Australian Business and Company Documents

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Australian Business and Company Documents Glossary

Below, you can find the most common terms and definitions in the area of advanced business structures. More information is coming soon. In the meantime, if you would like more information, contact us

Business Structuring – Simple to Advanced Structures

Below, you can find the most common terms and definitions in the area of advanced business structures.

Hobby

In some cases, an individual might not need to establish a definitive business structure to continue their actions. The general rule for this is the intent of the action was to gain profit or for personal enjoyment. If an individual is accruing capital from an activity that would not typically be defined as a business, they may be able to continue this in the form of a hobby.

The Hobbyist

As a hobby does not constitute a business, there are no key individuals other than the hobbyist themselves.

Formal Requirements

The things to consider when determining if an individual’s activities constitute a hobby or a business are centred around if the person intend to carry on the activity for commercial reasons. If their main intention is to make a profit or if their activity is organised and carried on in a business-like manner, then they are likely conducting a business. If not, then the actions constitute a hobby and no formal requirements exist. In the event that the individual decides to transform their hobby into a business, the requirements for that structure will need to be followed.

Example Scenarios of a Hobby

Example 1:
In his spare time, Martin collects and constructs model trains. Martin works as an engineer, so he has the knowledge and skill to design his own trains, in some cases going as far as to create entire sets from scratch. To offset the costs of Martin’s hobby, he occasionally sells his train parts to hobbyists. Martin makes approximately $3,000 a year from selling his train parts. As Martin’s main objective is for entertainment or leisure and not to make money from his train parts, his activities constitute as a hobby. This means that he does not need to disclose his earnings from his actions and can continue without needing to take any formal steps.

Example 2:
Vicky collects trading cards. In order to expand her collection, she buys, trades, and sells her cards. Vicky makes $1,500 a year from her transaction with other collectors, which she usually reinvests in further expanding her collection. As Vicky is clearly not making these transactions in a business-like manner, and her intentions are not commercial in nature, Vicky’s actions constitute a hobby. She does not need to disclose the money she earns through her hobby and can continue without taking formal steps.

Sole Trader

Overview

A sole trader is where there is only one key person in the business. The sole trader can employ others, but these additional employees do not play a key role in the business setup. It is the simplest of business models. There is minimal government regulation surrounding this business model, and it is ideal for people who value simplicity in their workplace.

There is no separation in the sole trader business model between the business owner and the business entity, making the owner the sole repository for the profits of the business. This means that the owner will be liable for any debts that their business incurs. Therefore, it is generally advised for individuals going into a business where there is no real risk involved.

Establishing A Sole Trader Business

Laws pertaining to the business field

While there are no formal requirements for establishing a business as a sole trader, individuals will need to follow the laws relating to their business field. For instance, a builder who is carrying on a business will need to be liscensed. It is very important to be aware of any stipulations beforehand, to avoid disputes later on.

Tax File Number (TFN)

An Australian Tax File Number (TFN) is a personal reference number for taxation purposes. You will need one in order to obtain an Australian Business Number (ABN). A TFN is not required for personal use, however it should be noted that tax fees are substantially higher without one.

Australian Business Number (ABN)

Every business is required to have an Australian Business Number (ABN) as of July 2000. It can be obtained through the Australian Taxation office. You can find an ABN application form here.

Business Name

If the business is operating under your own full name, it does not need to have the name registered. However, if you use any other name it will need to be registered with the Australian Securities and Investments Commission (ASIC). This is a requirement in Australia, however it is a simple process.

Registering for Goods and Services Tax (GST)

When your business has a turnover of $75,000 or more a year in income, you must register your business for Goods and Services Tax (GST). This can be done at the Australian Government’s Business Registration Service (Hyperlink: https://register.business.gov.au/)

Examples

Example 1:

Caroline is setting up a business as a freelance writer, providing articles for various magazines. She will work from home using her own equipment. She will earn $90,000 a year from this business. Caroline has no need to employ other people in this business. Therefore, Caroline has established this business as a sole trader. She can minimise the risks inherent in the business by not employing other people, but she will have to register for GST as she is earning over $75,000 a year.

Example 2:

George is setting up a business as a sole trader making cakes for special occasions. He already has full time employment as a manager in a retail business. He will work on her new cakemaking business after he has finished his other job. It will earn him a total of $10,000 a year, so there is no need to register for GST as he is not earning over $75,000. George will need some form of asset protection as there are minimal risks inherent in this business as well as limited rewards from carrying it on. There is little chance he will need to expand the business as it is in addition to his main source of income.

