Taxation

[Fab]

As anyone got a Commsec account under a Family Trust name ? What are the benefit of it ?

 

[carmo]

You may have read this before........

The difference between a "sharetrader" & a "shareholder"

also look at the examples & the other fact sheets in the right hand column.

rozella

I have been just deducting my buying and selling costs from my profits, have I been doing the wrong thing? Should I have been claiming them as a allowable deduction instead?

 

[Bin57again]

Can anyone recommend a good value no nonsense tax advisor in Sydney? I just want good value straight advice without all the references to the tax legislation. Specifically (I suppose like many of us) I want to know the most appropriate vehicle for me to trade through. Can anyone recommend someone? What sort of hourly rate can I expect to pay? Would the cost of such advice be a deductible?
Thanks.

 

[Bin57again]

Can anyone suggest someone further to my post above. There are more than 100 certified financial planners in central Sydney alone. Can anyone provide a name of someone reliable and their hourly rate?
Thanks.

 

[GreatPig]

As anyone got a Commsec account under a Family Trust name ? What are the benefit of it ?

Not Commsec, but I do have a broking account in a family trust.

The benefits are somewhat dependant on your personal situation, but in general, potential benefits are flexibility in distributing profits (assuming you make any) which can reduce tax, asset protection if the trust fully owns the funds (ie. they haven't just been lent to the trust), and if it's a hybrid trust (combination of discretionary and unit), the ability to negatively gear against a high income earners name while distributing capital gains to low income earners (part of the distribution flexibility).

The main disadvantages are the added cost and complexity.

You really need to discuss it with a knowledgeable accountant.

GP

 

[GreatPig]

By my understanding only...

I have been just deducting my buying and selling costs from my profits, have I been doing the wrong thing?

That is correct if you are classed as an investor (shareholder). The transaction costs form part of the cost base on sale.

Should I have been claiming them as a allowable deduction instead?

Only if you are classed as a share trading business.

As I say though, my understanding only. Check with your accountant.

GP

 

[GreatPig]

Can anyone recommend a good value no nonsense tax advisor in Sydney? ... Specifically (I suppose like many of us) I want to know the most appropriate vehicle for me to trade through.

You could try Nick Moustacas at Strategic Wealth Management. He's good, which for structuring is much more important than being cheap. I can't remember his hourly rate, but I don't recall it being extraordinary on either the cheap or expensive side.

And if you want, you can use him just for the structuring and then another accountant for the day to day stuff and tax returns. If you end up with a trust though, particularly a hybrid trust, you want an accountant that actually knows something worthwhile about them. Many don't.

Would the cost of such advice be a deductible?

I believe so, but am not sure of the exact details. They'd be able to tell you that though if you ring them or send them an email.

Cheers,
GP

 

[Bin57again]

Thanks GP. I'll look into it. Thanks for taking the time to respond. All the best.

 

[two40]

Good thread, very informative. I have something to add/ask.

If the ATO considers you to be carrying on a business isn't it just wiser to apply for an ABN (Sole Trader) and claim all possible expenses? What are the benifits of getting an ABN over simply trading without one? If the ATO considers you to be carrying on a business you might as well act like it and claim GST credits.

eg.

I earn $60k per year from a full time position unrelated to trading.

I earn $25k NET in FY 2007 trading with an ABN as a Sole Trader.

The tax rate had I not traded would have been $2,850 + 30c per $1 over $25k = $13,350

With trading profits the income would see me into the next tax bracket being: $17,850 + 40c per $1 over $75k = $21,850


So in the above scenario the CGT is treated as a component of my income tax and I get taxed at the higher rate. Had I made a loss of $15k I would be taxed at the lower rate ($60k income only) and the loss would be carried over to the next year to offset any profits. So in the next year if I made $25k I could use the $15k loss from the previous year giving me a total income of $60k + $10k = $70k to be taxed at the lower rate being $2,850 + 30c per $1 over $25k.


When carrying on a business of share trading your share purchases become your trading stock ie COGS. Your sales become your Income and Gross Profit is detirmened by Income less COGS. Net profit is the result of deducting all expenses (computer exp, books & mags, part of your rent, electricity etc etc) from your Gross Profit. It is this Net Profit that you treat as your Capital Gain to add to your other income to calculate your tax payable.

Now if you have an ABN and are carrying on a business you will be paying a fair amount of GST for all the expenses incurred and there is no GST collected on income so the tax man will give you a refund when you lodge your BAS.

