Small businesses account for a huge 57% of Australia’s GDP . You might think that means SMEs as a sector are going strong. But the reality is there are some common challenges that threaten just about every Melbourne SME.
For instance, while SMEs may not be in the spotlight in quite the same way as medium and large entities, they’re often subject to overwhelming government fees and regulations. And if you’re not careful, tax can weigh heavily on your cash flow.
Every year, the private sector pays approximately $249 billion in compliance and other government charges. So as a Melbourne SME owner, while all the decisions you make are important, the type of business structure you choose could be the most important of all.
Not only will your small business structure help decide how much tax you pay, it’ll also affect the inner workings of your SME. Think of it like the foundations of your small business.
Lay the wrong foundations and your business stands on shaky ground. Choose the right structure and you’ll be standing firm when the inevitable challenges come.
So, how do you choose a suitable structure for your Melbourne SME – one that protects your assets and at the same time helps remain tax-efficient?
Read on to find out.
How to Choose a Structure that Suits Your Melbourne SME
No matter how careful you are in business, or how well you’ve performed in past years, your small business could be gone in a flash if you’re successfully sued.
Likewise, no matter how profitable you are, it’s hard to maintain solid cashflow if excessive revenues are going to taxes and other government charges.
Times aren’t getting any easier for Melbourne small businesses. Owners who thought they were secure are losing their businesses every day. One of the stats we share with our clients is the percentage of Australia’s total employment held by small businesses. It fell from 46% to 44% in 2017 and it’s yet to get back to its peak. That means fewer small businesses have the cash flow to employ as many as they did in 2017. So times aren’t getting easier for Melbourne SMEs.
Luckily, there are some perfectly legal and ethical steps you can take to protect your business’s assets – and at the same time, promote tax efficiency.
One such step is setting up a trust.
What is a Trust?
A trust is a relationship in which one party, the trustor, legally offers another party, the trustee, the right to hold and manage their assets or property for the benefit of a third party, the beneficiary.
It may sound a bit complicated, but it can be fairly simple to manage once it’s set up. It’s just a financial agreement in which the three parties draft a trust deed with regard to an entity’s assets.
When might you use a Trust?
So you could put this kind of arrangement in place if your priority is to legally safeguard your assets and make sure they’re distributed per your wishes.
As a small business owner, structuring your business as a trust can significantly reduce the amount of taxes your business is expected to pay. It can also reduce the paperwork
in tax-returns. On top of that it can be a good way to legally protect the assets of the trust from unforseen threats.
However, not all trusts are the same. The two key trust types you might choose from are:
The Discretionary Trust and
The Unit trust
Let’s take a closer look at each so you can get an idea of what kind of SME trust could suit the structure of your Melbourne business.
A Discretionary Trust
In a discretionary trust, the trustee not only manages the assets but also has control over how much the beneficiaries get. To understand how it operates, let’s imagine you have two kids, Jane and John.
You run your business with the help of your spouse. In a bid to protect your assets and ensure tax efficiency, you open a discretionary trust and appoint your spouse as the trustee and the kids as the beneficiaries of a discretionary trust.
As the trustee, your spouse will have the legal right to discreetly decide how much of the trust Jane and John receive depending on income distribution. For instance, they can choose to split it in half so each beneficiary can get an equal share or divide it in such a way that Jane gets 60% while John gets 40%.
This amount is usually not fixed. Therefore, the trustee might decide to do vice-versa during the next income distribution.
The beauty of a discretionary trust is that it’s flexible and hence allows the trustee to distribute the income discreetly and in the most tax-efficient manner.
Discretionary trusts are a popular business structure among family-owned entities. This is because all parties are usually comfortable with the trustee’s decisions.
Structuring your business under this type of trust is also beneficial as it has broader tax planning opportunities. So you’ll want to consider your tax rate as part of selecting a suitable trust for your SME.
Meanwhile, if you use a corporate trustee, your creditors, or anyone suing your entity cannot come after your trust property, offering you a valuable level of asset protection.
In comparison to other structures, a Discretionary Trust has few regulatory requirements. At the same time, it has a few downsides.
For instance, losses cannot be distributed, and in some cases, the trustee cannot be held personally liable for the trust’s debts. If you run a small family-owned business, this type of trust could be a good fit.
What about a Unit Trust?
Also known as an express trust, a unit trust, on the other hand, is in some ways, the opposite of a discretionary trust. The trustee distributes the income from the trust to the beneficiaries in fixed units from the word go.
A unit trust works a bit like a company’s shares system. Depending on their holdings in the trust, the beneficiaries generally receive fixed units of the trust’s income each time there’s a distribution.
In a nutshell, this trust takes away the trustee’s control over the trust’s income distribution. For instance, to use the example mentioned earlier, both John and Jane, the beneficiaries, will receive 50% of the trust’s income.
Given this transparency, it’s no surprise that this type of trust is a more common option in situations where there’s more than one family involved or unrelated business partners.
It also carries a list of perks you may find suitable for your small business. For instance, you can raise business capital by increasing the number of units and issuing additional units to new investors. On top of that, the unit trust can create access to small enterprise CGT concessions .
Structuring your business under a discretionary or a unit trust could be a good idea as it may reduce some of the regulatory requirements you would otherwise have if you simply operated as a company.
As we’ve covered, it’s more tax-efficient – and when you have a corporate trustee, your assets enjoy a degree of protection from creditors.
A general rule of thumb is that the more complex a business structure, the more tax efficient it can be – because it’s tailored more exactly to your unique business.
So if you want greater tax efficiency and asset protection, it can pay dividends to have an expert to help you set up a more sophisticated structure for your business.
Want to find out more? See how our insights could help you to structure your Melbourne business for asset protection and tax-efficiency. Get in touch today for an introductory consultation call that’s tailored for your situation.
We’ll explain what could work well for your business and give you the rundown on how we could help. Then we’ll leave it up to you to decide whether we’re a good fit and how you’d like to move forwards.
Disclaimer: This article provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. It does not constitute legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances.