Navigating the Home Renovation Tax Credit Minefield

Home Renovation Tax Credit

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The kind of Renovation Tax Credit you can receive all depend on how you set up your business. All home renovation tax deductions are calculated according to the way you set up your business. Also the way you set up your business will influence what home renovation grants you may be able to take advantage of. But let’s talk about business options and renovation tax deductions…

In Australia, you have four main options available to structure your business. Each option has its own advantages and disadvantages, so you’ll have to review them carefully (with the help of an expert advisor) to select the one that’s appropriate for your situation.

The Sole Trader Option

With this option, you are the business. It’s the simplest and easiest business structure to set up and run. In addition, you don’t have to register a business name in the event you prefer to use your own.

Advantages – Beyond being easy to set up, the Sole Trader Option allows you to stay in complete control of your business, and you retain all profits. There’s also very little paperwork.

Disadvantages – You have 100% responsibility. You’re financially liable. It’s hard to take time off when you’re the sole owner. And because you’re the sole proprietor, it can be harder to get financing. Finally, it can be difficult to change ownership if you decide to sell the business.

In terms of taxes, business profits are treated as personal income. That means you pay income tax on them, using your own tax file number

In order to set up a Sole Trader structure simply trade in your own name or register a business name in each state where you’ll trade. Costs vary by state, ranging from $60 in the Northern Territory to $224.50 in Queensland (for three years)

Register for an Australian Business Number (ABN) on the Australian Business Register and register for the Goods and Services Tax (GST) if you’ll turn over more than $75,000 a year. You can register for GST when you apply for your ABN.

In terms of ongoing administration, you’ll need to complete a Business Activity Statement (BAS) and personal income tax returns.

The Partnership Option

With this option, all partners own the business and its assets jointly, and they’re all equally responsible for any debts.

Therefore, this means that even if you only own, say, 5 or 10% of the partnership, you’re still personally responsible for 100% of the debts (and so are your partners). Your rights are governed by the Partnership Act along with your partnership agreement.

Advantages – The Partnership Option is pretty easy and cheap to set up. It’s also easier to share responsibility and get financing with the resources of one or more partners.

Plus, there’s little ongoing paperwork and/or red tape.

Disadvantages – As stated above, you’re personally responsible for all of the liabilities of the partnership. Right from the start, you must also make sure you and your partners will get along; otherwise, some pretty bitter battles can erupt. Also, changes of ownership can be difficult, especially if there are several partners

In terms of taxes, a partnership is not a legal “person” of its own and doesn’t pay tax.

However, it does need to have a tax file number and file a return.

Business profits are distributed among the partners, and each one pays income tax on those profits.

Register your business name or trade under the partners’ names, register for an

Australian Business Number (ABN) on the Australian Business Register and a tax file number, and register for the Goods and Services Tax (GST) if you’ll turn over more than $75,000 a year.

Generally speaking, you should ask a lawyer to draw up a partnership agreement, which currently costs about $1,000. In terms of ongoing administration, you’ll need to complete Business Activity Statements (BAS) and partnership income tax returns.

The Company Option

A company is a separate legal “person” and has a life of its own. This means that you get an extra level of flexibility in terms of managing your business affairs. It also reduces your personal responsibility for business liabilities and debts.

Currently, your exposure is limited to the “paid up capital” of the company. This is the amount you and other shareholders have paid to own shares in that company.

However be aware that lawmakers are taking a close look at this arrangement so speak with a professional about its present status. Also, be aware that lenders will often ask you for a personal guarantee.

Advantages – As stated above, you have reduced personal liability. You also have flexibility in distributing profits to other share holders (like family members). It’s also much easier to sell or transfer ownership compared to the Sole Trader or Partnership options.

Disadvantages – As with any more complicated structure, there’s more paperwork.

There’s also higher compliance requirements and set up costs.

In terms of taxes, the company is currently subject to the company tax at a flat rate of 30%. Profits can be reinvested in the company or paid out to the shareholders as dividends. Those dividends can come with “franking credits” which are credits for the tax already paid by the company, thus reducing the shareholders’ tax. Finally, the company can claim a tax deduction for directors’ wages and other salary costs.

In order to set up this option, you’ll need to create a new company or buy a “shelf” company and register it with ASIC. You’ll also need to register for an Australian Company Number (ACN), an ABN on the Australian Business Register and a tax file number. You’ll also need to register your business name and register for GST. Set-up costs will range from $1,500 to $2,000.

In regard to ongoing administration, you’ll have to maintain and supply annual company returns, Business Activity Statements (BAS), and company tax returns (from around $1,000 annually).

The Trust Option

A trust is run by a trustee for the benefit of the beneficiaries of that trust. The beneficiaries and trust rules are spelled out in the “trust deed.” As you can tell, this is the most complicated option available to you.

With a discretionary trust, the trust has considerable flexibility in distributing each year’s income among the beneficiaries. This means that while the trust normally pays no tax itself, it can give you significant tax planning opportunities. Also, because the trustee is personally responsible for the debts of the trust, it can limit your liability, especially if the trustee is a company.

Advantages – In addition to reduced personal liability, you have flexibility in distributing profits to beneficiaries. It’s also easy to sell or pass on ownership.

Disadvantages – There’s definitely more paperwork with this option.  There are also higher compliance and set-up costs. In addition, a trust has a limited life (normally 99  years). In relation to tax matters, each year’s profits are distributed to the beneficiaries, who pay tax on that amount. Generally speaking, the trust doesn’t pay tax; however, there are some exceptions.

In terms of set-up, register your business name or trade under the trust name, register for an Australian Business Number (ABN) on the Australian Business Register and a tax file number, and register for the Goods and Services Tax (GST) if you’ll turn over more than $75,000 a year. Also, you should generally ask a lawyer to draw up a trust deed; the cost runs around $1,000.

Finally, you’ll need to maintain Business Activity Statements (BAS) and the appropriate income tax returns.

So, there you have it – a review of the basic business structures within Australia.

Now, which one do we choose for our business?

That’s something you can find out about in the Renovating Riches Quick Cash Profits System… Plus you’ll learn everything there is to know about running and succeeding in a profitable renovation business.

You can access this system by clicking on the link below

CLICK HERE to access the Renovating Quick Cash Profits System

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