Key Legal Implications of Having a Company Car

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A car can be used as an incentive for employees. Employees can use an executive car to meet with their clients. A truck or van can be used to deliver your products. These and more are many reasons why investing in a car for your business makes sense. But having a company car isn’t without its legalities. Here are some of them:

Costs, leases and taxes

You, as the business owner, are required to pay for various expenses including the registration, insurance, maintenance and the fuel costs of your vehicle. You have to factor in these items when you’re planning for the purchase of a vehicle or fleet.

The company, an employee and a leasing company may enter into a 3-way agreement to pay for a car. This is called a novated lease. The lease payments are made by the company using the pre-income tax of the employee. This reduces their taxable income and they get a car. Draw up a contract that lays out clearly the conditions and the costs for using the car.

The business owner may have to pay the FBT, or fringe benefits tax, if you or your employee uses the car for private reasons:

  • Parking the vehicle at or near an employee’s house, even if they’re not allowed to utilise it privately
  • Parking the vehicle in house that is also used as a place of business
  • Driving the car to and from the office.

Ask your tax agent for more information about novated leases

Vehicle surveillance and employee privacy

A car is an investment, so it’s wise to track its location for security reasons. GPS trackers will do the task of telling the vehicle’s location, speed and other information. There is no law yet in Queensland requiring an employer to inform their employee if they plan to install such device. But it is still a good idea to notify your employee.

Accident and damages

If the company car gets involved in an accident, the business owner is liable for the cost of damages even if the vehicle was being driven by the employee. The amount may be claimed from your insurance, but you may have to pay for the excess.

In some cases, you will not be required to pay for the damage. These may include:

  • If the employee was driving the vehicle to work but got into an accident while doing something illegal such as driving under the influence of an illegal substance.
  • If the employee was driving to work but intentionally caused the accident
  • If the employee was driving the car for private purposes.

Know more about the legalities of company vehicles by consulting with your accountant. PJS Accountants can help you organise your tax affairs. We work with large companies, SMEs, family businesses and individuals. For enquiries, contact PJS Accountants.

Trust Explained

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“A fiduciary relationship in which one person (the trustee) holds the title to property (the trust estate or trust property) for the benefit of another (the beneficiary)” – this is how trust is defined in the dictionary.

Reasons to set up a trust

To protect assets is one of the major reasons for creating a trust. A trust can protect assets and property from creditors, it can look after an estate until such time when a beneficiary reaches legal age to take ownership, or keep valuable assets separate from a trading company that may be exposed to risk, like litigation.

If set up properly, a trust can be used to lawfully reduce some tax obligations. However, this can be a delicate matter, as the taxman is constantly watching for individuals or corporations who are taking advantage of the loopholes or over-stretching the limits for lowering taxes. It is advised that you seek specialised advice on this matter.

The word “trust” is used inappropriately in these types of arrangements. A trust is an official entity overseeing a responsibility, where “beneficiaries” put their trust (or confidence) in the one who controls the assets (called trustee) for their benefit.

Another party in a trust structure is a “settlor,” the person who provides the initial trust asset (which can be money or property like a house) in order for the trust to be formed. There is also the “appointor,” the person with the power to appoint, replace or remove trustees.

Fiduciary duty of a trust

This relates to isolating control from beneficial ownership. The trust allows for a business or assets to be controlled by a third party (trustee) who has the legal control and has the responsibility to run that business or oversee the assets for the benefit of another party (beneficiaries).

Distributions and tax

The usual tax laws govern how a trust computes its taxable income for the year. The income is either distributed or kept by the trustee. Income received by beneficiaries will be taxable at their own marginal rate. On the other hand, the trustee, (on behalf of the trust), must pay tax on any taxable income that is retained by the trust. Top rate (including Medicare levy) is used to tax undistributed income.

When income is distributed to each beneficiary, the trust must consider the financial, taxation and personal situation of each beneficiary so that income is distributed in a manner that benefits everyone. Naturally, the terms of the trust deed bound the trustee.

