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Week 10 - STRUCTURE FOR

INVESTMENT Individual

Partnership

Company Trust

Superannuation Fund

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SOLE TRADER / INDIVIDUAL The term sole trader is used to describe an individual

who has a one person business.

There is no statutory regulation of the sole trader.However the sole trader must register a businessname if s/he is operating the business in a name otherthan their own and is subject to many other laws thateffect all businesses eg TPA, Tax law.

Factors to be considered - continuity- the business dies with the proprietor. Liability- liability is unlimited as there are no partners

to share the responsibility and no corporate veil.( note: insurance) control - rests with the proprietor

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SOLE TRADER / INDIVIDUAL

Tax issues

Subject to the various tax rates 47% plus medicarelevy

Passive or active investor - Ferguson v FCT

Non-commercial loss provisions over $40,000 pa Loss deferred until profit

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PARTNERSHIPS

A Partnership is a business organisation - anorganisation that is recognised as one which is usedto carry on business.

Partnerships are not separate legal entities and unlessthe partnership uses the names of all the partners thebusiness name chosen by the partners must beregistered - Business Names Act ( Vic)

The relevant laws are found in legislation - ThePartnership Act 1958 (Vic) and the common law.

In determining the rights and duties of the partners toeach other, partnership agreements and documents ,the Act and case law will be considered.

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Partnerships Advantages:

informality, inexpensive,flexibility, secrecy, tax, Disadvantages:

no corporate personality therefore unlimited personalliability,, investment potential, individual rights,

agency.

Note: size- usually 20 people however there areexceptions that exist within specific professions

eg accountants, law firm, Architects, pharmacists,veterinary surgeons Actuaries, medical practitioners,patent-trademark attorneys, stockbrokers

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PARTNERSHIPS

DEFINITION

s.5(1) .. partnership is the relation which subsistsbetween persons carrying on a business in common

with a view of profit.. indicators: 1)partnership agreement, 2) business, 3)

business being carried on by persons in common 4)with a view to profit

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Partnerships - relationship to outsiders ( cont)

Partnership by Holding out or estoppel s. 18. If a

person allows themselves to be held out as a partnerand a third party acts on that basis then that personholding out or allowing themselves to be held out

may be treated as a partner by third parties.

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Partners liability to one another.s.23-35

This part of the Act regulates the relationship of the

partners with one another. This relationship can bemodified by partnership agreements (unlike therelationship between partners and third parties)

The basis of the relationship is fiduciary ie mutual

good faith, trust and confidence in each other thatarises because of the nature of the relationship. Afiduciary relationship occurs because each partner isthe agent of the other and is responsible for the others

actions therefore mutual reliance and trust arisesbetween the them.

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PARTNERSHIPS

Partnership not assessed on net income mustlodge tax return s 91

Losses can be distributed to the partners and

income can be split

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Shareholders

Dividends included in assessable income Dividend imputation designed to eliminate double

taxation of same profit, first in the company, and;second in the hands of the shareholders

Shareholder obtains a credit for the tax paid by thecompany up to 30%

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Companies - continued

Franking account maintained by company Credit for tax paid and debit for dividends paid with a

franking credit

Franking account not part of a companies financial

statements

Losses two tests, continuity of ownership andcontinuity of business

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Companies - continued

Capital Gains tax no discount

Small business CGT exemptions

- if proceeds used to fund retirement

Less than $5 million and active assets

15 years no CGT

$500,000 retirement concession

50% discount

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TRUSTS

Discretionary trust family trust

Testamentary trust discretionary trust within a will

Unit trust beneficiaries hold an interestrepresented by a unit

Public unit trust or trading trust taxed as acompany

T di i

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Trusts- discretionary Def: trust deed nominates a pool of beneficiaries and

the trustee may chose to distribute capital, income or

both to any, all or none of the beneficiaries. Incomefrom the trust which is not distributed in any year hastraditionally been taxed at a higher rate.

the trustee will either be an individual or a company, The beneficiary of a discretionary trust has less rights

than in a fixed trust as the beneficiary of adiscretionary trust has only an expectancy which

does not confer any equitable rights to property

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Unit trusts

The terms of the trust deed divide the beneficialownership of the trust fund into an equal numberof units. There is no discretion in the distributionof income or capital. (although unit holders maybe trustees of a discretionary trust.) Unitsresemble shares. The unit trust may have a

manager and a trustee General purpose: permits the association of a

large number of unassociated people forinvestment purposes or a smaller group working

through a trust.

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Duties, Rights,Powers & Liabilities of TrusteesDuties:

transfer of titles to trustee with the aim of preserving

the trust property and maintenance of the economicwell being of trust

no conflict of interest

keeping of accounts

Powers: Trust deed, trustee Act, court

Rights:

remuneration permitted by trust deed, courts or legis.

Reimbursement, indemnityLiabilities:

to beneficiaries for breaches of duty

to third parties for debts ( trust doesnt exist anddifficult tocatch beneficiaries /Cor law as director.

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Taxation of Trusts

Trust lodges tax return but trust does not pay tax Trustee will only pay tax if retains profit or nobeneficiary presently entitled or under a legal disability

Trustee pays tax at a flat rate of 47% if beneficiariesno presently entitled, except with a will, normalindividual rates apply

Minor beneficiaries tax applies as follows:

0-416 no tax 417-1445 tax at 66% 1445 or more, tax at 47% Exception contained in s 102AE

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Taxation of Trusts

Benefits for an investor Trust a flow through structure except for trustlosses held in the trust

Dividends can be paid to a specific beneficiarywith franking credits

Capital gains tax discount applies to an

individual beneficiary Asset protection

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SUPERANNUATION Superannuation fund a form of trust

Contributions and income taxed at 15% CGT discount of 33.3% - taxed at 10%

Complying fund complies with SISAct

(Superannuation Industry (Supervision) Act1993)

Non-complying funds taxed at 47%

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SUPERANNUATION

Employer obtains a tax deduction for contributions

made on behalf of an employee

Limit on deductions under 35 13,233; age 35-49,$36,754; 50 and over $91,149

Different for self-employed first $5,000 plus 75% ofage based limit.

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SUPERANNUATION

Superannuation contribution surcharge - $94,691 to

$114,981 up to extra 14.5% tax on contributions Self-managed superannuation fund investment

vehicle

Company or individuals as trustee but must bemembers

In-house assets and use of fund for property to beused by business

Franked dividends

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Joint Ventures

A group of individuals or companies or other entities

that pool resources for the purpose of a singlecommercial venture.

The term joint venture is not recognised for the

purpose of legislative control, however the entities thatcome together for the joint venture are subject to theusual legislation by which they are formed -similarterms: consortiums and syndicates

Note: despite the parties using the term joint venturethe courts may determine that the group is in fact apartnership if it fits within the definitions in thePartnership Act.

J i t V t

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Joint Ventures

Advantages:

not subject to the Partnership Act concerning theliability of Partners to each other and third parties

not recognised as a separate entity for taxation orother purposes, ceases to have effect at the end of the

venture no legislative control, only subject to the laws effecting

the parties and the laws in the area of the venture

usually established by a written agreement betweenthe parties which establishes a committee ofmanagement that controls the jointly pooled financialand other resources and is also responsible for

entering agreements with outside groups