division 830 ITAA97 extends the definition of “partnership” to include certain “foreign hybrid” entities that are treated as partnerships for the purposes of foreign income tax, but as companies for Australian tax purposes. Special rules under this Division apply to these entities in addition to those that normally apply to partnerships.

Trusts
Trusts may include discretionary trusts, unit trusts, fixed trusts, testamentary trusts and inter vivos trusts (ie between the living)

For a trust to exist there must be six elements:

• a settlor who provides trust property (in the case of a trust that is not a deceased estate)
• trust property
• an appointor (who appoints a trustee)
• a trustee
• beneficiaries, and
• obligations and rights created in respect of the trust property.

In general law, a trust is not recognised as a separate legal entity. However, trusts are recognised as such for tax purposes although the trust itself is not a taxpayer. The trust deed sets out the obligations imposed on, and the discretions allowed to, the trustee and the relationship between the trustee, the beneficiaries and the trust property. The trustee (who may also be a beneficiary, but not the sole beneficiary) has a fiduciary duty and a duty of care to the beneficiaries to exercise due care and skill in the exercise of decisions over the trust property. Each beneficiary is taxed on their present entitlement to the “net income” of the trust (including capital gains). In other cases, the trustee may be assessed on the net income of the trust (eg distributions to minor, those under a legal disability, non-resident taxpayers, on in respect of income to which no beneficiary is presently entitled)