Natalie from Sydney and the founder of online marketplace of babies and children’s clothes and toys for mothers or soon to be mothers looking, www.mamadoo.com.au, posed us three questions:
1) I run my own business and have been told I am best to set up a trust for tax purposes but the fees to do so seem quite high. Can you tell me if this is the best thing to do and what the benefits are?
2) I want to start employing people but how do I go about paying them a salary, super, do I have to get insurance? At what stage am I best doing this? Am I better off just hiring freelancers who invoice me directly?
3) What is the most tax efficient way to pay myself a wage? Do I do this as dividends as a shareholder or as PAYG?
Top answer provided by:
Joshua Stega
All advice is general in nature. Readers should seek their own professional advice before making decisions.
Joshua Stega of JAS Wealth responds:
1) I run my own business and have been told I am best to set up a trust for tax purposes but the fees to do so seem quite high. Can you tell me if this is the best thing to do and what the benefits are?
There are only two ways to build real wealth in Australia. One is to borrow money to invest, think property developers and investors in shares and property, the other is to run your own business. If you don’t believe me, look at the recent BRW richlist, there are no pure salary earners.
The main value in running your own business is the flexibility afforded in tax planning. You can effectively spend pre-tax dollars on items required for running your business. You can also manage how tax is paid on your business profits.
If you run a business as a sole trader, your profits are taxed at normal individual tax rates, like a salary earner. As an individual you also receive benefits such as the tax free threshold, which means at lower levels of income you are better off.
If you run your business through a company, you will cap your tax rate at 30%. A company is beneficial for businesses generating higher profits because as an individual your average rate of tax will only hit 30%, the company tax rate, when you personally earn $135,000 p.a.
If you elect to use a trust you can reap the benefits afforded to you as a business owner. Depending on the structure of your business and the trust you can theoretically distribute profits to a range of beneficiaries, each with differing tax rates. For example you may be a beneficiary, your partner may be a beneficiary and you may also have a company as a beneficiary. You would distribute less than $135,000 to the individuals and any additional income should be directed to the company beneficiary, which will pay tax at a flat rate of 30%. Using a trust you should pay an average rate of tax of 30% or less on your profits.
2) I want to start employing people but how do I go about paying them a salary, super, do I have to get insurance? At what stage am I best doing this? Am I better off just hiring freelancers who invoice me directly?
This is a good question and one which really depends on the industry you operate within and the size of your business. If your income is solid, you have a constant supply of work that is constantly growing and your customers favour building a relationship with the people who work in your business then you should consider employees. If these factors don’t apply you should consider freelancers. Freelancing is a growing part of the workforce and is used extensively in small business as well as in large corporations like the big four banks.
In terms of setting up the employment payroll system, you should look at using an accounting package, such as Xero. Xero is a cloud based accounting system, which can help you effectively streamline your payroll function. Your accountant should have recommended this to you.
Depending on your industry you may require insurances. You should also consider insurances to protect the value of what you have built, such as key man insurances.
Noting the theme of these questions, it sounds like you need a good accountant. You should ask other successful businesses in your industry what accountant they use. Alternatively I would be happy to provide three referrals of accountants who could help you in this instance.
3) What is the most tax efficient way to pay myself a wage? Do I do this as dividends as a shareholder or as PAYG?
This follows from question one. You should be doing a combination of both as part of your annual tax planning. Your goal is to pay less than 30% on your total income.
As mentioned, once your personal income reaches $135,000 you should distribute to a company, which can in turn pay you fully franked dividends. You should also consider making super contributions as these are taxed at 15% in super and are also a tax deduction to your business.
While the Adviser Ratings Website facilitates the question and answer functionality, all such communications are between users and authorised financial advisers, of which Adviser Ratings has no affiliation. Adviser Ratings is not the advice provider and does not provide financial product advice and only provides information that is general in nature.
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Comments2
"Totally misleading advice, need to look at marginal tax rate not average tax rate. The personal tax rate at $135,000 is curremtly 39% with medicare levy. "
David 12:49 on 04 Mar 15
"An added wrinkle is that the tax rate is due to fall for small business soon to, I think, 28.5% from July 1 2015. Though this may not benefit those with a trust. This is something that I would refer you to our friendly accountant Chris."
Greatrex 15:43 on 26 Feb 15