Quick Guide to Companies

Key Positions:

• Director: Oversees and manages the business, responsible for its operations.
• Shareholder: Individuals or entities that own shares in the company.

Entity Characteristics:

• A company is a separate legal entity from its owners, enjoying the same rights as a natural person.
• Offers limited liability, protecting members’ personal assets from company debts.

Taxation:

• Possesses its own Tax File Number (TFN), Australian Business Number (ABN), and lodges its own tax returns and business activity statements.
• Pays taxes directly to the Australian Taxation Office (ATO) at either 25% (for business activities) or 30% (as an investment entity) of taxable income.
• Personal Services Income (PSI) rules apply.
• Division 7A rules apply to loans made to individuals, requiring interest charges (taxable income to the company) and repayment over seven years. Mandatory dividends (taxable income to shareholders) may apply if funds are physically repayments are not made.
• Tax credits from paid taxes can be passed through to shareholders with franked dividends.
• Tax losses cannot be offset against other entities.

Drawings:

• Can pay members through wages or dividends, or both.
• Wages require PAYG withholding, superannuation contributions, and work cover. STP reporting requirements apply. (Work cover doesn’t cover directors.)
• Superannuation paid late is not tax-deductible and incurring penalties and interest.
• Fringe Benefits Tax (FBT) applies to company-owned vehicles used by shareholders or employees.

Best Practice:

• Prepare financial statements annually alongside tax returns to track financial position of company.

Responsibility:

• Directors may be personally liable for company debts if they act against its best interests or sign a director guarantee.
• The Director is responsible for ensuring the company meets all obligations, including tax filings and employee payments.

 

Shareholders/Dividends:

• Shareholders are established when company setup naming individuals or entities who own the shares. Shares can be sold, however this will trigger a Capital Gains Event for the Shareholder.
• Who is entitled to receive dividends from the company, and is therefore taxed on the dividends, is pre-set, and cannot be changed year to year.
• Therefore, to be able to control who is taxed on dividends from company, a Family Trust needs to be the shareholder of the company (see Trusts in Australia Guide).

 

Summary:

Pros:

• Limited liability shields shareholders’ personal assets.
• Operates independently, owning assets and conducting business activities.
• Can accumulate profits and handle taxes independently, offering potential tax advantages.

Cons:

• Higher setup and closure fees compared to other entities.
• Annual fees from ASIC apply.
• Increased administrative workload, for example, meeting requirements when paying business owners wages.
• Additional accounting fees compared to sole traders.
• Directors may face personal liability for company debts if legal obligations are not met.