Family law in Australia is in many ways the most pervasive. And one of the central tenets of family law is that – between the couple – there is really no such thing as his and hers. (The situation can be somewhat different when it comes to third parties. Wives can typically not be sued by their husband’s creditors, and vice versa).
A common scenario for couples with a high income earning member (often the husband, given that he does not need to take as much time out for pregnancy and childbirth) is that the parent who is the primary carer for the children returns to work via self-employment. This can create substantial tax planning opportunities.
One simple strategy is for the high tax paying spouse to own the new business, and for the business then to employ the other spouse. She (we will say she) starts on a salary of $50,000 plus super of $30,000 and the business buys a car. The immediate cost of $100,000 or so a year can be offset against the husband’s other income. If the business makes a loss (and many do, especially in the early years), the loss is effectively tax deductible.
If the business makes a profit, then this does not necessarily mean a tax problem for the husband with the already high income. There is clearly sufficient justification to increase the wife’s salary: she is running a profitable business, after all. Her salary can be increased to the point where she is paying tax at the same rate as the husband, at which point the profits can then be distributed to him without any detrimental impact on the family’s bottom line.
So, in cases where an adviser knows or can see that a family business is being established, it can be incredibly helpful to spend some time discussing this new business and the optimal way of owning it.
Remember, unless there is a pre-nuptial agreement or something similar, then within family law the basic rule is that what’s hers is his and what’s his is hers. If the couple were to separate, the business would in all probability be seen as a marital asset and included within the property settlement, usually with a CGT treatment that is as friendly as possible.
It is quite possible that the adviser may prefer for a lawyer to be involved in the ownership planning of a new business. That is fine: just make sure that the client knows who it was that gave the advice in the first place.
In summary, if the husband (or wife) is in the top tax bracket, then the $100,000 of start-up costs described above would lead to an immediate tax benefit of $45,000 for the couple. This benefit is only lost if the business starts to earn revenue – which, while it will lead to higher tax charges, is a very nice problem to have.