How to minimise tax and protect your assets

By GLENN SMITH

In our last article (Why even small businesses should go corporate), we discussed various company structures open to the small-business owner.

Clearly, the best structure for asset protection and tax minimisation was the limited liability company (or incorporated company). Here we expand on advantages of this structure and give tips to discuss with your accountant or tax adviser.

Asset protection You probably have your personal wealth tied up in a few key assets such as your home, car(s), beach house and/or rental property, investment accounts and shares/bonds.

Many businesses, sometimes through no fault of their own, get into financial difficulty and end up owing considerable sums. Receivers and creditors are relentless at seeking their money, and if your personal assets are not protected they can be seized to pay business debts.

It is critical for your personal assets to be kept separate from any business dealings. The best way to start protecting your assets is to have the business set up as a limited liability company. The term "limited liability" means that the liability (risk) of the shareholders is limited to the amount of money they have put in. This differs from other business structures, such as the sole trader or partnership, where the shareholder's liability usually extends to include all of their personal assets too.

In an upcoming article we will examine family trusts as a way of further protecting your personal wealth. However, the minimum first step for any small-business person is to set themselves up as a limited liability company, which is cheap (around $300) and easy to do (takes a day or two). Unless you behave illegally or negligently, you will instantly reap the benefits of enhanced asset protection.

Tax minimisation If you were to add up what you pay in PAYE and/or company tax, GST, import duties, council rates, petrol taxes, school fees, alcohol taxes, and even the tax on lotto tickets, and if you are a high-income earner (more than $60,000 yearly), you will be paying about 65 per cent of your income in taxes. Low-income earners pay around 45 per cent.

That means, as a high-income earner, you may be working from January 1 to August 24 for the Government. For free. There is little you can do to avoid paying this level of tax. Avoidance might land you in more financial difficulty, even jail.

Smart business owners concentrate less on tax-avoidance and more on tax-recovery. It is critical that you position yourself to claim back the maximum amount of tax each year. Some tax-recovery is simple, such as claiming GST paid and the cost of employing staff. Some tax-recovery is not so obvious, but equally important. A visit to a good accountant or tax adviser will pay dividends as you prepare your plan. Here are some questions to ask yourself:

* Do I have the best possible business structure to take advantage of tax deductions?

* Am I claiming for space I use at home to run my business, including part of the rates, insurance, mortgage interest, repairs and power?

* Am I claiming work-related home costs such as internet connection, child-minding and vehicle expenses?

* Am I claiming my travel expenses when I combine personal travel with business travel (attending a seminar, researching a market, networking with other business owners)?

* Am I splitting income among shareholders to take best advantage of lower tax rates?

Remember to always be diligent and aggressive when you claim business expenses. It is your money you are clawing back.

* Glenn Smith runs a company formation business and is the HomebizBuzz company formations expert. HomebizBuzz offers a free company name check service.