The Three Types of Tax Structures (and Which One’s Best For You)

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Choose one of these three tax structures, and you could keep more of your own money 

Australians are a funny bunch …

On some issues, we have strong divisions in our ranks. AFL or Rugby. Labor or Liberal. VB or XXXX Gold. Fantales or Minties. But on other issues such as income tax, we stand united.

It’s universal that Aussies want a fair go, but when the greedy buggers in the ATO claim 40% of your hard-earned money every year, we all cry foul. That’s why I talk about three types of tax structures with my clients. 

But first, a disclaimer …

Most of the talk from here on in will be centred around Australians working in Australia who want to legally pay less taxes. High-income earners who have a business or assets overseas need to have a different conversation, and that deserves its own article. 

I see my job as a balancing act. I want to help Australians earning high incomes to secure more of their own money against the Australian Tax Office and their grubby fingers. But I also want to do it in a way that keeps the Australian government happy. I’m only interested in 100% legal means of reducing your tax burden. And what’s wrong with that?

According to the media, it’s nefarious, barbaric, and unthinkable to want to slash your tax bill. In one scathing example from an article by the ABC, “an electrician from Perth emailed [an offshore tax service] asking what he could do to ‘reduce or zero my tax’. 

If I didn’t know better, I would assume that he’s trying to do the wrong thing. But he’s not. He’s doing what everyone should be doing, looking for a 100% legal way to reduce his tax bill. 

They reported it as if that was a bad thing. I have to ask it; what’s wrong with that? What’s wrong with contractors, doctors, lawyers, CEOs, and investors seeking ways to legally slash their tax burdens? As long as they choose legal means, the answer is nothing. Nothing is wrong at all with that. 

The sad news is that electricians don’t have the option to take their business offshore legally. But the truth is that many people can, and do, find 100% legal ways to slash their tax bill. And to talk about finding ways to legally reduce the tax you owe the Australian government, we need to talk about tax structures. 

What Is A Tax Structure?

If you are a top earner in this country, you will be taxed at a ludicrous rate of 41% of your income every year. That’s just an unavoidable fact. I can’t help you with that, and if anybody approaches you saying otherwise, run. 

Individuals in this country, especially those earning the top dollars, are among the highest tax brackets in the world. 

According to a study performed by Price Waterhouse Cooper in 2013, Australia’s right up there on the podium for the highest tax owed by high net worth individuals. 

These figures are based on a $400,000 salary. That number in brackets? That’s how much the ATO generously allows you to keep. 

Of your own money!

Germany 60.61% ($242,440)
Australia 59.3% ($237,200)
France 58.1% ($232,400)
UK 57.28% ($229,120)
India 54.9% ($219,600)
Italy 50.59% ($202,360)

Here’s why we need to talk about tax structures. At the Print Media Enquiry in 1991, Kerry Packer once famously said ...

“Anybody in this country who does not minimize his tax wants his head read.”

Truer words have never been spoken. 

Notice that he didn’t say “avoid” or “skip out”. Nor do anything illegal. And that’s smart. Nobody wants to go to jail over money!

The good news is, I can sleep soundly at night knowing the three types of tax structures I introduce to my clients are 100% legal ways to minimize your taxes. 

Kerry Packer goes on to say ...

“I can tell you as a government that you are not spending it so well that we should be donating extra.”

If you’re completely comfortable with how the Australian government is spending your hard-earned cash and feel good about the “donations” you’ve made, stop reading right now! But if you have a niggling suspicion that your hard-earned cash would be better served in your own pocket, then keep reading. 

Because I have three tax structures to offer you. 

Let’s look at these structures individually.

1. The Company 

According to Indeed, the average contractor in Australia is earning at least $50/hr, with top tradies earning an average of almost $100/hr. In one article, a Melbourne builder pocketed over $370,000 in one year, more than the average doctor or lawyer makes.

When you think of high-income earners, it’s tempting to ignore the plumber fixing your sink or the builder installing your kitchen fixtures. But in my experience, Australian contractors are steadily increasing their earning potential to join the ranks of the traditional high-income professions. 

This is where the company tax structure can be such a valuable way to protect your income. Particularly for contractors because of the PSI (Personal Services Income) rules, which essentially states that if you make your money from the personal services you offer, your tax rate is different. 

If an individual earns more than $150,000 a year, it makes sense to set up a company to reduce your tax burden. 

Why is that? Because individuals are taxed at higher rates than a company rate. And as long as you’re earning over a certain threshold, the company flat rate will save you big bucks at tax time. 

