IMPORTANCE OF THE RIGHT INFORMATION:

SELF EMPLOYED BUSINESS STRUCTURES/

TAXATION

Presenter: Luis Aleixo Managing Director LA Partners Presentation Date: 5 May 2011

Overview 1. Structures:

a. Trusts & Companies; b. Owners getting money out of business c. Common areas of mistakes - business structures d. Common areas of mistakes - finance restructures e. Areas of frustration from an Accountant dealing with financiers

2. Negative Gearing & Capital Gains

a. Impact of negative gearing b. Depreciation (rates and free deduction) c. Borrowing Costs d. Capital Gains Tax e. Buy Investment Property in Individual name or Discretionary Trust? f. Negative Gearing - Primary Objective or Secondary Objective?

3. Risk Insurance and the importance to business/individuals

a. Life/Trauma (Buy/Sell Agreement) b. Income Protection

4. Super Gearing

a. Overview b. Demand by Clients

5. Questions

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1. Structures a. Trusts & Companies

• Trusts

• Types of Trusts

• Discretionary Trusts (Non-Fixed Entitlement) • Unit Trusts (Fixed Entitlement) • Hybrid Trusts (mixture of Non-Fixed & Fixed)

• Trust Roles

• Principal (ultimate power in controlling trust) • Trustee (Legal representative of trust) • Beneficiary (Receives income distributions) • Settlor (person that starts the Trust but can never receive any

Trust benefit)

• Taxation Treatment – Generally the Trust does not pay income tax • Government’s latest views on discretionary trust and ability to distribute

to children

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• Companies

• Types of Companies

• Private (Pty Ltd) • Other – Public Non-Listed (Ltd), Public Listed (Ltd)

and No Liability (NL) • Company Roles

• Director (Appointed by Shareholders to Manage

the company) • Secretary (ensures all company compliance

matters are addressed) • Shareholders

• Taxation Treatment – Taxed in its own right at 30% • Government reviewing company tax rate

• Other Structures - Partnerships

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Discretionary Trust

(Activity: Property

Holding Entity)

Discretionary Trust

(Activity: Business

Holding Entity)

Individual/Company

As Trustee For

BUSINESS PTY LTD

(Activity: Business)

100%

Company

As Trustee For

Examples of Structures: 1

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Discretionary Trust

(Activity: Property

Holding Entity)

Discretionary Trust

(Activity: Business

Entity)

Company

As Trustee For

Company

As Trustee For

Examples of Structures: 2

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b. Owners getting money out of businesses

I. Wages/Salary/Directors Fee II. Consultant/Management Fees III. Dividends IV. Loan

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c. Common areas of mistakes - business structures

I. Business Trusts with Individual owners as Trustees (Asset

Protection);

II. Business Trading Trusts/Business Trading Companies with appreciation assets owned by the same entity (Asset Protection);

III. Unit Trusts/Companies with Individuals as owners of units/shares in entity (Asset Protection and Tax Planning);

IV. Real Estate Property owned by companies (no CGT Discounting).

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d. Common areas of mistakes - finance restructures

I. Financiers having lack of knowledge of finance structure – See Accountant’s advice on client’s finance structure;

II. Refinancing - Paying out deductible debt and

raising refinanced debt as non-deductible;

III. Debt used to fund business activities secured against Real Estate Property not structured correctly.

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e. Areas of frustration from an Accountant dealing with Financiers/Mortgage Brokers

I. Financiers/Mortgage Broker not understanding client’s structure, and as a result not understanding income sources for the group;

II. Mortgage Broker not able to articulate to

Financier client’s structure;

III. Financier/Mortgage Broker not having an understanding of add back items from Taxable Income to Adjusted Income: • Depreciation • Interest • Tax Benefit items claimed for tax purposes

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2. Negative Gearing & Capital Gains a. Impact of Negative Gearing The power of negative gearing is demonstrated in the following example

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Summary of Property Income & Expense For the End of Financial Year

