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AYB205 - Week 1 and 2- Sole Traders

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AYB205 – LAW OF BUSINESS ENTITIES LECTURE 1: SOLE TRADERSHIP LAW Sole Trader  A sole trader is a person who carries on business alone, without the use of a company structure and without partners.  A sole trader has complete control including ownership of all profits, business assets and personal responsibility for all debts. Why a Sole Trader?  Tax Considerations o Income taxed at personal tax rates; o Income losses offset against other income; o Operating losses carried forward indefinitely; o CGT small business concessions; o Income splitting for tax offsets not allowed.  Asset Protection o Personally liable and all unencumbered assets are exposed – UNLIMITED LIABILITY  Business Risk o Capital investment o Insurability o Revenue Stream (cash or debtor) Advantages Disadvantages  Simple and inexpensive to setup  Unlimited personal liability and operate  Health and Lifestyle  Full operational control  Limited tax concessions  No profit sharing  Limited costs concessions, e.g.  Privacy of operations vehicle ownership costs  Relatively simple to sell business  Limited growth potential  Minimal winding-up costs  Difficulty raising capital  Some tax advantages Small Business  Broadly, a small business will have: Defined differentially in different acts o Assets ≤ $20M; o Annual Income (Y) ≤ $2M p.a. o Employees ≤ 20 full-time person equivalence All sole traderships are small businesses but not all small businesses are sole traders Carrying on a Business  ‘Carrying on business’ includes establishing a place of business and soliciting or procuring any order from a person in the State. Business Names Act 1962 (Qld) s3 o For the purposes of this Act a person shall not be regarded as carrying on business within the State for the reason only that within the State the person —  Is or becomes a party to any action or suit or any administrative or arbitration proceeding, or effects settlement of an action, suit or proceeding or of any claim or dispute; or  Maintains an account at a financial institution; or  Effects any sale through an independent contractor; or  Creates evidence of any debt or creates a charge on real or personal property; or  Secures or collects any of the person’s debts or enforces the person’s rights in regard to any securities relating to such debts; or  Conducts an isolated transaction that is completed within a period of 31 days, but not being 1 of a number of similar transactions repeated from time to time; or  Invests any of the person’s funds or holds any property. Working Out If You Are Operating A Business (ATO)  If you are in business: o The money you earn from your business activities is generally assessable income; o You can generally claim a deduction for the expenses you incur in earning that income; o You may be able to offset any loss you incur against other income you earn or carry the loss forward to offset future income. o If your activities are a hobby, the above points do not apply. Capitalisation/Funding  Usually small capital base to start business, sourced from: o Home Mortgage o Bank Finance o Overdraft o Business/Personal Loan o Credit Cards and Credit Lines o Angel Investor, e.g. family, friends, business associates o Dependant on: o Personal asset base to secure credit; o Demonstrated ability to service debt; and o Creditworthiness Start-Up Administration  The following administrative matters need to be undertaken by all business types: o Register for an Australian Business Number (ABN) o Register for a Tax File Number (TFN) (will invariably already have one) o Register for GST – payment can be made through ATO Business Portal  Business Activity Statements (BAS) can be submitted monthly, quarterly or annually depending on turnover and PAYG withholding values o Non-Compulsory:  Superannuation for Associated Persons RUNNING A SOLE TRADERSHIP Managerial/Regulatory Issues  All businesses must deal with the following at some point in their lifecycle, but can be particularly onerous for Sole Traderships: o Adherence to a myriad of business law and regulation; o Adherence to a blizzard of zoning, town planning and environmental regulations, including adherence to fire regulations, asbestos management and other cleanliness and safety matters, plus licensing, permits and council by-laws. o Asset and Income Protection Insurance. Capital Gains Tax (Div 152)  Small Business CGT Concessions Basic Conditions Tests o Maximum Net Asset Value Test: the entity must be a small business entity or a partner in a partnership that is a small business entity, or the net value of assets that the entity and related entities own must not exceed $6,000,000; o Active Asset Test: the divested asset must be an active asset; o Controlling Individual Test: essentially, 90% of the controlling ownership of the asset must be a small business.  Small Business CGT Concessions o 15-year Asset Exemption –  Assets owned for >15 years exempt from CGT on realisation if owner is >55yo and retiring/incapacitated. o 50% Active Asset Reduction  Applies to all small businesses who qualify. o Retirement Exemption  Where owner is <55yo and rolls capital gain over into superannuation. o Asset Rollover Concession  Where an asset is sold at a profit but the funds are reinvested within a certain time period in another asset. Other Tax Issues  Deductions o Motor vehicles, travel, capital allowances, operating losses, employee-related, etc.  Substantiation of Expenses/Deductions o Record keeping and document management – an absolute must for all business managers.  The ATO provides extensive assistance, support and technology for record keeping. Personal Services Income  The PSI rules were essentially a measure designed to stop people claiming business benefits when they are not really running a business.  Income generated in the following ways is not PSI: o By selling or supplying goods. Income from selling or supplying goods, such as retailing, wholesaling or manufacturing, is generally not PSI as the income is not mainly a reward for your skills, knowledge, experience or efforts. o Using an income-producing asset. Income from an income-producing asset, such as a bulldozer or printing press, is generally not PSI as the majority of the income is generated by the asset. o Granting a right to use property. Income from granting a right to use property, such as copyright to a computer program, is generally not PSI as the majority of the income is generated from the right to use the property. o Through a business structure. Income from a business structure, such as a large firm, is generally not PSI as the majority of the income is generated by the significant assets, many employees or contractors, sizable operations or goodwill of the business s
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