Common mistakes when changing business structure

The ATO has identified the following common errors that can result when small businesses change their business structure from a sole trader to a more complex company or trust structures:

• reporting income for the wrong entity;

• claiming expenses incurred by another entity as business expenses; and

• personal use of business bank accounts;

Therefore, they ask that practitioners remind any small business clients who have incorporated that:

• the company is a separate legal entity from them as a shareholder or director;
• money that the company earns, belongs to the company;
• the company owns its assets, and they cannot treat them as their own; and;
• if a director or shareholder of a company uses company assets for their personal use, it must be properly treated as a benefit to the director or shareholder (and Division 7A or FBT could apply if not treated correctly).

If a client moves to a trust structure, practitioners should remind them of the trustee’s responsibilities, including:

• holding the trust property (including assets, investments and income) for the benefit of the beneficiaries;
• managing the trust’s tax affairs; and
• paying the trust’s tax liabilities.