Discretionary Family Trust

Overview

In a discretionary family trust, one person, the Trustee, holds property for the benefit of another, the Beneficiary. There can be more than one trustee, and more than one benficiary. The trustee distributes capital to the beneficiaries according to the terms which are established in the trust deeds.

A discretionary family trust is generally established by a family member for the benefit of members of the ‘family group’.

People starting a business will usually choose to establish trusts for tax reasons. Distributing capital through a trust enables people to minimise the total amount of tax paid to less than that of a company structure. Additionally, it is possible to receive a 50% exemption from the Australian Government’s capital gains tax from the disposal of assets.

Establishing a Discretionary Family Trust

Trust Deed

A trust deed is a document that sets out the terms and conditions under which a discretionary family trust is established and maintained, including the identity, rights and responsibilities of the trustee, beneficiaries, settlor and appointor. The trust is established by the settlor and trustee signing the trust deed, and the settlor giving the trust property to the trustee.

You can ask Ailira to help you draft a discretionary trust deed.

Settlor

A settlor is the person responsible for establishing the trust relationship. It is usual for the settlor to exit the trust once it is created. However, the settlor can be the trustee. The settlor can be a beneficiary, if there are multiple beneficiaries.

Trustee

A trustee manages and distributes the capital to the beneficiaries. In a discretionary trust, the trustee will have discretion over how and if they are to distribute capital to the beneficiaries. There can be more than one trustee. A trustee can also be a beneficiary, so long as there are other beneficiaries.

Beneficiary

A beneficiary is a person who receives the benefits of a trust. In a discretionary trust, how much of the benefits they receive is dependent on how the trustee distributes the capital within the trust.

Appointor

A trust can create an appointer, who is able to add or remove a trustee to the trust deed if the need arises. They are often considered to be the controller of the trust, as they have the power to remove the trustee.

Examples

Example 1:

Michael is considering a business as a contractor for a construction company. He will work in tandem with his apprentice James, while his wife Sarah works part time to handle the book keeping for the business. In this case, it might be appropriate that Michael arranges his business as a discretionary trust. As Michael has family members that are not working full time and over the age of eighteen, he can act as a trustee and distribute the income from the business to his spouse. This will allow them to minimise their tax thresholds, which will then cost them less in tax fees. The discretionary trust also gives Michael a level of protection in the event that his business incurs debts.

Example 2:

Frank is the owner of a fruit store business which is run within a discretionary trust. Because Frank operates his business within a discretionary trust, he is able to distribute a portion of the store’s income to his two children, who live at home with Frank. This reduces the tax threshold that Frank is subject to and saves him a considerable sum on tax fees each year. Furthermore, the fruit industry in the area where Frank lives is deteriorating. This means that any debts the store incurs while operating in these hard circumstances will remain separate from Frank’s debts.

 

Company Owned By Discretionary Trust

Overview

A Company Owned by Discretionary Trust is one of the most common business structures.

It will have directors who control the business from day to day. The company itself will own and operate the business.

Advantages of Running a Company Owned by Discretionary Trust

1. Shareholders

The company’s shares will be owned by the individual shareholders, however the shares will be held by Discretionary Trust.

As the shares are held by the trustee of the Discretionary Trust, the shareholder has asset protection in the case that they go bankrupt.

A discretionary trust can decide who to distribute the trust’s taxable income to, which can result in tax savings by distributing income to beneficiaries in lower tax brackets. This minimises the overall tax payable on the trust income.

Allocating capital gain to a beneficiary with capital losses carried forward will result in tax savings, as the capital losses will absorb the capital gains, and this can result in there being no tax payable on the capital gains.

Streaming fully franked dividends to beneficiaries on low taxable incomes will result in some or all of the franking credits being refunded by the ATO.

2. Limited Liability

If the business goes bust, then the assets of the individual people involved are not at risk. For instance, any debts will go to the Company. The Company will be limited to its assets to pay those debts, and you won’t lose your family home.

3. Company Tax Rate

The Company Tax rate for a small business is currently 27.5%, and it is scheduled to decrease in the following years. The Company itself will pay that tax rate, allowing you to retain the profits.

4. Research and Development Tax Credit

If you have a technology company and therefore investing in research, you can claim the Research and Development Tax Credit. This means that if you are making a profit you will get 15% of your tax back, and if you are making a loss you can get 45% of your expenditure back.

