Small and Medium Enterprises (SMEs) employ 48 per cent of the Australian workforce and comprise 96 per cent of all businesses in Australia. Additionally, the Australian Bureau of Statistics shows that the average age of small business owners is 45 years. Given this large number of self-employed individuals (the majority of whom have families), financial planners need to take greater care in advising this segment of the market to ensure they maximise their Government support entitlements.
The Family Assistance Office provides Australian families with support related to the costs of raising children via the Family Tax Benefit (FTB) Part A & B.
FBT Part A is paid for dependent children up to and including the age of 20 years, and for dependent full-time students up to the age of 24 years (who are not getting Youth Allowance or similar payments like ABSTUDY or Veterans' Children Education Supplement).
The current rates are:
Maximum Rates of Payment* |
||
|---|---|---|
For each child |
Per fortnight |
Per year |
Under 13 yrs |
$156.94 |
$4,803.40 |
13-15 years |
$204.12 |
$6,033.45 |
16-17 years |
$50.12 |
$2,018.45 |
18-24 years |
$67.34 |
$2,467.40 |
*Maximum rate is paid up to a family income of $44,165 and is reduced by 20 cents for every extra dollar of income. Annual figures include the $711.75 per child supplement for 2009/10.
Base Rates of Payment* |
||
|---|---|---|
For each child |
Per fortnight |
Per year |
Under 18 yrs |
$50.12 |
$2,018.45 |
18-24 years |
$67.34 |
$2,467.40 |
*Part-payment at the base rate is available up to a family income of $94,316 (plus an additional $3,796 for each dependent child after the first child).
FBT Part B gives extra assistance to sole parent families and to families with one main income where one parent chooses to stay at home or balance some paid work with caring for their children.
Base Rates of Payment* |
||
|---|---|---|
For each child |
Per fortnight |
Per year |
Under 18 yrs |
$50.12 |
$2,018.45 |
18-24 years |
$67.34 |
$2,467.40 |
* Note this includes the supplement payment of $346.75 p.a.
If the primary earner's income is $150,000 or less, then:
To maximise these payments we need to understand the definition of ‘income’ for FTB Part A and B. The income assessment for these benefits is based on the families ‘adjusted taxable income’ which includes:
Taxable income has the same meaning as in the Income Tax Assessment Act 1997. It is the amount of an individual’s assessable income received for a relevant income year, less any allowable deductions. Individuals can utilise the previous years ATO assessment to determine this figure.
Fringe benefits are benefits (other than cash) that an employee receives from their employer. An individual’s adjusted fringe benefit is based on their assessed reportable fringe benefit which can be found on an employee’s payment summary. The reportable amount is the grossed-up value of the fringe benefit. The adjusted fringe benefit is then calculated using the following formula:
Adjusted Fringe Benefits = Reportable fringe benefit x (1 – FBT rate)
From 1 July, the Government has introduced changes to the definition of ‘adjusted taxable income’ by adding back
This new income assessment has made it harder for financial planners to recommend appropriate financial strategies to help clients maximise their entitlements to the FTB but there are still opportunities for many SME clients.
To demonstrate this benefit lets focus on a case study.
Peter and Susan are aged 42 and 38 respectively. They have two young children aged 10 and eight. They have recently been made redundant from their long term employers where they were each earning $60,000 p.a. They both received a total net redundancy package of $250,000. They have both decided that they would like to have a career change and have decided they want to focus on starting their own business (which they are looking to purchase shortly utilising part of the funds from their redundancies). They will use the remaining payment to repay their home mortgage.
They have stated that they will require approximately $50,000pa to cover living expenses and other expenses (e.g. car, petrol) will be paid from the company. They would like to retain profits within the business to help it grow. They have found an existing specialist retail business that they would like to purchase that has weighted average EBIT figures (assuming no debts) over the last three years of $150,000pa.
They would like advice regarding their options about how to structure the business and how it might impact on their entitlements to Government support payments given they previously haven’t been eligible for benefits.
Assuming the net profit for the business in 2009/10 will be $160,000. What benefits will they be entitled to based on various business structures.