A benifit of creating a company to trade through is the tax rate of 30% vs the tax rates for personal income which can be as high as ~45%. The more you make the more enticing creating a company is. However, pulling money out of them is Companies have their own pro's and con's which we won't get into here. Trusts are another matter which I cannot comment on.

References:

ATO Tax Brackets

CGT

CGT Essentials

If I've made any errors please correct me.

 

[GreatPig]

If the ATO considers you to be carrying on a business you might as well act like it and claim GST credits.

You need to register for GST as well as have an ABN.

Now if you have an ABN and are carrying on a business you will be paying a fair amount of GST for all the expenses incurred

For share trading, you mainly have GST on brokerage, which is not a lot unless you trade a lot. You then have to trade off the amount you can claim back against the hassle of submitting periodic GST statements (BAS forms).

A benifit of creating a company to trade through is the tax rate of 30% vs the tax rates for personal income which can be as high as ~45%. The more you make the more enticing creating a company is. However, pulling money out of them is

Yes, you have to always remember that company funds are not your funds, and that they can only be utilised for the benefit of the company. Any transaction that is not arms-length (ie. one you would equally do with someone unrelated) may result in those funds being deemed a dividend, with loss of associated franking credits.

So the 30% tax rate is good if you would otherwise be on a higher rate, but only as long as the profits stay in the company. When it comes time to take them out, the only real means is through dividends, which makes who the shareholders are important. The shareholder could be a family trust, but then the company becomes subject to the trust loss provisions which may prevent losses being carried forward (this is the setup I have).

Another potential problem is if you build up a lot of profits with associated franking credits and then the government goes and lowers the company tax rate. That's good for future earnings, but locks some of your existing franking credits in the company, since I don't think you can issue a dividend at a higher franking rate than the prevailing company tax rate. So if you're hoping to just retain earnings until you retire and then start taking dividends, you're risking effectively losing some of the franking credits if the company tax rate is lowered in the interim.

As they say, every silver lining has its cloud...

GP

 

[Duckman#72]

Good thread, very informative. I have something to add/ask.

If the ATO considers you to be carrying on a business isn't it just wiser to apply for an ABN (Sole Trader) and claim all possible expenses? What are the benifits of getting an ABN over simply trading without one? If the ATO considers you to be carrying on a business you might as well act like it and claim GST credits.

When carrying on a business of share trading your share purchases become your trading stock ie COGS. Your sales become your Income and Gross Profit is detirmened by Income less COGS. Net profit is the result of deducting all expenses (computer exp, books & mags, part of your rent, electricity etc etc) from your Gross Profit. It is this Net Profit that you treat as your Capital Gain to add to your other income to calculate your tax payable.

Now if you have an ABN and are carrying on a business you will be paying a fair amount of GST for all the expenses incurred and there is no GST collected on income so the tax man will give you a refund when you lodge your BAS.

A benifit of creating a company to trade through is the tax rate of 30% vs the tax rates for personal income which can be as high as ~45%. The more you make the more enticing creating a company is. However, pulling money out of them is Companies have their own pro's and con's which we won't get into here. Trusts are another matter which I cannot comment on.

References:

ATO Tax Brackets

CGT

CGT Essentials

If I've made any errors please correct me.

Hi two40

You do not have a choice to have an ABN. You are either in business - in which case you must have an ABN or you are an investor.

As for trading through a company structure - just be very careful. They are not for everyone. They can be expensive to setup, complicated and can incur the wrath of the ATO far quicker than trading as a sole trader/partnership.

A couple which invested in joint names would have to make a combined profit of more than $200,000 before it becomes cheaper for them to use a company structure (admittedly they could assess super rules). But the point is a lot of people think to make "big money" they need to set up complicated tax structures which is just not the case.

Duckman

 

[two40]

For share trading, you mainly have GST on brokerage, which is not a lot unless you trade a lot. You then have to trade off the amount you can claim back against the hassle of submitting periodic GST statements (BAS forms).

What about all the expenses? They also have GST which you may claim. With no GST collected it soon becomes a nice little refund and the trouble of filling out BAS forms is nothing really. A Trader would not have an array of transactions to complicate BAS's and many beginners will fall under the $50k voluntary GST registration thus only having to complete one BAS form.

Hi two40

You do not have a choice to have an ABN. You are either in business - in which case you must have an ABN or you are an investor.

So the ATO will actually force you to take up an ABN?