Setup

Ailira can help you set up a Company Owned by Discretionary Trust and help you to keep down the costs involved in this process.

Example

Molly owns a small flower shop. It focuses mainly on gifts and arrangements for intimate events but is largely successful and growing more popular every day. Molly started her business as a company so that she could expand her flower business and open additional stores. The company structure makes it easier for her to do this because other than Molly’s salary, the business’s income remains within the company, making it simpler for her to reinvest. However, Molly is also a cautious person and opening a second store is a relatively risky venture. If her second store fails however, she is protected from any debts that the company might incur.

Company Owned by Multiple Discretionary Trusts

Overview

A start-up might choose to take the form of a company owned by multiple discretionary trusts if they value security or if they see the business growing in the future.

A company is treated as a separate entity than its founders. This creates a ‘corporate veil’ between the company and the individuals, which protects them from legal consequences if the company suffers debts.

Furthermore, the flow of capital derived from a company stays within the business. This allows for simple reinvestment towards company growth. Finally, if the company is owned by multiple discretionary trusts, it allows individuals to minimise their tax paid through distribution of funds or streaming to family members.

The Director

The director is the individual that founded the company and consented to be named director. They are also the first shareholder of the company when shares are issued upon the creation of the company. They are ultimately responsible for the running of the company.

The Shareholders

Shareholders are those who own shares in the company. A beginning company, such as a small proprietary company, may wish to have all the shares owned by a single person, often the director.

In the case where there are multiple founders shares can still be owned by the founder and divided according to their wishes.

Formal Requirements

There are a few formal requirements for individuals wanting to start a company that is set up to be owned by multiple discretionary trusts.

Firstly, each founder needs to establish their own discretionary trust. This is done through completion of a trust deed. At this time the trustees and beneficiaries can also be named.

Secondly, the founder needs to establish what kind of company they want to create. The most likely choice for the establishment of new companies is a small proprietary company. This means that the company only needs one director and does not have to hold an annual general meeting of members.

Thirdly, the founder must register the company with ASIC and obtain an ACN or Australian Company number. At this time, the founder may also wish to register the business name with ASIC. Once the company has been registered with ASIC, the officers of the company must be appointed such as the director and secretary.

Laws pertaining to the business field

Individuals participating in the business will need to follow laws relating to their business field. For example, an electrician carrying on a business will need to be licensed. It is important that before starting any business, the founders are aware of these stipulations to avoid disputes later.

Business name

If the business is being carried on under any name other than that of the full name of its founders, then the name needs to be registered with ASIC. This is a simple and inexpensive process but still required in Australia.

Tax File Number (TFN)

An Australian Tax File Number (TFN) is a personal reference number for taxation purposes. While a TFN is not required for personal use, but the tax fees are substantially higher without one. Furthermore, without a TFN it becomes impossible to obtain an Australian Business Number.

Australian Business Number (ABN)

Every business after July 2000 is required to have an Australian Business Number (ABN), which can be attained through the Australian Taxation Office (ATO).

Register for Good and Service Tax (GST)

If the business has a GST turnover of $75,000 or more a year in income, they are required to register their business for GST.

Examples Scenario of a Company owned by multiple Discretionary Trusts

Example 1:

Mark, Julie, and David are in the process of starting a company that makes and distributes beverages. They expect the business to eventually be largely profitable and wish to distribute their products nationally at some point in the future.

They have elected to proceed using a company that is to be owned by multiple discretionary trusts as their business model. All three founders have established discretionary trusts and together they have successfully applied for a business name, which has been registered with ASIC. They named each person as a director of the company and have distributed shares to each individual. Mark and David each receive twenty five percent of the shares and Julie receives fifty percent as this reflects the capital that each founder invested in the business. If the directors wish to redistribute the shares at a later date, they are still able to do so.

This structure enables the company to grow larger as capital is reinvested into the business, making it simpler for Mark, Julie and David to reach their goal of national distribution. Furthermore, if a customer were to claim that they became sick after consuming one of the company’s beverages, the founders do not share liability for any damages that might be awarded to the customer.

Example 2:

Jacob and Leslie have a company that they jointly own through their individual discretionary trusts. The company sells designer sporting shoes to speciality stores across Australia. Jacob designs the shoes while Leslie is primarily responsible for distribution. The business is currently fairly small, however Jacob’s work was recently featured in a popular magazine and Leslie has noticed an uptake in the amount of shoes being ordered through their partnered retailers. Together, Jacob and Leslie decide to further invest in their company to branch out further and increase production of Jacob’s shoes. As their business is structured for growth, it is a far simpler matter for them to expand their production to meet the increased demand by employing more people and reinvesting the revenue produced through the company.

