There are five main ways to own and run 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 to a certain degree the owner's personal assets are not put at risk if the business fails.
It is very important to think about this before buying or starting a business as there is likely to be tax consequences of changing structures down the track.
By way of one example: Let's look at a couple running their business through a trust with a company acting as trustee. The couple use their own funds to purchase the business and have a mortgage over their home. How can they operate the business in a tax-effective way based on their structure? They are also planning to purchase a car. Can they claim this in the business? If so, how much can they claim?
Well choosing to own and operate your business through a family discretionary trust means any profits made by the business can be distributed amongst family members, ensuring that tax is paid at the lowest possible individual marginal tax rate.
One area that can affect this effectiveness is structure of loans. As a general rule it is best to use personal funds for personal purposes and to borrow (if necessary) for business or investment purposes.
In this case even though the couple chose a trust to own and run their business, they can still correct the mistake of having used cash to purchase it.
In order to do this however the trust will need to have financial statements and accounts maintained. Assuming that the business cost $50,000 to set up and purchase, the accounts of the trust would show that the couple are owed about that amount as well.
To improve the tax effectiveness of their current situation they could approach their bank and request that a line of credit or loan facility be set up for the family trust.
Once this facility has been established, the trust would draw down the funds from the bank and transfer the funds to the couple in repayment of the amount loaned to the trust to buy the business. The $50,000 would then be paid off the mortgage.
The effect is interest on the business purchase is deductible as it should have been in any case with proper planning.
The same goes with purchasing a vehicle for the business generally this should also be financed rather than using personal cash if you have a mortgage. A consideration is if you are looking at purchasing a passenger or commercial vehicle - a commercial vehicle is 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 this vehicle, as long as 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.
These are just general examples and may not apply in your situation, please get advice before acting on any information.