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Case Study - How a simple change in business structure saved a client over $95,000 per year. 

This family owned business is very profitable in manufacturing and designing quality joinery products for both domestic and commercial applications. From kitchens and bathrooms to home office and renovations, they are experienced in offering their customers the highest in quality and design. 

Financial Situation

The family has always ensured that all taxes was completed and submitted to the ATO on time. As they did most of the general accounting work themselves, they didn't meet their accountant regularly to discuss the financial side of the business, or review ways to improve and grow the business. 

Peter and his three sons each drew a salary of $140,000 plus 9% compulsory super per annum. They employ 12 full-time staff all with full entitlements. 

Problem 

It was identified that in 2012 their Workers compensation premiums were approximately $18,000, and they were required to pay payroll tax of more than $35,000 per annum. 

The family understood the tax requirements and regulations when employing staff and was more than willing to make sure they complied. However, they did question why they had to pay workers compensation and other entitlement to themselves when they did not take sick days and would not use any compensation claim relating to them. 

They also questioned why they had to pay the 9% compulsory super on their wages. They did agree and appreciate that it was important to save and invest money for their retirement but would prefer to use this money to reinvest back into their business. 

The Solution 

Twelve Chartered Accountants met with the boys and after reviewing their business structure, realised that a reorganisation of their current business structure was needed. 

We suggested that the current business be split into two separate entities. 

1. A Family Partnership

  • Responsible for all the sales and therefore, earned all the income for the business
  • An operating partnership between the three sons and the father.
  • Was charged a management fee by the service company.
  • The net profit which was made was distributed to the father and the three boys.

2. The Existing Company "Service Company"

  • Employed staff and paid rent and other business costs.
  • Responsible for the manufacture and installation of the kitchens.
  • Was paid a management fee from the partnership covering all operational costs.
  • The company did not make a profit.
  • It was important that the "service company" operated within the ATO service company guidelines. 

The Result 

Workers compensation premiums are not payable on partner distributions. Workers compensation payments are only required for the staff employed by the Service Company. This will save and continue to save the business over $10,000 per year in insurance premiums. 

Payroll's tax is not payable on partnership distributions and with the deduction of the four wages of $140,000 each, this meant that the total payroll was below the payroll tax threshold, a saving of $35,000 every year. 

There is no compulsory super on partnership distributions. It is up to the individual if they wanted to contribute to their superannuation. This saved the family over $50,000 per year. 

This resulted in a combined saving of over $95,000 per year. 

The family was delighted with the outcome and commended Twelve Chartered Accountants on their quick and knowledgeable solution. The family also commented that they would have regular meetings with Twelve Chartered Accountants, and communicate any problems or concerns they had immediately.

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