The Three Most Tax Effective Business Structures

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Tax-Effective-Business-Structures

There are tax-effective structures if you know where to look

What’s your dream holiday? 

And what does this have to do with tax-effective business structures? 

(Don’t worry. We’re getting there…)

Imagine you’ve booked one of those river cruises in the European waterways. Not for me, but different strokes for different folks. 

You’ve had it planned for months. You have the schedule mapped out of every stop along the way. This will be the perfect holiday. 

When you arrive at the boat, you discover you’re not stopping at those 10 idyllic cities along the cruise. You’re only hitting 6 of them. 

And when you thought it was going to be a 14-day trip, the whole cruise was cut to just 9 days. Your meals are smaller. Your bed is 40% narrower. 

Even worse, as is happening all over the world now, an unexpected event (such as the CV-19 virus) wrecks your cruise completely. The boat is locked down. 

The whole adventure has been diminished in every way.

When you get home, would you just shrug your shoulders and brush it off? 

No, you’d be pissed. You’d be furiously calling up, trying to get a refund for this holiday which was nothing at all like you were promised.

And you’d certainly never go on that cruise again. 

And yet, what I’ve just described is exactly what Australians do every year. Although not a boat cruise holiday, they give up massive chunks of their hard-earned income to the Australian Taxation Office. And they do it again, year after year, willingly submitting to this system that takes and takes without taking steps to mitigate it legally. 

It’s time to do something about it. To take action and look for ways to legally reduce your tax bill. 

It’s time to make smarter choices about choosing tax-effective structures that benefit you, and not the government. 

The Tax Structures They Don’t Want You To Know About

tax-structuring

Need help with your taxes?

As Kerry Packer famously quoted in the Print Media Enquiry in 1991:

“I pay whatever tax I am required to pay under the law, not a penny more, not a penny less... if anybody in this country doesn't minimize their tax they want their heads read because as a government I can tell you you're not spending it that well that we should be donating extra.”

I’d like to point out a pattern the media seems committed to keeping from you. 

The rich and famous aren’t dodging or avoiding taxes. That’s illegal (not to mention stupid). The wealthiest earners in Australia are finding legal ways to reduce their tax bills, often by using tax effective business structures.

In this article by Peter Martin, 54 of Australia’s top 56 earners paid no income tax, even though their average income was $2.46 million each. 

How do they do that?  

Two ways. 

First, they seek the advice of a tax specialist. Accountants, by and large, are more frightened of the Tax Office and doing them wrong then they are of finding tax benefits for you. It takes out-of-the-box thinking to use strategies to 100% legally reduce your tax bill.  And unfortunately, most accountants aren’t stereotypically radical thinkers. So they use different kinds of people to what most people are using.

Second, these high net worth people reduce their tax bill by using tax effective business structures. Using simple, low-maintenance tax structures, you can save thousands of dollars of YOUR MONEY and keep more in your pocket. 

Let’s see what that looks like.

Tax-Effective Structure 1: The Company

Here’s one thing you may not know ...

The most underrated high-income earners in Australia are often the tradies who fix your toilet or install your A/C. Plumbers and builders can easily earn 6-figure incomes, outpacing even doctors and lawyers. 

And one of the most effective tax structures for that business is the use of a company. 

The company is taxed at a flat rate, compared to one of the highest personal tax brackets in the world. According to a study done across several countries, Australia is one of the worst culprits for high personal taxes. 

If you were to earn $400,000 a year, your tax bill would be over $160,000. That’s almost $450 every day given over to the tax office. 

But when you use a company (and you’re earning over $150,000 a year), it makes sense to protect your income using a Pty Ltd business tax structure. 

How large would you expect your savings? As a private individual, you’re liable to pay at least 46.5% tax rates, but as a private company, that rate falls to just 27.5%. On a salary of $200,000, that works out to be over $40,000 in savings. 

Or to put it in another way, that’s $40,000 more in your own pocket. What would you do with an extra 40 grand?

Now three words of warning …

ONE is the PSI (Personal Services Income) rules. Under these rules, if you make money from your own personal services (ie. trading your personal time and experience for money), you have to meet a set of rules (eg. the results test, 80% clients rule, etc.) before you can income split in a company. Otherwise you are compelled to pay high tax rates.

