By: Max Newnham
Many small businesses are family affairs. They often start off as a simple partnership between a husband and wife and can grow into being operated through a discretionary family trust. Since the tax laws were tightened family trusts can effectively only distribute $416 tax-free to children under 18.
As long as the i’s are dotted and the t’s crossed there is no limit to paying tax-deductible wages to children when they work in a business. For this to happen the first thing to establish is that the work is involved and necessary to carry on the business.
For example, a son or daughter that assists in the running of the business by serving customers or performing other work directly related to the business could be paid for the hours they work.
Where the work done only has a tenuous connection with the business, such as washing a car that has a small amount of business use, it is a lot harder to make a case for paying tax-deductible wages.
Once a link between the work and the business has been established it is important to have a system that records the hours of work done. Then the wage that is paid must be at a market rate and not at an inflated amount that is clearly designed to shift income.
Q. My parents have a business that is not very active with their main source of income being interest from bank accounts. I provide clients with marketing services and have my own ABN. If my parents hire me for a short period of time to do some marketing for their business and they pay me $3000, can they reduce their taxable income by this amount?
A. On the face of it there would be nothing wrong with you providing marketing services to your parent’s business so that they can claim a tax deduction. As you run a business there should be an agreement or contract that sets out the services to be provided, and the rate being paid is what you charge other clients.
If the $3000 creates a loss for your parent’s business, they cannot use that loss to reduce the tax payable on their interest income unless they can pass one of the following four non-commercial loss tests:
- the business has an annual assessable income of at least $20,000,
- the business made a tax profit in three out of the past five years including the current year,
- there is property used in the conducting of the business that has a value of at least $500,000, or
- there are other assets such as plant and machinery used in the conducting of the business that is worth at least $100,000.
Before continuing with your plan to provide the marketing services to your parent’s business you should seek professional advice to make sure that the tax saving for your parents is greater than any tax payable by you.
Source: The Age