Partnership of Individuals

Overview

A partnership is an agreement entered into where the founding members agree to share both the rewards and consequences of a business. A partnership is favoured because of its simplicity. As part of the establishment of a partnership, a partnership agreement is created by the founders which details the terms under which the business will operate. The only other time in which the agreement needs to be amended is when a partner enters into the agreement or if a partner retires from the partnership. The main drawback to the partnership is that each partner, unless specified otherwise in the partnership agreement, is jointly liable for the actions of the both the partnership the individual partners.

Partners

A partnership is defined as a relationship between persons carrying on a business in common with a view to profit. As such, the partners in a firm are those directly carrying on the business. Anyone able to enter into a contract is able to become a partner. It is also important to state that the partners share liability in the event that the firm incurs debts.

Formal requirements

While a partnership can be established through oral agreement or implied by conduct, most partnerships are created through a written agreement referred to as a partnership agreement. This agreement typically stipulates the conduct under which the partnership will be run and details which may be used to help settle a dispute at a later date.

Laws pertaining to the business field

Individuals participating in the business will need to follow laws relating to their business field. For example, an electrician carrying on a business will need to be licensed. It is important that before starting any business, the founders are aware of these stipulations to avoid disputes later.

Business name

If the business is being carried on under any name other than that of the full name of its founders, then the name needs to be registered with ASIC. This is a simple and inexpensive process but still required in Australia.

Tax File Number (TFN)

An Australian Tax File Number (TFN) is a personal reference number for taxation purposes. While a TFN is not required for personal use, but the tax fees are substantially higher without one. Furthermore, without a TFN it becomes impossible to obtain an Australian Business Number.

Australian Business Number (ABN)

Every business after July 2000 is required to have an Australian Business Number (ABN)[Link to a ABN Application page], which can be attained through the Australian Taxation Office (ATO).

Register for Good and Service Tax (GST)

If the business has a GST turnover of $75,000 or more a year in income, they are required to register their business for GST.

Example Scenario of Partnership of Individuals

Example 1:

Rachel and Bill are hairdressers operating out of the same building. They established a general partnership agreement two years ago to enable them to work together and they both contribute funds to the business. The partnership allows them to pursue their own clients while still generating business for their partner. In this way, Rachel and Bill are able to take advantage of the positive aspects of the partnership. They are able to avoid the negative aspects of the partnership, such as joint and several liability, by operating in an industry in which they are unlikely to be sued.

Example 2:

Ted and Thomas have worked in advertising for other companies since they graduated university. They are considering starting a business together and their advisor suggested a partnership as creating a partnership is a simple process and remarkably inexpensive. The partnership would allow Ted and Thomas to diversify their client base and hire employees to supplement their work load. In addition, as they work in an industry in which they are unlikely to be sued. 

Partnership of Discretionary Trusts

Overview

A partnership of discretionary trusts is a more complicated form of a partnership than a partnership of individuals but it provides an added level of security. Like a simple partnership, this model is still an agreement where the members agree to share both the rewards and the consequences of a business, among other terms set out in the partnership agreement. The key difference is that if the partnership incurs debts which it cannot pay, it is the discretionary trusts that share the liability for the debt, not the individuals.

Partners

A partnership is defined as a relationship between persons carrying on a business in common with a view to profit. As such, the partners in a firm are those directly carrying on the business. Anyone able to enter into a contract is able to become a partner. It is also important to state that the partners share liability in the event that the firm incurs debts. The partners will be discretionary trusts (typically with company trustees), with a separate discretionary trust for each person who would otherwise be a partner.

Formal requirements

While a partnership can be established through oral agreement or implied by conduct, most partnerships are created through a written agreement referred to as a partnership agreement. This agreement typically stipulates the conduct under which the partnership will be run and details which may be used to help settle a dispute at a later date. In addition to the partnership aspects, to establish a partnership of discretionary trusts, individuals need to create a discretionary trust for each founder. As such they will need to complete a trust deed to detail the terms of their individual trusts.

Laws pertaining to the business field

Individuals participating in the business will need to follow laws relating to their business field. For example, an electrician carrying on a business will need to be licensed. It is important that before starting any business, the founders are aware of these stipulations to avoid disputes later.