Benefits |
Sole Trader |
Partnership |
Company Structure |
Discretionary Trust Structure |
|---|---|---|---|---|
Tax Rate |
Marginal Tax Rate (MTR) |
50/50 at MTR – Peter & Susan |
Flat tax rate of 30% |
Taxed at beneficiaries’ MTR. If no beneficiary is presently entitled to income, it is taxed at 45%. |
Limited Liability |
No |
No |
Yes |
Yes |
Eligible for FTB Part A & B |
No |
No |
Maybe, depending on salary paid and dividend income received by Peter and Susan |
Maybe, depending on salary and distribution income received by Peter and Susan. |
Maximum Annual FTB Part A & B Payment |
NA |
NA |
Pay salaries to optimal level (discussed below). |
NA |
To maximise their family payments it would be best that the business is held within a company structure with Peter and Susan, directors, employees and shareholders of the company.
Firstly, we need to think about whether it’s worth ignoring the FTB Part B because (with the benefit only worth a maximum of $2,774) we may be able to save more in taxation by receiving salary income from the company.
Secondly, can we structure Peter and Susan’s income requirements of $50,000pa to receive the maximum FTB Part A? The maximum FTB Part A of $4,803.40 per child is payable if the family adjusted taxable income is up to $44,165. Also note that recipients of the maximum payment are automatically eligible for the Social Security Health Care Card.
To provide the most effective income to the family from the business, Peter and Susan should employ the children on a casual basis with a maximum earnings capacity of $3,000 each (even if assigned under Div 6AA (Minors Income) the payments will still be tax free).
Based on Peter and Susan’s income requirements we can assume the following scenarios and provide answers to the above questions:
| Scenario A - Focus on Maximum FTB Part A | $ |
|---|---|
Net Cash Flow Required |
50,000 |
Income to Children |
6,000 |
Maximum FTB Part A |
9,607 |
Taxable Income – Peter |
19,083 |
Taxable Income – Susan |
19,083 |
Total Tax Payable |
1,579 |
Net Annual Cash Flow |
52,193 |
| Scenario B - Maximising FTB Part A & B | $ |
Net Cash Flow Required |
50,000 |
Income to Children |
6,000 |
Maximum FTB Part A |
9,607 |
Maximum FTB Part B |
2,774 |
Taxable Income – Peter |
33,493 |
Taxable Income – Susan |
4,672 |
Total Tax Payable |
3,416* |
Net Annual Cash Flow |
53,130 |
* Note total tax payable in this situation is really $3,416 minus the maximum FTB Part B of $2,774 (totalling $642) because it’s an additional Government benefit they are receiving.
Peter could also make a $3,000 super contribution for Susan and receive a $540 tax offset to reduce the tax payable further, and even each apply for the co-contribution by contributing an additional $1,948 to receive 100% of the co-contribution benefit each.
Many accountants would focus on the taxation issues for Peter and Susan and may advise to receive a salary up to $35,000 each because of the 30% marginal tax rate. To understand this analysis, we need to compare the tax payable for an individual with taxable income of $35,000 (which is $3,725) and the tax payable on $35,000 for a company (which is $10,500).
We can see that the tax payable within the company is a lot higher but what will $76,000 (includes $6,000 to the children) of adjusted taxable income do to Peter and Susan’s eligibility for FTB. Based on scenario B above, they will lose their entitlement to the FTB Part B ($2,774) and their FTB Part A would reduce to the base rate which is worth $2,018.45 per child.
This means that by increasing their taxable income for taxation planning purposes you are saving $6,775 ($10,500 - $3,725) for Susan and $226 ($35,000 – 33,493 = 1,507*0.15) for Peter but you are losing $8,344 plus your health care card, potential for spouse contribution rebate and a reduced co-contribution entitlement.
Financial Planners need to consider all the above issues which will incorporate overall taxation costs, Government benefits and what is the client is trying to achieve. Peter and Susan have stated they would like to retain maximum profits and cash flow in the company and so would choose to minimise withdrawals. They would then be eligible for the maximum FTB payments equating to $12,358 plus access to a Government Health Care Card which previously they haven’t been entitled to.
Viewpoint
Contents
Newsflash: The Battle Lines Get Drawn: IFSA, FPA, AFA and the Government on fees, commissions and advice
Technical Strategy: Adviser opportunity: SMEs and Family Tax Benefit Part A and B
Technical Strategy: New Income Test Definitions and their impact on popular retirement planning strategies
Technical Strategy: Taxation of Employee Share Schemes
Product Spotlight: New Online Forms for Pursuit Select
Our People
Performance Data
RSS feed