Say, I do have a question for personal tax and the way deductions offset it.

I made $50k in the year. I spent $11k in the year in deductable expenses with a component of $1k in GST. Now, does the whole $11k come off my income making it a taxable total of $39 or is it the net deductable amount of $10k making it $40k. If it's the net amount what happens to the GST portion? Does it offset the tax payable at 100% thus basically having the same effect as it would under a business setup? If the GST does not offset your final income tax payable at 100% then there is no doubt that having an ABN and claiming GST credits is the only way to go for traders.

 

[two40]

I made $50k in the year. I spent $11k in the year in deductable expenses with a component of $1k in GST. Now, does the whole $11k come off my income making it a taxable total of $39 or is it the net deductable amount of $10k making it $40k. If it's the net amount what happens to the GST portion? Does it offset the tax payable at 100% thus basically having the same effect as it would under a business setup? If the GST does not offset your final income tax payable at 100% then there is no doubt that having an ABN and claiming GST credits is the only way to go for traders.

Finally found it. In a nutshell you are better off registering for GST even if you don't have to. Here's why:

GST credits and income tax deductions

Where you can claim an income tax deduction for a business purchase, you claim the amount of the purchase less any GST credit you are entitled to claim. If you are not entitled to claim a GST credit for the purchase, you can claim the full cost of the purchase, including GST, as a deduction.

Example

GST credits and income tax deductions

Alice, a GST-registered computer repairer, buys some stationery for her business. She pays $22 (including $2 GST). Alice is entitled to claim a GST credit of $2 on her activity statement, and $20 as an income tax deduction on her income tax return.

If Alice was not registered or required to be registered for GST, she would not be entitled to claim a credit for the $2 GST, but she could claim the full $22 as an income tax deduction on her income tax return.

So without being registered for GST you can still claim the GST portion of your expense which sounds good right? Yes but there's a catch. Say your tax rate is the maximum at 45c. When you claim expenses to the value of $11k with $1k of GST included you are reducing your income by that amount. If you look at the GST portion only you have reduced your income by $1k so you have saved yourself paying $450 tax. Now this is the maximum rate. Most people would fall in the lower tax rates only receiving $300 or $400.

If you were registered for GST you would be able to claim that $1k completely and the lovely ATO department would send you a nice cheque as proof.

Reference:

GST for Small Businesses

 

[GreatPig]

What about all the expenses?

My trading company doesn't have many other expenses. Accounting fees for doing the tax return might be the main other one, and the annual ASIC fee which I don't think has any GST on it.

I'll have to check with my accountant if he's claiming an input credit for the GST component of his own invoices.

GP

 

[Fab]

Not Commsec, but I do have a broking account in a family trust.

The benefits are somewhat dependant on your personal situation, but in general, potential benefits are flexibility in distributing profits (assuming you make any) which can reduce tax, asset protection if the trust fully owns the funds (ie. they haven't just been lent to the trust), and if it's a hybrid trust (combination of discretionary and unit), the ability to negatively gear against a high income earners name while distributing capital gains to low income earners (part of the distribution flexibility).

The main disadvantages are the added cost and complexity.

You really need to discuss it with a knowledgeable accountant.

GP

How do you trade . Do you have a bank account under your family trust name ?
How can the money be own by the trust without you earning it first and transfering it to the family trust account ?

 

[GreatPig]

Do you have a bank account under your family trust name ?

I hold shares in two different entities: a trust for investment and a company for trading. Each entity has its own bank account.

How can the money be own by the trust without you earning it first and transfering it to the family trust account ?

It can't. Even profits earned within the trust itself have to be distributed.

If this question relates to my comment about asset protection if the trust fully owns the funds, then that can be achieved through gifting (rather than lending or buying units).

However, gifting is less flexible for you, in that you can't just take the money back if you suddenly need it for something personal, so you might want to weigh that against the real risk of your being sued.

GP

 

[Duckman#72]

So the ATO will actually force you to take up an ABN?

Hi Two40

You seem to be confusing an application for an ABN with voluntary registration for GST.

If you "a trader" in the eyes of the ATO then you are in business. As you are in business you therefore require an Australain Business Number. There are no choices. What you need to do is feel comfortable that you would pass the criteria put forward by the ATO to be connsidered in business.

Whether of not you register for GST is entirely up to you. Yes you are correct in that from a cash flow view point you are getting more back by being in the GST system.

Regards

Duckman