Types of trust

A fixed trust is where the share that beneficiaries own in assets and income (which can be absolute or proportional) are fixed or pre-determined, giving no flexibility for the trustee to adjust income distribution. A typical fixed trust is a unit trust, as each unit owned in the trust entitles a beneficiary to a specific share of the income and/or capital.

A discretionary fund gives the trustee the discretion to choose which beneficiary receives income from the trust. This must be distributed based on the terms of the trust deed.

A hybrid trust has elements of both discretionary and fixed trusts. It can be a discretionary trust having some rights that are pre-determined by the trust deed, or a unit trust having discretionary distribution options. A hybrid trust is characterised as anything that is neither completely discretionary nor completely fixed.

Family trusts

A hybrid or discretionary trust can typically be a family trust to obtain tax breaks, if the trustee chooses to do so. However, distributions have to be limited to members of a certain family group. Only the income distributed outside of this group will be taxable at the highest marginal rate (plus Medicare levy).

There are various reasons to set up a family trust. First, a discretionary trust’s beneficiaries may otherwise be unable to benefit from franking credits ascribed to share dividends obtained by the trust and distributed to beneficiaries. Second, it would otherwise be more difficult for the trust to utilise previous tax losses versus the present year income.

Ownership issues

Another reason to set up a trust is if means or assets tests for government benefits are a possibility in your financial future. A trust can help re-allocate legal ownership without fully sacrificing the benefits you get from the assets.

Consideration for inheritance is the other side of asset protection. If a major asset, a beachfront property for example, is owned by a trust, and there are conditions for the sale and/or maintenance of the property specific in the trust deed, family members born later will also be able to benefit from the property and not have some irresponsible cousin just sell it off.

Getting the trust structure right can be a challenge. There could be instances in which asset protection and taxation would be competing interests, and great consideration should be given to other trade-offs for taking advantage of the trust structure.

There are some areas of trust that are complex, so if you are considering setting up a trust it would be wise for you to seek expert advice from a lawyer and an accountant.

Are you considering setting up a trust? Ask your lawyer or accountant for guidance, or contact PJS Accountants. We offer accounting and other bookkeeping services to individuals and companies, big and small. Allow our team to evaluate your business and advise you on the right measures to create an excellent financial management strategy for you.

Protect your Assets through Family Trust

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A vital part in planning your will is the creation of a family trust. It can entail terms and conditions to protect your assets that you will leave behind and guide your family in handling the financial consequences of inheriting your wealth.

Testamentary trust

The Australian Tax Office (ATO) defines testamentary trust as a trust that is created in keeping with an individual’s provisions in their will. To be exact, the trust doesn’t exist till the individual who wrote instructions in their will dies.

When this happens under the provisions of the will, the beneficiaries could be offered the alternative of gaining their inheritance within a testamentary trust, instead of coming into it directly.

By creating a testamentary trust, you make sure that a trust over your estate is set up on the day you die, meaning that your fortune will not be distributed directly to your beneficiaries but will be held on behalf of your beneficiaries through a trusted organisation or person.

Testamentary trusts have different kinds. In estate planning, however, a testamentary trust is discretionary, meaning the trustee can decide which beneficiaries named will receive capital or income from the trust fund.

Why provide for the creation of a trust in your will?

Not everyone can benefit from setting up a discretionary testamentary trust. However, for people to whom it is the right option, the benefits are:

  • Tax effectiveness
  • Protection of the bequeathed assets

Tax effectiveness

As an example, a husband or a wife dies leaving behind two children and a spouse. A standard will provides that the spouse who died would leave their fortune to the surviving spouse. Normally, if both husband and wife die they will instruct that their wealth be distributed equally among their children.

In this case in which only one spouse dies, the estate’s assets would go to the surviving spouse.

The spouse still living would then be taxed on the income and capital gains made from those assets using his or her marginal tax rate. This means the amount of tax could increase considerably and any unearned earnings shared to the offspring below 18 years old would be covered by a penalty tax rate.

