Financial Planning for Small Business Owners in Australia

The structure through which you operate your business affects your tax rate, asset protection, super obligations, access to CGT concessions, and complexity of administration. Choosing the wrong structure at the start can be costly to unwind - but the right structure for year one may not be the right structure forever.

• Sole trader: Simplest structure. All business income is your personal income - taxed at marginal rates (up to 47%). No asset protection - personal assets exposed to business creditors. Cannot access the 30% company tax rate. Easiest to set up (ABN only), cheapest to run. Suitable for: early-stage, low-risk businesses with modest income or where profitability is uncertain.
• Company: A separate legal entity - pays tax at 25% (base rate entity with turnover <$50M) or 30% on business income. Provides asset protection (company assets separate from personal assets - though directors can be personally liable for certain debts including unpaid wages, SGC and GST). Access to the 50% CGT discount is forfeited on company-held assets. Profits retained in the company are taxed at 25-30% - not distributed until a dividend is declared. Higher setup and compliance costs ($600–$1,500/yr ASIC, separate tax return).
• Discretionary (family) trust: Trustee controls distribution of income to beneficiaries each year - allowing income splitting to lower-rate family members (subject to PSI and trust-tax rules). Individual beneficiaries accessing the 50% CGT discount on trust capital gains. No fixed tax rate - taxed in hands of beneficiaries. Does not provide asset protection in the same way a company does (trustee remains liable). Trust losses cannot be distributed to beneficiaries - they are trapped inside. Common structure for family businesses where income splitting is the primary objective.
• Company + trust (hybrid): A discretionary trust distributes income to a company beneficiary - taxed at 25-30%, retained for reinvestment. Income not needed personally can accumulate at the lower company rate. Distributions to individual beneficiaries when needed at lower marginal rates. More complex and costly to establish and administer - typically appropriate for businesses generating $200,000+ of profit annually.
• PSI rules - critical restriction: If the business income is primarily derived from the owner's personal services and skills (consulting, contracting, professional services), the PSI rules restrict income splitting via trusts and companies. The results test (multiple clients, own equipment, risk of loss) can establish that PSI rules do not apply - but must be carefully documented. Get advice before structuring.

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Division 7A of the Income Tax Assessment Act 1936 is one of the most misunderstood and most frequently triggered tax provisions for private company owners. It treats loans, payments and forgiven debts from a private company to shareholders or associates as deemed dividends - fully assessable, with no franking credits.

• What triggers Division 7A: (a) Loans from a company to a shareholder or associate (spouse, children, related entities) not documented as a complying loan; (b) Payments from the company to shareholders/associates that are not wages, dividends or repayment of a shareholder loan; (c) Use of company assets by shareholders/associates without market-value consideration (e.g. using a company car personally, living in a company-owned property).
• The complying loan solution: A loan from a company to a shareholder can avoid Division 7A if it is documented as a complying Division 7A loan - written agreement, minimum interest rate (the ATO benchmark rate for 2024-25 is 8.77% per annum), and minimum annual repayments over a term of 7 years (unsecured) or 25 years (secured against real property). The minimum repayments must actually be made - not simply journalled.
• The benchmark rate for 2024-25: 8.77% per annum - set by the ATO each year based on the Reserve Bank indicator lending rate for small businesses in May of the prior year. Interest must be paid (not just accrued) by 30 June each year or the interest is itself caught by Division 7A.
• UPE - Unpaid Present Entitlements: If a trust distributes income to a company beneficiary but does not actually pay the money over, the amount is an Unpaid Present Entitlement (UPE). ATO tax rulings treat sub-trusts or complying loan arrangements as required for UPEs to companies. This is a highly complex area - get specialist advice before 30 June each year.
• Consequences of a Division 7A breach: The deemed dividend is assessable income of the shareholder in the year the breach occurs - no franking credits attached. On a $100,000 loan deemed dividend at 47% marginal rate, this is $47,000 in additional tax. The ATO has been actively reviewing Division 7A compliance - it is one of the top audit triggers for private company owners.