Item Amount

Rental income $15,600

Rental Management ($1,248)

Loan Interest ($16,250)

Rates etc. ($3,000)

Cash flow Loss ($4,898)

Fit out depreciationA ($3,000)

Capital works deductionB ($4,500)

Tax Loss ($12,398)

A. $30,000 x 10% = $3,000 (assessed by engaging Quantity Surveyor) B. $180,000 x 2.5% = $4,500 (assessed by engaging Quantity Surveyor)

Given the details above, a summary of Bob's tax position is:

Bob with no property

Bob with investment property

Salary $75,000 $75,000

Property tax loss - ($12,398)

Taxable income $75,000 $62,602

Total Tax + Medicare ($22,087) ($16,444)

Using this information we can calculate an after-tax summary to establish whether or not Bob has created wealth with his property investment.

Bob with no property Bob with investment property

Salary $75,000 $75,000

Cashflow loss - ($4,898)

Income tax ($22,087) ($16,444)

After-tax cash flow $52,913 $53,658

CONCLUSION Despite the fact that the property brings about a negative cash flow, Bob nevertheless has more after-tax income available ($53,658 compared with $52,913) as a result of buying this property.

Combining the above information, we can make a comparison of Bob’s after tax cash flow with an investment property, with an investment property but no Tax Depreciation Schedule and Bob without an investment property:

Bob with Property but with out Meridian report Bob with no property Bob with Property and Meridian report

Salary $75,000 $75,000 $75,000

Cash flow loss ($4,898) - ($4,898)

Income tax ($19,711) ($22,087) ($16,444)

After-tax cash flow $50,391 $52,913 $53,658

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b. Depreciation Rates (rates and free deduction)

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c. Borrowing Costs

• Borrowing Costs? • Loan Establishment fees; • Mortgage Insurance; • Registration Fees; • Mortgage Stamp Duty; • Valuation Fees.

• Timing of Deduction: • Claimed over 5 years or the term of the

loan (which ever is less).

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d. Capital Gains Tax

• Profit Calculation – Residential Investment • Sale Price (less Agents Fees and selling

costs) • Less Purchase Price (incl Stamp Duty &

purchase costs) • Gross Capital Gain

• Tax Payable

• Gross Capital Gain included with your other income in your tax return (if property held less that 12 months);

• If property held 12 months or more, then only half the Gross Capital Gain is included with your other income in your tax return;

• If taxpayer is on top tax bracket already, then Capital Gain included in tax return is taxed at 46.5%.

e. Buy Investment Property in Individual name or Discretionary Trust?

• Tax payer is on wages • Tax Payer who is in business

f. Negative Gearing – Primary or Secondary Objective?

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3. Risk Insurance and The Importance to Business/Individuals

• Life/Trauma (Buy/Sell Agreement)

• Income Protection

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4. Super Gearing

a. Overview

b. Demand by Clients

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Questions?

Contacts Details: Phone: + 61 7 3010 9285 Mobile: 0419 781 713 Email: Luis@lapartners.com.au Skype: luisaleixo1 Web: www.lapartners.com.au Street Address: Level 7, 320 Adelaide Street, Brisbane Qld 4000 Disclaimer: In preparing any advice in this document it has not taken into account any particular persons objectives, financial situation or needs. Investors should, before acting on this information, consider the appropriateness of this information having regard to their personal objectives, financial situation or needs. We recommend investors obtain financial advice specific to their situation before making any financial investment or insurance decision. The information contained in this document is general information only made available to residents of Australia and its territories and is not intended to be a recommendation, offer or invitation to take up securities or other investments. You should seek advice from an appropriately qualified professional on whether the information is appropriate for your particular needs, financial situation and investment objectives. LA Partners is not liable in any way to any person for any loss, damage, cost or expense incurred as a result of the material contained in this document or from unauthorised access to, or any misuse of this document including, without limitation, any negligence by LA Partners.