Company Structure

A company is a separate legal entity capable of holding assets in its own name. The two main participants in a company are the shareholders and the directors. The shareholders are the owners of the business and the ones who put the capital into the business.

Private, or proprietary, companies have no more than 50 non-employee shareholders and cannot issue a prospectus and sells shares to the general public.

The Australian Securities and Investments Commission (ASIC) must be notified of any changes in shareholders. The transfer of shares must be done in accordance with the company’s constitution, which will require the execution of a transfer of shares form. Whether or not shares are transferred, there may also be a CGT or stamp duty liabilities.

ASIC is responsible for monitoring and overseeing the corporations law regime and companies that fall under its jurisdiction. Companies must keep ASIC up to date in regards to company details, change in directorship, changes in shareholders, and must pay a annual review fee per annum.

• Advantages
• Disadvantages
• Other Tax Issues

Advantages

1. Companies offer the advantages of limited liability for the shareholders.
2. The imputation tax system ensures that if the company has paid tax, then the shareholders will get a credit for that tax paid.
3. Contributions made by the company to a superannuation fund on behalf of employees may be claimed by the company as a tax deduction.
4. Companies are entitled to make tax deductible retirement payments to all employed family members.
5. Losses may be transferred from one company in the group to another provided that there is 100% common ownership.
6. The company structure provides an opportunity to employ the principals.
7. Companies offer some ability to “split” income among family members, this can be done by either employing family members of issuing difference classes of shares.
8. Companies offer the ability to obtain CGT deferral where a company is formed to replace existing family structure.
9. The company tax rate, 30%, is much lower than the highest marginal tax rate for individuals, which is 45% plus Medicare.
10. Asset ownership can be transferred in certain circumstances, through a company structure without significant stamp duty costs.
11. Under the Corporations Act 2001 there is greater flexibility in cancelling shares or reducing the paid-up capital of companies, this makes companies a less “rigid” choice of entity.

Disadvantages

1. Where negative gearing starts by a company the tax losses are trapped within the company. Therefore this often means that negative gearing should be structured outside the company.
2. Tax preferred amounts received by a company will be subject to tax on distribution to shareholders. This inability to pass through tax preferred amounts to shareholders without causing further taxation stems from the way that the imputation system operates.
3. Prior to 1 July 2000, the benefit of imputation credits could be lost through the inappropriate structuring of entities within an entity group.
4. The commercial costs in maintaining a corporate entity can be considerable.
5. The incorporation of an enterprise means that the principals become employees of that company. This may give rise to exposures to payroll tax and “compulsory” superannuation.

Other Tax Issues

Tax File Number:
A company needs to apply for a tax file number and uses it when lodging its annual income tax return. This can be applied for on the ABN application form.

ABN:
A company registered under the Corporations Act 2001 is entitled to an ABN. A company that is not registered under the Corporations Act may register for an ABN if it is carrying on an enterprise in Australia.

Who pays income tax:
If a business is run as a company, the money earned by the business belongs to the company.

Under the self-assessment system, companies have to lodge an annual company tax return which shows the income and deductions of the company and the company’s income tax payable. Companies also usually pay PAYG instalments, which are credited against their annual income tax liability.

A company pays income tax on its assessable income (profits) at the company tax rate, which is currently 30%. The amount of tax to be paid is reduced by any PAYG instalments reported during the year. There is no tax-free threshold for companies.

GST:
A company may apply for GST registration if it is carrying on an enterprise. This can be applied for on the ABN application form. A company is required to be registered for GST if its annual turnover is $75,000 or more ($50,000 or more prior to 1 July 2007). The registration threshold for non-profit organizations is $150,000 ($100,000 prior to 1 July 2007).

Superannuation:
Companies need to pay superannuation contributions for all of their eligible employees, including company directors.

If you would like more information on how to set your business up as a company, pleasecomplete and submit the express enquiry form or call us on 1300 QUINNS (1300 784 667) or on +61 2 9223 9166 to arrange an appointment.