![Setting up a family discretionary trust may be the best tax vehicle for this child care operator.](/web/20151218075633im_/http://www.theage.com.au/content/dam/images/g/l/6/b/0/d/image.related.articleLeadwide.620x349.gln1pt.png/1450070258700.jpg)
Setting up a family discretionary trust may be the best tax vehicle for this child care operator. Photo: Peter Braig
When a husband and wife go into business choosing the wrong business structure to own and operate the business through can cause major problems. In addition to paying too much income tax, if the wrong structure is used, the family's assets can be put at risk in the event of a business failing.
Q. I and my husband are looking to start up a business of a family day care centre. I will be involved in day to day running of the business and he will deal with administration tasks. He also works full-time for an insurance Company.
Can we form a family partnership with different shares of partnership income as he will be earning sizeable employment income? If not can we register a different kind of partnership that will allow us to have different profit distributions?
A. I am not sure whether you are getting mixed up between using a family discretionary trust with a partnership to own and operate the family day care business. With your husband being in full time employment you need to choose a business structure that means his share of the business profits result in tax being paid at too high a marginal tax rate.
The marginal tax rate paid by most Australians, including the 2 per cent Medicare Levy, is 34.5 per cent. This rate applies to income earned of between $37,000 up to $80,000. Income of between $80,000 up to $180,000 has a Medicare inclusive tax rate of 39 per cent.
Partnerships are often started without a partnership agreement being drawn up. In this situation the relevant legislation, which is on a state-by-state basis, decides what can happen within the partnership. If you decided to have a partnership you should have an agreement drawn up that allows for the partnership income to be distributed differently from the ownership of the business.
By this I mean you and your husband could be 50 per cent owners of the day care centre, but the profit from the business would be distributed in accordance with a resolution signed by you both as partners.
The ability to distribute more profit from a partnership to a partner with a lower taxable income can also be achieved by recognising that one partner has worked more hours than another. One major problem with choosing a partnership to operate the day care centre would be your personal assets are at risk if you have a major legal claim against your business.
A better option would be for you to set up a family discretionary trust with a company acting as trustee. Family discretionary trusts allow the owners of the business to distribute the net business income amongst their family group to ensure that tax is paid at the lowest possible marginal tax rate.
In addition to the flexibility when it comes to distributing the net business income, by having a company act as trustee for the discretionary trust your family's private assets are protected in the event of the business being sued or failing.
Questions on small business income tax and other issues can be emailed to max@taxbiz.com.au. Max Newnham is a partner in the accounting firm TaxBiz Australia and founder of www.smsfsurvivalcentre.com.au
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