Business name

If the business is being carried on under any name other than that of the full name of its founders, then the name needs to be registered with ASIC. This is a simple and inexpensive process but still required in Australia.

Tax File Number (TFN)

An Australian Tax File Number (TFN) is a personal reference number for taxation purposes. While a TFN is not required for personal use, but the tax fees are substantially higher without one. Furthermore, without a TFN it becomes impossible to obtain an Australian Business Number.

Australian Business Number (ABN)

Every business after July 2000 is required to have an Australian Business Number (ABN), which can be attained through the Australian Taxation Office (ATO).

Register for Good and Service Tax (GST)

If the business has a GST turnover of $75,000 or more a year in income, they are required to register their business for GST.

Examples Scenario of a Partnership of Discretionary Trusts

Example 1:

Terresa and Susan are doctors working in a general practice together. They formed the practice a few years ago so that they could combine their specialisations and expand their client base. Combining their skill set was an easy decision, however, both Terresa and Susan were worried that they might be liable if one of them became the focus of a malpractice suit. The addition of discretionary trusts provides an added level of protection between each of them and the practice so that if the practice incurs debts, it is the trusts, not the individuals that are liable for what is owed. It also enables them to distribute income from the partnership through their discretionary trusts to members of their respective families who are on the lowest marginal tax rates,.

Example 2:

Jack and Scott are lawyers who have just resigned from their previous jobs at a law firm and have moved to a different state to start their own firm. They have elected to go with a partnership of discretionary trusts so that in the event that the firm is sued, they are both protected from incurring debts. Similar to medical practices, forming a partnership allows Jack and Scott to expand the expertise that the firm can offer. Structuring the firm this way means that they can grow their business at a stable rate.

Unit Trusts

Overview

A unit trust is designed to hold assets and distribute profits to individual unit owners. This is instead of reinvesting the profits back into the trust. A unit trust is ideal for holding property or land that is not considered the principal place of business for a business.

Trustee

In the case of a unit trust, trustees monitor the fund manager to ensure that the trust is managed according to the terms of the trust deed and that it adheres to the investment objectives described in the trust deed.

Unit Holders

Unit holders are the owners of the rights of the trust’s assets. The total value of a unit portfolio is made up of the total value of each unit. Each unit does not necessarily share the same value.

Formal Requirements

While a trust can be created through oral or implied conduct, it is more ideal to create a trust through the establishment of a trust deed. The trust deed details the terms under which the trust will be run and, in most cases, the responsibilities of the various individuals participating in the trust. A trust deed can also be used after the establishment of the trust to resolve disputes that arise as the business is being carried on.

Laws pertaining to the business field

Individuals participating in the business will need to follow laws relating to their business field. For example, an electrician carrying on a business will need to be licensed. It is important that before starting any business, the founders are aware of these stipulations to avoid disputes later.

Business name

If the business is being carried on under any name other than that of the full name of its founders, then the name needs to be registered with ASIC. This is a simple and inexpensive process but still required in Australia.

Tax File Number (TFN)

An Australian Tax File Number (TFN) is a personal reference number for taxation purposes. While a TFN is not required for personal use, but the tax fees are substantially higher without one. Furthermore, without a TFN it becomes impossible to obtain an Australian Business Number.

Australian Business Number (ABN)

Every business after July 2000 is required to have an Australian Business Number (ABN) [Link to a ABN Application page], which can be attained through the Australian Taxation Office (ATO).

Register for Good and Service Tax (GST)

If the business has a GST turnover of $75,000 or more a year in income, they are required to register their business for GST.

Example Scenarios of Unit Trusts

Example 1:

A group of individuals want to enter the share market together. They each invest $10,000 in the fund. The combined fund allows them to take advantage of areas of investment that they would not have been able to gain access to without combining their money. Furthermore, they are able to diversify, which makes their investment safer. The individuals create a unit trust to be managed by a fund manager and name themselves trustees so that they are able to guide the unit trust towards their own goals. In addition, they are also the unit holders and hold a number of units with the same net value as each other. This means that if one decides to drop out, that person can sell their units and leave the trust without affecting the others.

Example 2:

Jason is a developer who wants to develop a piece of land. He creates a unit trust and invites investors to invest capital in the trust. Jason takes on the position as trust manager and creates units for each of his investors equal to the amount of capital they invested. This allows Jason the opportunity to develop the land with a level of capital that he would not have had access to otherwise. When Jason has finished developing the land, the investors can redeem their unit shares and gain property at the end of the transaction. 
 

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