While we recommend companies as tax structures for contractors all the time, it’s a simple solution that works for many. Let’s say that you earn $400,000 a year. As an individual, you would be taxed at the highest rate for Australian earners, 48.5%. But if you were conducting business under a “Pty Ltd” company, your tax rate would fall to just 27.5%.

How much more money does that put in your pocket? In our example, that’s an extra $55,000 a year that doesn’t get sent to the Canberra coffers. What would you do with an extra $55,000 at the end of the year? 

If you have a business with partners, this is a great solution to protect your own income through the use of the company tax structure.

Some of the problems arise with the Division 7A loans. These can get nasty really quickly. If you want to withdraw money from your company, its best to consult with a tax specialist or you can get hit with a staggering 78.5% tax rate on whatever you withdraw. That was not a typo.

One of the other issues that arise is with any assets you hold as a company. In general, I’m not an advocate for companies holding assets (see the next subsection on “Trusts”) because you lose the 50% Capital Gains Tax exemption for those assets.  

2. The Trust 

One of the most common of the three tax structures I recommend for my high-income clients is the use of a trust. 

You may have heard of unit trusts and discretionary trusts. For the purposes of minimizing tax and protecting assets, I deal exclusively with family, or discretionary trusts. 

Since we are on the subject, one of the key features of a trust is the ability to control, but not own, assets. If one party holds the assets for another party listed in the trust, that creates security and a legal requirement for the beneficiaries to be paid. 

The discretionary trust requires an appointor, who ultimately controls the trust. That appointor has the ability to sack the trustee if they aren’t doing their duties as prescribed. 

These trusts are simple to establish (cheap as well!), very simple to run, and have low ongoing compliance costs. 

But the real kicker comes when it’s time to distribute the income from the trust. The features that really help minimize tax burdens are two-fold. First, the trust can distribute funds to multiple beneficiaries. Second, the money distributed is taxed according to who receives it, not the trust itself. 

How does this work for you?

Let’s say that you have a trust with $100,000 to distribute, but you make $250,000 a year in your job. If you were given any of that money, you would be taxed at the highest rate of 46.5% as an individual. You would instantly lose $46,500 right away to those knobs at the ATO. But with a family trust, you can proportion that out to different beneficiaries to minimize the tax owed. Maybe your wife is a stay-at-home mum, so you can give her $60,000. You can give $30,000 to the company (a flat tax rate of 27.5%)and another $10,000 to a charity like a church (tax-exempt). Your wife’s tax rate is just $13,350, and the company pays $8,250, making a grand total of $21,600 paid. 

You’ve just saved yourself around $25,000 in tax with the use of the trust. Well done!

One of the problems with a trust is that it cannot accumulate income. Each year, the trust must distribute the money, otherwise, it gets stung with very high tax rates of 48.5%.

3. The Self Managed Super Fund 

There is one other tax structure that’s worth mentioning. The Self Managed Super Fund.

But we have to include another disclaimer. We are not a licensed superannuation agent with ASIC. This limits us from any kind of advice for your situation, whether general or specific. 

However it is one of the three types of tax structures, and we are allowed to present factual information and educate you on how you can preserve income by using a Super fund. 

If you’re nearing retirement age, there are options that will benefit you and the tax you’re liable to pay. Australian government rules allow for super funds that can spare you from heavy tax bills, but you have to do it right. 

As we said, we can’t assist you with any advice. However, we can certainly help in other areas and refer you to a specialist in that area that we trust and recommend.  

Looking for a Tax Structure? Consult a Tax Specialist!

In that same article I referred to earlier, my name was mentioned. But in this context, it was a good thing. When the Panama Papers were released, I was the only Australian mentioned by name without any criminal activity. In fact, the article reported that:

“The ABC is not suggesting any illegal behaviour or wrongdoing by Mr. Black”

Quite the opposite, in fact. I specialize in advising people on 100% legal ways to minimize their tax, sometimes even to zero. I help people with tax structures in Australia as well as helping establish offshore companies to further reduce taxes. 

And every bit of it is 100% legal.

Talk to us today to consult on your specific situation. I’ve covered a broad overview of the three types of tax structures. But I want to hear from you for a tailored solution to your tax problem. It takes a tax expert to create a tax solution. We are those tax experts.

Simply fill in the form online and we can get started with a no-risk, no-obligation 15-minute strategy session right away. Start keeping more of your money with a tax structure that works.