<Deleted – See Nat R>
Rob,
Tell me more…
How do I pay 30c in the dollar of my income over $52K???
Ears are open…
Liz
Mortgage Lender
The Mortgage Adviser,
Do you need to form a trust in order to pay the 30% tax.For instance if you and your wife both earned $710000 each would this still be possible whithout a trust?
DomWhat about those of us who are government types? How could we do that?
“Looking forward to the day when I can tell the boss where to go”
MortgageAdvisor is correct. This strategy will only work if you generate income through a company. Personal Services Income (such as most PAYG) would not be open to this strategy as the income is treated as assessable in the hands of the taxpayer earning the income. Basically to disinguish between PSI income and non PSI income you need to meet the results test.
Even if you do meet the results test and are paying yourself a maximum wage of $71K the profits will be retained in the company and will be taxed at a rate of 30%. This is where the maximum rate of 30% comes in.
However what happens when you want to get the money out of the company. Well if there are sufficient funds in the company then the company can invest although this has problems (e.g. companies don’t get the 50% CGT discount so this might be the wrong strategy if you plan on selling one of your assets in the future), also any losses (from negative gearing) are kept in the company and carried forward (providing it meets the carrying forward of losses tests) and are not able to be offset against other income. It can be offset against company income but the loss then only has a benefit of 30% not 47% (if you are on the highest income tax scales). So again need to work out what is best.
Also if you plan on lending money from the company to yourself as an employee or as a director make sure you have a Division 7A Loan Agreement in place otherwise it will be treated as an unfranked dividend which is non deductible for the company but fully assessable in the hands of the taxpayer. Nasty. And Div 7A Loan Agreements cannot be made respectively, it is against the law.
You can pay a dividend to yourself from the company but the net effect is the same. ALthough this can change if you plan on earning less income in future years or if you plan on paying a dividend to a shareholder that is on a lower tax scale. However there must be sufficient franking credits in the company’s franking account otherwise the company will be liable for franking deficit tax.
So just be aware of how you want to use the future funds and the taxation implications both now and in the future. Some good planning with your accountant and/or taw laryer should assist you with these decisions.
Originally posted by aussiemike:This strategy will only work if you generate income through a company.
What do you mean by “this strategy”?
The example Rob gave with the $71k giving an average tax of 30% is true for all taxpayers no matter where their income comes from. I don’t see what companies have to do with it at all.
The only advantage is if the total income is greater than $71k (and not capital gain), as the extra money can then accumulate in the company. However, as you pointed out, it’s then not easy to get it out later without paying extra tax.
I have been wrestling with this problem for a while now, and am finding having cash stuck in a company is a bit of a trap.
GP
Originally posted by The Mortgage Adviser:Many of them try to not pay themself much because they think they pay less tax through the company.
Okay, I see what you mean.
The 30% company rate compared to a 42% or 47% marginal rate is deceptive since company tax is 30% right from the first dollar.
GP
Originally posted by SALACIOUS:The Mortgage Adviser,
Do you need to form a trust in order to pay the 30% tax.For instance if you and your wife both earned $710000 each would this still be possible whithout a trust?
DomKnow what you mean Dom- once you start putting Income from IP’s onto your Wage, your total income starts to *shoot* up..
REDWING
“Money is a currency, like electricity and it requires momentum to make it Effective”
Count The Currency With This Online Positive Cashflow CalculatorRob,
I would still end up with more in my pocket if I paid myself up to the 30c in the dollar for tax on income, then the rest through my company.
Your comparison is flawed and still does not make sense to me. If I pay 42c in the dollar REGARDLESS of how much “overall tax in the dollar” I pay (you’re taking an average)… I would be better to funnel that income into the company and pay 30c in the dollar, rather then 42c.
I guarantee you I will pay less tax per dollar then you, who chooses to pay a portion of their income at 42c in the dollar (OR MORE!!!)