When there are children or grandchildren below 18, inheriting assets under a testamentary trust can provide more tax advantages. The reason is that Division 6AA of Part III of the Income Tax Assessment Act provides that a child below 18 years of age who get income from a trust created through a will would be covered by adult tax free threshold of $18,200, for 2012-2013 and 2014/2015, and marginal tax rates.

Protection of assets

What this means is the wish to make sure that the wealth is kept in the family for the gain of immediate loved ones.

Asset protection is also important in the event of a marital breakdown. People prefer that their wealth is inherited by their lineal descendants and not to worry about half of their fortune being given to a child’s former spouse.

Another motivating factor in creating a testamentary trust is the protection against a child’s bankruptcy, as the assets are held by a trust instead of turning into the direct asset of the child.

Another case where a testamentary trust may be useful is when there is a child with disability. It allows for the assets to be utilised for the benefit of the disabled child who may not be capable to managing financial matters after their parents die.

Things to consider when setting up a trust

Before setting up a testamentary trust, here are a few things to consider:

  1. Know the amount of asset it becomes beneficial to create a testamentary trust. Testamentary trusts basically bring the biggest advantage for massive estates with several children.
  2. Work out who you will name as the trust’s trustee – of which you are allowed to name more than one. One trustee can be an independent third party such as an accountant or a lawyer, and the other trustee is the trust’s main beneficiary.

There are people creating a will who may want to think about naming an independent trustee because they want to make sure that every beneficiary’s best interests are taken care of and the sharing of assets is not affected by factors like family politics. Doing this offers an additional level of safeguard over assets.

On the matter of considering the structure of the trust, it is best to consult an expert, such as an qualified accountant specialising in estate planning or an estate planning lawyer.

PJS Accountants offers a full range of services, including tax planning and compliance, accounting and SMSF services, and bookkeeping. For enquiries regarding our services, contact PJS Accountants.

The Basics of Trust and Business Asset Protection

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Trust

A trust structure is a tool that provides flexibility to investors and businesses. It is a way for income to be distributed to lower income earners, assets to be safeguarded and wealth to be passed on to the next generation with little trouble and minimal or zero tax.

There is no “one-size-fits-all” form of trust, so be careful of someone who tells you there is. There are several factors to consider when determining the right type of trust for you. These include the type of business or asset, income type, financing, marital status, and vulnerability to being sued.

A trust is essentially a promise or an agreement. It involves a company or an individual agreeing to hold assets for the benefit of another. The trustee is the one who holds the assets, while beneficiaries are those who benefit.

Having legal control, though merely legal title, allows the trustee to purchase and sell asset, but has no right to own or enjoy the benefits of ownership. All legal documents, bank accounts, etc. contain the trustee’s name.

Such documents do not mention the beneficiaries’ name. They have beneficial ownership, meaning they enjoy usage, income, profits and other benefits of ownership, though the legal title is in the trustee’s name.

A trust is created to put a distinction between control and ownership. This way, assets are protected and profits are dispensed with in the most tax efficient manner.

Business asset protection

It is a sad reality that some industries and professionals are more vulnerable to being sued than others. Asset protection can benefit all business owners, but not all businesses.

Doctors, soloists and other professionals with significant plant or equipment, or maybe intellectual property, are types of businesses that must think about setting up some method of asset protection.

But remember – get sufficient insurance as a stop-gap before considering asset protection.

A business that owns plenty of expensive machinery, equipment or intellectual property should maintain these items separately from the trading entity.

In case a professional or business undergoes litigation, their holdings are safe as they are held by a different entity and utilised under a license agreement.

In such a case, what the owners have to do is to just wind up the trading entity, create a new one and draft another licence agreement.

A good analogy to use is likening a business to a tree, with the most vital part being the main trunk. Though branches may sometimes fall but the trunk continues to grow. All things possible are done to keep the tree growing and not let anything hurt it. Like a business or in investing, never neglecting it and always protecting it.