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Australia's small business CGT concessions are among the most generous tax provisions available - potentially eliminating CGT entirely on the sale of a business. But the rules are specific, and eligibility is not automatic.

• Basic eligibility conditions: The entity selling the asset must satisfy either: (a) the $2 million maximum net asset value (MNAV) test - the net value of assets of the entity AND its affiliates AND connected entities must not exceed $2 million at the time of sale; OR (b) the small business entity (SBE) test - aggregated annual turnover of the entity AND connected/affiliate entities is less than $2 million. The asset sold must be an 'active asset' (used in the business, or a share in a company/interest in a trust that is an active asset).
• The four concessions (stackable in order): (1) 15-year exemption - if the asset has been continuously held for 15+ years by an individual aged 55+ who is retiring or permanently incapacitated, the entire capital gain is exempt. Cannot be combined with the other concessions. (2) 50% active asset reduction - reduces the capital gain by 50% (applied after the general 50% CGT discount for individuals, if eligible - effectively reducing the assessable gain to 25% of the original). (3) Retirement exemption - the remaining gain (after the 50% active asset reduction) can be exempt up to a lifetime limit of $500,000 per individual; amounts must be contributed to super if the individual is under 55. (4) Rollover - the remaining gain can be rolled into a replacement asset (purchased within 2 years) - deferring the CGT event.
• Practical example - stacking concessions: Business premises sold for $1,000,000, cost base $200,000, gain $800,000. (1) General 50% CGT discount (if individual, held 12+ months): $400,000 assessable. (2) 50% active asset reduction: $200,000 assessable. (3) Retirement exemption up to $500,000: entire $200,000 exempt. Final assessable gain: $0. Tax payable: $0. The $200,000 retirement exemption amount must be contributed to super if the owner is under 55.
• Contribution of retirement exemption to super: The retirement exemption amount (up to $500,000 lifetime) that is contributed to super does NOT count against the non-concessional cap - it goes in under a special CGT cap ($1,705,000 for 2024-25, indexed). This allows business owners to make substantial super contributions on sale that would otherwise be barred by the NCC cap.
• Professional advice is mandatory: The small business CGT rules interact with the individual's personal circumstances, the entity structure, the nature of the asset, and timing of the sale in complex ways. Tax adviser and legal advice before executing a business sale is not optional - the cost is trivial relative to the potential tax saving.

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Business owners often neglect superannuation - the business itself is viewed as the retirement asset. This creates dangerous concentration risk. A balanced approach treats super and the business as complementary retirement pillars.

• The concentration risk problem: A business valued at $1.5M is not a diversified retirement asset - it is a single illiquid asset with key-person risk, market risk, and buyer risk. If the business cannot be sold (no buyer, key person illness, sector downturn), the 'retirement asset' may be worth a fraction of its expected value. Super provides a genuinely diversified, liquid retirement pool alongside the business.
• Maximise concessional contributions throughout the business lifecycle: Business owners have the same $30,000 concessional cap as employees (2024-25). Personal deductible contributions (with Notice of Intent) allow the business owner to contribute and claim the deduction - reducing assessable business income. If the business is operated through a company or trust, the business entity can make contributions directly on behalf of the owner as employer contributions.
• Carry-forward and the $500,000 balance test: If the owner's total super balance is below $500,000 at 30 June of the prior year, unused concessional cap space from up to 5 prior years can be carried forward - allowing a very large tax-deductible contribution in a high-income year or in the year of business sale.
• Business succession planning: A business succession plan addresses: (a) who will own and run the business if the owner dies or becomes incapacitated; (b) how the business will be valued and transferred; (c) buy-sell agreements funded by life insurance (key person insurance); (d) whether family members will inherit the business or a cash payment equivalent. Without a succession plan, a business owner's death can force a distressed sale at a fraction of fair value - destroying the family's primary asset.
• Key person insurance: Insures the business against the financial impact of losing a key person (typically the owner or a critical employee) - covering lost revenue, loan repayments, or the cost of finding a replacement. Premiums are generally tax-deductible to the business where the purpose is revenue protection. Premiums for capital replacement (e.g. repaying a business loan on death) are not deductible.

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