What's the best structure? Episode 4 - Complexity and cost

How much work and cost is it to maintain these structures? And is it worth while? Find out here.

Tax Snap available from Resources tab.

Next episode: Episode 5 - Scenarios

Date published: 1 September 2021

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TRANSCRIPT

Anyway, the next category really is complexity, and cost to maintain. So it's basically the way that we have been speaking about them. The whole time is the kind of scale of simple to complex. 

Sole traders 00:14

So sole traders, very easy to setup. So, you just need to lodge an individual tax return with the business schedule. And maintaining them, is fairly easy. No cost to set up either. You just need to register and apply for an ABN. 

Partnership 00:27

Partnership. Basically the same thing, except you do need to lodge a separate tax return. So it goes up in the cost of maintain a little bit because you've got to lodge separate tax return to your individual and then lodge that individual with its distribution.

Company 00:39

Companies. It goes up again. You have to, it, it costs you have to set it up, ASIC fees. You've got to create a company. There's legal documents. It can be anywhere, you know, a thousand bucks to 5,000 bucks to set up a company depending on what you're trying to do with it. And, you know, generally there might be 1500 bucks to set up. Yeah. But so that's just the cost to create it. 

And then you've got to pay for a tax return. Andyou got to pay ASIC fees every year. There's corporate compliance you've got to maintain. And they should have financials prepared. Well so yeah, it's definitely stepping up in cost and definitely complexity.

So the area we, where people get lost and stuck, especially if they're coming from a sole trader into a company is pulling cash out of the company. Division 7A, that adds to the complexity massively. Yeah, exactly. FBT. Suddenly your motor vehicle has extra cost, it's the complexity of maintaining a company is significantly greater than a partnership.

You mentioned worker's comp? I did not. Got to pay workers' comp on your own wages. Yep. As an employee, as you know, sorry. You are an employee of that business now. There's all sorts of complications there.

Trust 1:50

 A trust costs even more to set up and is a little bit more complex again. So you have all those same issues that we just spoke about. But you also have the added complexity of trust distributions, and creating a distribution statement and all of that kind of stuff that goes with it. 

Yeah, Trust's done wrong can go very wrong. So trusts done wrong may not even exist yet. People think they exist, but they might not even exist. That's a trust deed that hasn't been executed. 

Or people just struggle to grasp with the concept of how the trust works, because they've got all this money in the business bank account. And they're like, but I paid tax on the amount of cash in the bank account, right? Like, no. Oh, okay. But I distribute the cash with the income, don't I? No. You pay tax on the profit. You pay tax on the income minus the expenses in the trust. You don't pay tax on what the cash you've got left or how much cash has gone to each person. That is tracked, and that is important because if you're distributing your income to someone, they could come and ask for that cash, which adds to the complexity again. You're going to really consider who you're distributing income to.

So trust. Yeah, definitely the most costly, most complex. But easier to get cash out of. Easier than a company to get cash out of yet. So less complex in that nature. 

Yeah. I'd say overall more complex than a company. Just because the nature of trust are complicated. The law around trust is complicated. However, there are some more simplicities to it like taking cash. Yeah. So that's an, that's a nice thing that trusts do. 

And the reason it's more expensive to set up is you're setting up a company if you want that asset protection and a trust. And you're going to pay stamp duty to set up that trust, which is just a government tax for setting trusts up, which is in New South Wales, $500. Yeah. In Victoria is $200. So so yeah, it's, it's it's a highest on the spectrum. Yep. Absolutely.