Seek advice and guidance from professionals regarding trusts and business asset protection. PJS Accountants offers a full range of services, including tax planning and compliance, accounting and SMSF services, and bookkeeping. For enquiries regarding our services, contact PJS Accountants.

Leasing vs. Buying your Business Assets

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Small business owners usually lack the money on hand to buy business assets outright without tightening their cash flow. On the other hand, ownership can also be appealing.

So, what’s the right option for you: lease or buy?

Financing choices

There may be times when you can’t get a hold of cash to purchase business assets straight away, or you are saving your cash on hand for other more important uses. When it comes to purchasing and financing business assets, several options are available to you.

Equipment loans

This is suitable if you wish to own a business asset, such as key plant or equipment, outright. In most cases, you can claim a tax deduction on the interest payable on the loan.

Hire Purchase

If you eventually wish to own the asset, but don’t want to use your available cash, then a hire purchase (HP) agreement may be more suitable. This agreement involves the bank or financier buying the asset and hires it to your business for a prescribed period of time.

Finance lease

With finance leases, the bank initially owns the equipment and leases it to you for an agreed period of time. The rental payment can be arranged with a residual value balance, which allows you to buy the asset when the agreement ends. This options lets you better manage the initial cash flow.

Perhaps, you can opt to lease equipment for a prescribed time period, which brings its own benefits such as being more flexible and being more certain with regards to your cash flow.

Is buying your premises the right decision?

Possibly one of the most important decisions confronting small businesses is whether to lease or purchase business premises. Having ownership of commercial real estate can be attractive; the premises could turn into a major asset for your business, delivering possible capital growth while you avoid paying rent to a third party. There’s also the feeling of security with owning your premises.

By buying your premises, you can also borrow against the asset and use it to expand your business. In some cases, there could also be benefits in buying business spaces using your superannuation fund.

Cons of ownership

The significant amount of money you need is one of the disadvantages of purchasing business premises. You may also be required to provide a personal guarantee by the lender or mortgage company.

There is also minimised flexibility with ownership in case you need to move your business, downsize or upsize. If the nature of your business or its operations is specialised, you may have difficulty in selling a niche asset fast.

Lastly, the infusion of money into a property purchase can possibly cost you precious opportunities; it may minimise the possibility for investment in other productive assets of your business. Small business owners should ask themselves what is more important: concentrating on their primary business competencies or on real estate ownership.

For businesses that are just starting out, the flexibility brought by a short-term lease could be more beneficial until your business is on better footing.

Tax and ownership structure implications

Before making financial decisions, make sure to get familiar with all the various tax and ownership structure implications. It is recommended that you consider seeking advice from a licensed taxation accountant or financial planner.

Other business asset classes

There are various purchase or financing strategies to choose from for different business asset classes. For instance, a novated lease agreement is suitable in cases where the staff of a business utilise cars. This type of agreement, signed between the employer, employee and financier, deliver flexibility to employees while cutting down administration costs.

In the age of information technology, leasing assets for shorter prescribed periods may be more appropriate for small businesses, as it lowers the risk of obsolescence because certain IT equipment becomes outdated fast.

Cash flow requirements

The type of business you run will offer opportunities to maximise your cash flow and ultimately decide which way you will go: rent or buy your business assets.

How and when would your business assets earn money for you? When considering the answer, keep this simple rule in mind: it is illogical to fund an asset for a period longer than the length of time it is useful.

What is the situation with your cash flow? Is your business earning a steady cash flow, or does your business experience seasonal variations? The smart thing to do is prepare comprehensive projections to compare scenarios and allow you to prepare appropriately.

The major financial decisions you have to make for your business are determining how and when to buy assets. So, seek the help of your accountant, financial planner, and in certain cases, your small business banker.

Expect to make many major decisions when running your own small business, including whether to buy or lease equipment. Before deciding, seek the advice of your accountant or a financial expert. PJS Accountants, chartered accountants, offer a full range of services including accounting, taxation, business improvement, superannuation, business valuations, asset protection, succession planning, estate planning and bookkeeping. Contact PJS Accountants for enquiries.