Question 1 Sharon runs a lawn mowing business (which is GST registered) and she decides to employ her son Keith in the business. Sharon pays Keith wages of $100,000 per annum – whereas if she had hired someone else to do the work she would have paid the person only $55,000. Sharon thinks this ‘extra’ amount to Keith is okay because it is paid due to ‘natural love and affection’ and it helps Keith with paying his expenses (such as attending university). Keith is 17 years of age. Discuss the tax treatment of these payments to Keith when the business is conducted as: sole trader (with Sharon the sole trader) general partnership (with Sharon and Keith partners) general partnership (with Sharon and another person Melanie as partners) corporation (with Sharon as sole shareholder) trust (with a corporation set up to act as Trustee. Sharon is the sole shareholder of the corporate trustee, and both Sharon and Keith are potential beneficiaries). Question 2 Michelle Walters is a 34-year old Australian tax resident and is a pathologist. Michelle wants to set up her pathology business with another colleague, Jamie Stousar. The business will be known as ‘WaltSar Pathology’. Michelle and Jamie are not sure what type of entity should they use in running their business. Michelle and Jamie have both agreed to share their income equally. The business assets will include medical rooms from Macquarie Medical Hospital at a cost of $800,000 and expects furniture and fittings will cost $200,000 (the ‘business assets’). Michelle has the funds to purchase the business assets, whereas Jamie is not able to contribute to them. To provide Michelle some asset protection is thinking of acquiring the business assets through a discretionary trust, who will then lease the assets to WaltSar Pathology’. Michelle expects that WaltSar Pathology will generate a net income of at least $1,200,000. Michelle envisages that she and Jamie will need to work 50 hours a week for the first few months, before settling backdown to about 40 hours a week. This will make it difficult in terms of Michelle’s family, given that she has three children: Joel 18 years of age and a university student, Jacob 13 years of age, and Lucy 10 years of age. Jack, Michelle’s husband has agreed to give up his work and look after the children. He also would like to be involved in the administration of the business. Jamie on the other hand, is married and has no children. A colleague told Michelle that she should set up a Phillips (service) Trust. Michelle has approached you requesting the following advice: a)How can Michelle and Jamie split their income and minimise their tax payable with a Phillips (Service) Trust? How will it work? What are the ways that money/profits could be taken out of the company? What the issues to be mindful of with the company? What are the issues to consider with the distributions from the discretionary trust? b) Should Michelle or another entity buy the assets? Michelle requires asset protection. c) Will Michelle’s business need to become registered for GST ? Why or why not?
Question 1
Sharon runs a lawn mowing business (which is GST registered) and she decides to employ her son Keith in the business. Sharon pays Keith wages of $100,000 per annum – whereas if she had hired someone else to do the work she would have paid the person only $55,000. Sharon thinks this ‘extra’ amount to Keith is okay because it is paid due to ‘natural love and affection’ and it helps Keith with paying his expenses (such as attending university). Keith is 17 years of age.
Discuss the tax treatment of these payments to Keith when the business is conducted as:
- sole trader (with Sharon the sole trader)
- general partnership (with Sharon and Keith partners)
- general partnership (with Sharon and another person Melanie as partners)
- corporation (with Sharon as sole shareholder)
- trust (with a corporation set up to act as Trustee. Sharon is the sole shareholder of the corporate trustee, and both Sharon and Keith are potential beneficiaries).
Question 2
Michelle Walters is a 34-year old Australian tax resident and is a pathologist. Michelle wants to set up her pathology business with another colleague, Jamie Stousar. The business will be known as ‘WaltSar Pathology’. Michelle and Jamie are not sure what type of entity should they use in running their business. Michelle and Jamie have both agreed to share their income equally.
The business assets will include medical rooms from Macquarie Medical Hospital at a cost of $800,000 and expects furniture and fittings will cost $200,000 (the ‘business assets’). Michelle has the funds to purchase the business assets, whereas Jamie is not able to contribute to them. To provide Michelle some asset protection is thinking of acquiring the business assets through a discretionary trust, who will then lease the assets to WaltSar Pathology’.
Michelle expects that WaltSar Pathology will generate a net income of at least $1,200,000. Michelle envisages that she and Jamie will need to work 50 hours a week for the first few months, before settling backdown to about 40 hours a week. This will make it difficult in terms of Michelle’s family, given that she has three children: Joel 18 years of age and a university student, Jacob 13 years of age, and Lucy 10 years of age. Jack, Michelle’s husband has agreed to give up his work and look after the children. He also would like to be involved in the administration of the business. Jamie on the other hand, is married and has no children.
A colleague told Michelle that she should set up a Phillips (service) Trust. Michelle has approached you requesting the following advice:
a)How can Michelle and Jamie split their income and minimise their tax payable with a Phillips (Service) Trust? How will it work?
- What are the ways that money/profits could be taken out of the company?
- What the issues to be mindful of with the company?
- What are the issues to consider with the distributions from the discretionary trust?
b) Should Michelle or another entity buy the assets? Michelle requires asset protection.
c) Will Michelle’s business need to become registered for GST ? Why or why not?
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