TWO is one of the pitfalls of operating a company is that Division 7A loans can bite hard into that money. Without consultation, you could be at risk of a staggering 78.5% tax bill on monies you withdraw from your company. 

THREE is you shouldn’t use a company to hold assets because you lose that sweet 50% CGT exemption. 

So it takes careful planning to make it work. 

But for asset protection, as well as an added tax-effective business structure, a company is highly recommended.

Tax-Effective Structure 2: The Trust

There are dozens of trusts you could operate here in Australia. But for the sake of my high-income clients, there is one that I recommend above anything else.

The family (or discretionary) trust.

One of the key benefits of a family trust is its ability to control assets, and not own them. Big difference there. And that kind of tax structure can really come in handy if faced with a lawsuit. More on that in a second…

Another key benefit of trusts is they allow you to allocate your profits for tax purposes by way of distribution on paper. This means you get to choose who gets the money to pay the tax. The lowest tax people can get more distributions. And you don’t even have to pay the money out to them! It is fine to just have it on paper (within certain limits).

All the money distributed is taxed AFTER it’s been distributed. 

That really matters and let me show you why.   

Imagine that I have a client who makes $250,000 a year, and he has a side hustle trading options that earns him an extra $100,000 on the side. If all that income were paid directly to my client, they would have to send $46,500 straight off to the government, leaving them just $53,500 of their own money.

That’s ridiculous!

But here’s how a tax-effective trust structure really comes into its own. 

My client with a family trust can choose to distribute the $100,000 income in a different way. He pays $60,000 to his wife, $30,000 to their company for future investments, and $10,000 as a donation to their church. 

The wife’s tax rate is just $13,350, the company is taxed at a flat rate of $8,250, and the $10,000 donation is tax-exempt. And because the church donation was made through a family trust as a registered beneficiary, the $10,000 is effectively tax-deductible even if the organization doesn’t have the requisite tax authority to offer deductions.   

All 100% legal.

Let’s summarize: Instead of paying $46,500 in taxes, my client has paid just $21,600 and set aside a nice tax deduction to claim later on. 

That’s an extra $25,000 through just this one tax-effective business structure. 

Is it any wonder that I love recommending the trust so much?

Tax-Effective Structure 3: The Self-Managed Super Fund

It’s worth a mention but this is just for informational purposes only. We are not a licensed superannuation agent with ASIC so anything presented here is purely educational. We cannot recommend a superannuation fund nor even be seen to be hinting as such. The truth is, everyone’s circumstances are radically different and hence why licensed advice is critical before you even consider setting up a self managed super fund.

If you are getting closer to retirement age, there are options that allow you to establish a Self-Managed Super Fund to drastically cut the tax bill you have to pay and allow you to choose what the money is invested in rather than a fund manager. 

You have to be careful and abide by the strict conditions laid out by the Australian government. 

As we don’t provide any services in this area, we can refer you to trusted advisors to help you further with this tax-effective structure. 

There are also other options like offshore business structures or a Hong Kong pension fund, depending on the nature of the funds concerned (obviously any superannuation must be in compliance with the Australian law).

While we can't offer advice on managing supers, you can get some tips about how to choose who should manage your super here.

Tax-Effective Structures Require a Tax Specialist

Back when the Panama Papers came out, the world was shocked at how many people were using tax structures to reduce their tax bills. I was also listed on those papers and I was interviewed in regards to my connection to those papers. 

The article pointed out that I was the only Australian who was mentioned that they interviewed that was completely cleared of any wrongdoing.   

But my proudest line from that article perfectly described my life’s goal.

Warren Black is known for his "ability to create out-of-the-box solutions to minimise tax

And that’s exactly why you need to use the tax specialists at WealthSafe. 

We don’t play by the same rules. That’s why we don’t get the same results as everyone else. 

I know from a decade of firsthand experience what the ATO is willing to do to claim more of your hard-earned dollars. 

What’s My Next Step?

If you’d like to know more about how to legally reduce your tax bill (and possibly take it down to $0), have a chat with us. We are experts in Australian and international tax laws, working to reduce your tax burdens with completely legal tax structures. 

To learn more, fill in the form online. We can get started with a no-risk, no-obligation 15-minute strategy session right away. We want to hear from you so we can design a tax structure that meets your needs and saves your money. 

Contact us today.