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setting up a new company in Australia, forming a company

7 steps to set up a company in Australia

 

Setting up a company may be the first step people think of when coming across starting up a business. Although that is not always the case, there are other structures also available for running a business like mentioned in our previous post “comparison-on-business-structures-in-Australia”. Thus a company is still the most common form that people operate their business under. 

 

Here are the 7 steps on forming a company and get ready to operate. 

 

A company is a separate legal entity that is apart from the individuals who run it. You must register a company with the Australian Securities and Investments Commission (ASIC) and operate a business across Australia without having to register in each state and territories. 

 

Assuming you have decided a company as your business structure, the steps to set up a company are set out below.

1. Choose a Company or Business Name

In choosing a company name you should consider the following:

  • You do not have to have a company name if you wish.  If you do not use a company name, you can use the company’s Australian company number (ACN) as the company name such as 123 456 789 Pty Ltd;
  • In Australia, most companies’ names end with proprietary limited or Pty Ltd companies.  
  • You can only choose a name that is available (not been occupied by another company or business name yet). Here, you can search in ASIC and reserve the name prior to registering a company;

 

2. Choose the State/Territory To Register Your Company In

A company can be registered in any state or territory of Australia. You must set up a company in one of the states or territories. You may also be required to register for GST. Once you are registered, you will receive a certificate of registration.

 

3. Choose the Principal Place of Business and Registered Office

A company must nominate a principal place of business and registered office. 

If the registered office is not at premises occupied by the company then the occupier’s consent must first be obtained.

 

4. Prepare Your Company’s Rules or Constitution 

Before you start a company you must decide what rules will apply to govern the company.  This can generally be:

  • the replaceable rules from the Corporations Act, which means that the company does not require its own written constitution; or
  • a constitution; or
  • a combination of the two.

However, if the company is a sole director or member proprietary company, you do not need a constitution.

 

5. Decide Your Shareholders and Officers

You must decide who will be the members (shareholders) and officers (directors and secretary) of the company.  A company’s directors are the people who make decisions in the company.  You must have at least one director ordinarily resident (live) in Australia and each director must be at least 18 years of age.

You must obtain written consent from each person who has agreed to act as a director of the company and who has agreed to become a shareholder of the company.

 

6. Allocate Your Company Shares

After you have chosen your shareholders you must allocate how many shares will they each own and what class of shares will they own.  Ordinary shares are the most common. There is also another class of shares, which may have different rights on voting on company affairs and receiving dividends. 

 

7. Complete the Relevant Paperwork 

After you have made all the decisions in steps 1 to 6 above and obtained the relevant consents then you can register the company with fillup relevant application forms with AISC or through BOA & Co. as registered ASIC agent so we can make the process much easier for you. 

Do you need professional assistance to set up your own company? Call BOA & Co. accountants in Chatswood on 02 9904 7886 and our specialists will be pleased to assist you.

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Dividends for company shareholders

3 Types of Dividends for Company Shareholders

 

Do you know there are 3 Types of Dividends for company shareholders? 

If you have read our previous post “Comparison on Business Structuresyou will find that company is the only structure that can distribute after taxed retain profits to its shareholders. This is so-called Dividends.

What are the dividends?

When companies make a profit they often reward shareholders by distributing some of this profit by way of dividends. Like individuals who earn an income or profit, companies are also required to pay tax on their earnings at the company tax rate of 27.5%. As such, the dividends received by shareholders may be partially, fully franked, or unfranked (that is, have had the tax partially, fully, or unpaid on that income).

dividend-franking-credit-cash-flow_

Here are 3 types of dividends: 

  1. Fully franked – 100% of company tax paid is attached to the dividend as franking credit to be distributed to shareholders,
  2. Partly franked – less than 100% of company tax paid is attached to the dividend as franking credit to be distributed to shareholders,
  3. Unfranked – No company tax paid is attached to the dividend.

This is called the Dividend Imputation system

Franked-Dividend

 

What Is a Dividend Imputation?

According to the Australian Tax Office (ATO), A dividend imputation is an arrangement in Australia and several other countries that eliminates the double taxation of cash payouts from a corporation to its shareholders. Australia has allowed dividend imputation since 1987.1 Through the use of tax credits called “franking credits” or “imputed tax credits,” the tax authorities are notified that a company has already paid the required income tax on the income it distributes as dividends. The shareholder does not then have to pay tax on the dividend income

 

Fully franked dividends

When companies pay fully franked dividends, they have paid the full amount of tax on their profits. Consider the following example: After making a profit and reinvesting some of those funds back into the business, Company ABC Pty Ltd distributes its remaining profit of $1,000 to investors (shareholders) via fully franked dividends. Investor A owns 10,000 shares in the company, and as such, receives a fully franked dividend of $1,000 (10 cents per share). As the dividend is fully franked, this provides Investor A with $275.00 in franking credits which they can use to offset their personal tax liability.

Depending on Investor A’s marginal tax rate, the impact of the imputation credits is demonstrated in the table below:

 

Personal Effective Tax Rate 0.00% 15.00% 30.00% 37.00% 45.00%
Franked dividend paid by a company $1,000 $1,000 $1,000 $1,000 $1,000
plus Franking Credits $275 $275 $275 $275 $275
Company tax rate 27.50% 27.50% 27.50% 27.50% 27.50%
Assessable Income  $1,275 $1,275 $1,275 $1,275 $1,275
Tax on assessable income $0 $191 $383 $472 $574
less Franking Credits $275 $275 $275 $275 $275
Tax Payable/(Refund or Excess credits for tax offset)  -$275 -$84 $108 $197 $299

 

Claiming a refund of franking credits

 In the example provided, it has been assumed that franking credits have been claimed when an investor lodges their personal tax return. However, this isn’t the only way that shareholders can claim their franking credits. For those people who don’t lodge a tax return, imputation credits can be claimed by completing an ‘Application for Refund of Franking Credits’ form which is available from the Australian Tax Office: ato.gov.au.

 

Unfranked dividends 

Companies are also able to pay unfranked dividends in some instances, in which no franking credits are passed on to shareholders. Using the example below, Investor A would receive a dividend of $1,000 on their shares, but no franking credits, meaning that the income will be taxed at their marginal tax rate:

 

Personal Effective Tax Rate 0.00% 15.00% 30.00% 37.00% 45.00%
Franked dividend paid by a company $1,000 $1,000 $1,000 $1,000 $1,000
plus Franking Credits $0 $0 $0 $0 $0
Company tax rate 27.50% 27.50% 27.50% 27.50% 27.50%
Assessable Income  $1,000 $1,000 $1,000 $1,000 $1,000
Tax on assessable income $0 $150 $300 $370 $450
less Franking Credits $0 $0 $0 $0 $0
Tax Payable/(Refund or Excess credits for tax offset)  $0 $150 $300 $370 $450

 

Do you need professional assistance for your tax concerns? Call BOA & Co. accountants in Chatswood on 02 9904 7886 and our SMSF specialist will be pleased to assist you.

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