A good reason for setting your business structure up correctly is to ensure that you can become an employee to access some of the tax concessions available.
As a sole trader or partnership you cannot be an employee and so this tax tip is not available to those who use this business structure.
When it is time to sell or transfer your business we want to try to minimise the tax liabilities and maximise the amount of cash that you can get.
One often overlooked, but very important, tax concession is redundancy payments.
A genuine redundancy payment is a payment made to you as an employee who is dismissed because the job you were doing has been abolished.
Depending on your employment conditions, for example amounts your employer is required to pay under the industrial agreement or employment contract, a genuine redundancy payment may include:
* payment in lieu of notice;
* severance payment of a number of weeks pay for each year of service;
* a gratuity or ‘golden handshake’.
So, what has this got to do with my business and my status as an employee?
Great question you have asked here!!
Any payments that meet the conditions of a genuine redundancy are tax free up to a limit based on your years of service with your employer. The tax-free limit is a flat dollar amount plus an amount for each year of completed service in your period of employment with your employer. Indexation changes the tax-free limit on 1 July each year.
So if you are an employee of your own business that is being sold or transferred in 2020, the base rate is $10,989 plus $5496 for every year of completed service.
Therefore, if you have been an employee of your own business for say, 10 years, then you can take out of your business – tax free $65,949. This payment is also tax deductible to your business.
Furthermore, these formula amounts are indexed each year!
Remember, when you sell or transfer your business this redundancy payment is a payment made to you as an employee who is dismissed because the job you were doing has been abolished!
So why would you not want to re-structure your business if you are a sole trader or partnership? Please don’t hesitate to get in touch with us if you have a question.
Have a great day!