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 starts a small business and returns to work via self-employment.
This is often the most convenient way in which a person with primary care responsibilities can re-enter the workforce. Self-employment can often let a person organise their own hours, allowing work to be done at hours of the day when other demands on time are at their least.
Perhaps even better, this can create substantial tax planning opportunities, especially if the non-carer spouse earns a decent amount.
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 is the parent returning to work) starts on a salary of $50,000 plus super and the business buys a car. The immediate cost of $70,000 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 we as advisers know or can see that a family business is being established, it often helps 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.
This is something that we can help you with if the need ever arises. More happily, we can also organise for your new business to be established the right way in the first place, so give us a call if you or anyone you know is contemplating returning to work via their own business.
In summary, if the husband (or wife) is in the top tax bracket, then the $70,000 of start-up costs described above would lead to an immediate tax benefit of $31,500 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.