The story of Rodney
Rodney has a non-working wife and two adult children, one who is studying and the other who has left school but does not work and relies on Rodney for money. Neither pays any board, preferring to sponge off the parents. Rodney and his wife have always been frugal and their home is fully paid for with no mortgage.
Rodney is an extremely talented tradie and has decided that he could make much more money working for himself so he starts his own business doing maintenance for factories.
Being frugal (actually a bit of a tight arse) he decides not to go to his accountant for advice on setting up his new business, relying instead on some sound advice his wife picked up in the hairdressing salon. He is advised that he can get an ABN online and that’s all he needs to start his business.
He doesn’t register for GST as he doesn’t like paperwork and has been advised he doesn’t have to unless he wants to claim on his purchases. His client base is used to having GST on their invoices so Rodney puts this on his invoices.
Business goes well and Rodney has full order book and by the end of the year he has invoiced $165,000 with costs of $50,000. Around this time he gets a letter from the ATO asking him to send in copies of his invoices. It seems one on his customers have been subjected to a GST audit and he has claimed GST on an invoice paid to Rodney, who the ATO notices is not registered for GST. The ATO establishes that Rodney has charged $15,000 GST on his invoices illegally. Rodney is devastated as he has always tried to stay on the right side of the law and his wife’s hairdressing buddies had not told him this!
The ATO advises him that he is going to have to pay the $15,000 back to his customers who will then have to re-do all their BAS’s for the 12 months they have been over claiming their GST input credits. They are not happy with Rodney. The ATO also fines Rodney for charging GST illegally.
Rodney now goes to his accountant to do his annual tax return and the accountant calculates that his net profit is $100,000 and advises him that his tax payable is $24,947 based on this income.
While working out how he is going to pay this he is advised that a platform he has repaired at a factory has collapsed onto a production line and the irate customer is going to sue Rodney for $750k in damages to plant and lost production. Being a miser Rodney goes to Legal Aid who advise that he is likely to lose the claim and as he is personally responsible, his house will be taken in part payment. The house is worth $500,000 so Rodney files for bankruptcy.
Rodney’s wife leaves him for one of the girls in the hairdressing salon. WOE IS RODNEY!!!
Rodney has a friend, Proactive Pete, who has almost identical circumstances to Rodney. He is, however, skeptical about getting financial advice from clients of the hairdressing salon.
Pete decides to start his own business around the same time. He consults Alec at Proactive Accounting who he met while attending a BNI meeting as a visitor. He has heard only good things about Proactive so feels this is the good option prior to starting out.
After a fact find about his personal circumstances it is recommended that he establish a Family Trust with a company (Pete One Pty Ltd) as Trustee as his trading entity. He pays a fee and a few days later is called in to sign the documentation. Proactive have registered an ABN for the trust, registered for GST and applied for a Tax File Number for him so he is ready to start his new business. He has also had GST explained to him so he is better able to quote for work to be performed.
Pete’s business also enjoys a steady stream of work and he keeps good records with his cloud based accounting program so always knows how much money he is making and how much GST he needs to jeep aside for his quarterly BAS.
At the end of the year he has invoiced more than Rodney but with the same costs of material. He has done some discretionary spending so at the end of the year he is also left with a profit of $100,000. He notes that the two sponging kids have been given pocket money and have made no contribution to the family running costs. As director of his Trustee company Pete decides that the profit should be split between him, his wife and two adult children equally. This will enable the kids to reimburse him for the pocket money and for the board money they haven’t paid. Each family member has a tax bill of $1,292 making the family’s total tax $5,168 (as opposed to Rodney’s $24,947).
Pete has also had an incident on one of his jobs and the customer has sued his company for damages. The company has no assets and id declared bankrupt. Pete loses his company.
The following day Pete comes to Proactive and registers Pete Two Pty Ltd and the Pete No 2 trust and continues to run a successful business. He has some interesting offers from some of the ladies at the hairdressing salon but life’s good so he wouldn’t change anything and doesn’t take up these offers.
Two of their mates, Tom and Dick go into a partnership and run a similar business. Events run similarly but when the claim for damages is made Tom finds that his wife has emptied the bank account and taken off with Rodney’s wife. Dick sees his lawyer, Harry, and is advised that in a partnership partners are joint and severally liable for partnership debts so he has to pick up the tab. A company or Unit Trust might have been a better option, but they never got advice.
Pete sympathizes with Dick but reminds him that he told him to see Proactive before deciding on his business structure.
Pete has reaped the benefit of getting sound advice and goes boldly forth. Rodney can’t even afford to go see a divorce lawyer, and Dick and Tom have to start again. They should have seen Proactive and this disaster could have been avoided.
So would you prefer to follow the path chosen by Proactive Pete, or would you just be like Rodney, Tom and Dick?
Cautionary note: The above is just a fictional story and should not be regarded as a ‘one size fits all’ for starting a new business. Your optimal structure depends on a number of factors including but not limited to family situation, other earnings, other assets, age etc. We at Proactive will be more than happy to discuss the options with you prior to you undertaking your new venture – phone 55394143.