Rob you are crazy, you are not comparing the averages effectively. Let me show you your example versus mine.
Based on the theory that you own a company and you have $62,500 that you want to funnel as income…
Your theory goes:
Pay yourself $62,500
Total Tax paid $16,182
25.89 tax in the dollaroverallMy theory (the standard) goes:
Pay yourself $52,000 pay $11,772 tax
Pay Company $10,500 pay $3150 tax
Total Tax paid $14,922 LESS!!!
23.87 tax in the dollar overall I PAY LESS TAX THEN YOU [tongue4]I don’t get your theory Rob… I think it’s misleading… but try and correct me if I’m wrong.
I see the benefit in having more income on your tax return, but this does not bother me, I’m a broker ey?
Liz
Mortgage Lender
Lizzy,
Your examples are correct but I think Mortgage Advisor was talking about keeping your tax levels BELOW the 30% rate. In both of your examples this is achieved.
Note however that the $ 7,350 remaining in the company is the vehicle you will need to use for investing. For some people this is not suitable as they want access to the funds.
So how do you get the money out. Well as I said if you don’t have a Division 7A Loan Agreement in place PRIOR to the loan then it is considered to be a unfranked deemed dividend which is not deductible to the company and fully assessable to the taxpayer.
If you do have a Divison 7A Loan Agreement then you will need to charge at least the Benchmark Interest Rate to prevent any Fringe Benefits Tax issues and the loan will need to be repaid eventually (including the interest you have charged). This will usually be at least before 7 years otherwise under State Law the loan will go stale and it will be considered as forgiveness of debt with the associated fringe benefits tax issues. This can be avoided with a Statement of Recognition.
Finally since you have paid $3,150 in tax then you will be able to distribute a dividend of $7,350. However under the Dividend Imputation system the $7,350 is grossed up in the hands of the taxpayer i.e. to $10,500 and then the taxpaper receives a franking credit of $3,150. This means that once the dividend is paid the result will be the same.
Leaving it and investing through the company may therefore make sense but if you do so then you will not get the 50% CGT discount on any capital gains.
Every situation needs to be carefully considered before making a final decision as they all have taxation implications. You need to work out which one is most suitable for you in the current circumstances and to prevent significant tax obligations in future.
Thanks Mike,
I see that I am barking up a different tree…
I am starting to warm to this idea [cool4]
Rob you are a [borg]
Liz
Mortgage Lender
[borg] It is the Borg from Star Trek Rob…
They assimilate civilizations wherever they go..
like you?[blush2]
I meant that you are assimilating people to your viewpoint wherever you go!
Guess not everybody has trekky in them [happy3]
Liz
Mortgage Lender
Mike,
So how do you get the money out.What do you think of the possibility of having a non-working or low-income partner as a share holder with a different class of share (say a preferential, redeemable, non-voting share), then only paying them dividends?
I looked at this but was told there are dividend streaming provisions to be wary of.
GP
Rob,
Originally posted by The Mortgage Adviser:What is also forgotten is the tax deduction available for paying a higher wage to the directors or staff. The company gets a larger deduction for paying you more.
I don’t understand what you’re saying here. The company claims wages as a deduction but they are taxed in the recipient’s hands at his or her full marginal rate.
So where’s the benefit?
GP
Originally posted by The Mortgage Adviser:The peson getting the wages owns the company as well so benefits from greater deductions in the company.
But if their marginal rate is higher than 30%, the net result is more tax.
Or am I missing something?
GP
GreatPig,
You are correct. Broadly speaking, any strategy directed at avoiding wastage of imputation benefits by directing the flow of franked distributions to members who can most benefit from them to the exclusion of other members, may amount to dividend streaming. When it applies, such benefits are treated as unfranked unrebatable dividends paid out of the profits of the company.
Mike,
Thanks for the info.
Seems the ATO has covered all bases. For everything you can do, there’s always a “but”.
GP
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