A trust will own the business with a company acting as trustee. My wife is the director and will be operating the business on a full-time basis. We used 100 per cent cash to purchase this cafe but we currently have a mortgage for our house. How can we operate the business to be most tax-effective based on our structure? We are planning to purchase a car. Are we able to claim this for the business? If so, what can we claim?
There are five main ways to own a business: as an individual, a partnership of individuals, a family discretionary trust, a unit trust or a company. Owning and operating a business through the last three structures provides some tax benefits and the owner's personal assets are not put at risk if the business fails.
A. Choosing to own and operate your business through a family discretionary trust means you are using the most tax-effective structure. Any profits made by the business can be distributed amongst your family members, ensuring that tax is paid at the lowest possible individual marginal tax rate.
One area that can affect this effectiveness is your choice of finance. As a general rule it is best to use cash funds for personal purposes and borrow for business or investment purposes. Thankfully because you chose a trust to own the business you can correct the mistake of having used cash to purchase it.
Your trust will need to have financial statements and accounts maintained. Assuming that the restaurant cost $50,000 to set up and purchase, the accounts of the trust would show that you are owed that amount. To improve the tax effectiveness of your current situation you should approach your bank and request that a line of credit or loan facility be set up for your family trust.
Once this facility has been established, the trust would draw down the funds from the bank and transfer them to you in repayment of the amount you loaned to the trust. The $50,000 would then be paid off your home loan.
If you're purchasing a car for the business this should also be financed rather than using personal cash. If you are looking at purchasing a commercial vehicle - in other words one designed to carry more than one tonne - you would be able to claim 100 per cent of the interest on the loan and the running costs for the vehicle, as long as you have another vehicle and the business vehicle is not used for private purposes.
If the vehicle is a normal passenger vehicle you will need to keep a logbook for 12 weeks to establish what the business use of the vehicle is. You will then be able to claim the business percentage of the interest and running costs for the vehicle.
