Key considerations for using a company structure in the construction industry

Using a company structure for your new construction business? Make sure you're laying the right foundations for success. 

From understanding the implications of a company structure to ensuring compliance with ASIC and the ATO, there are several tax considerations that can impact your bottom line. In this article, we’ll break down the key considerations of operating your construction business as a company and provide you with the knowledge you need to build a solid financial foundation for your construction company.

Key benefits of a company structure

Companies are fantastic structures which allow you to significantly benefit from a reduced 25% tax rate, provided your company qualifies as a base rate entity. A base rate entity is a small or medium sized company in Australia that has less than $50 million of aggregated turnover a year and receives no more than 80% of the company’s assessable income from passive sources like interest, dividends, rent, royalties and capital gains. 

This lower tax rate, compared to the standard 30%, can enhance profitability and provide more funds for reinvestment in equipment, technology, and workforce development. To be eligible as a base rate entity, a company must meet two key criteria: its aggregated turnover must be less than $50 million, and no more than 80% of its assessable income can be passive income, such as dividends, interest, or rent. By meeting these requirements, companies can take advantage of the favourable tax rate, thereby improving their financial health and competitive edge in the market.

When considering a company business structure for your construction business, it's essential to evaluate whether a company structure aligns with your business goals. For small businesses aiming for growth and scalability, a company structure often presents the right framework. With its ability to facilitate expansion, attract new partners, and provide limited liability protection, it is also an attractive option for entrepreneurs. However, it's crucial to weigh the associated compliance costs and regulatory requirements that come with this type of structure.

ASIC requirements

The Australian Securities and Investments Commission (ASIC) is responsible for the registration of companies and regulating corporate conduct by ensuring companies in Australia comply with laws, maintain transparency and operate fairly. When setting your company up with ASIC, there are several key points to consider:

1. You must select a company name that is unique to your business and complies with ASIC’s naming rules. This name cannot be already in use and try your best to make it different to other construction businesses in your area.
2. You must appoint at least one director for your company who resides in Australia. The secretary is also selected at this stage and must also reside in Australia.
3. You must also provide a registered office to ASIC and principal place of business. The registered office is where ASIC will send official correspondence.
4. You must determine the share structure, including the number and type of shares to be issued and the rights attached to those shares.
5. All directors must now apply for a Director Identification Number before being appointed. This can be done through the ABR once you have established at least a Standard Identity strength with myID.
6. Once these details have been established, you can register your company through the ASIC website. Here, you will provide details about the company, its directors and shareholders. You will then need to update ASIC with any change of details as they occur for the company and ensure your company complies with ongoing obligations, such as annual reviews. 

Paying yourself as a director or shareholder

Paying yourself as a director or shareholder in Australia involves understanding the various methods available and their tax implications. Each method has its own tax implications and compliance requirements, so it's important to seek professional advice to determine the best approach for your specific situation, however, the main methods are summarised below:

Salary or wages

•  Directors can pay themselves a salary or wage, which is subject to Pay As You Go (PAYG) withholding tax and superannuation contributions. This method provides a steady income and can help with personal budgeting. However, it also means higher personal income tax rates. Another important consideration of paying yourself a wage from the company is that you generally need to have workers compensation insurance to cover yourself in case of a work-related injury or illness, which can be very common in the construction industry. Workers compensation is mandatory for all employers, including business owners who draw a salary, so is something you want to ensure is set up correctly to avoid penalties.

Dividends

• Shareholders can receive dividends from the company's profits. Dividends are taxed at the shareholder's marginal tax rate, but they may also receive franking credits, which can reduce the overall tax liability. A franking credit is a type of tax credit that you can receive when you are paid a dividend from a company. The franking credit amount represents the tax the company has already paid, and it can help to reduce your individual tax bill when you receive a dividend with a franking credit attached. This method is beneficial for tax planning but depends on the company's profitability.

Loans

• Directors and shareholders can take out loans from the company. However, these loans must comply with Division 7A of the Income Tax Assessment Act to avoid being treated as unfranked dividends. Non-compliance can result in significant tax penalties. Essentially, if a company gives a loan, makes a payment, or forgives a debt for a shareholder without following specific guidelines, these transactions are treated as if they were dividends. This means the shareholder has to pay tax on them, just like they would on regular income.

Bonuses

• Directors can receive bonuses based on the company's performance. Bonuses are subject to PAYG withholding tax and superannuation contributions. This method can incentivise performance but also results in higher personal income tax rates.

Liability benefits of a company structure

Forming a company offers significant liability benefits for construction businesses in Australia. Here are some of the key benefits:

Asset protection

• Protects personal assets of directors and shareholders from business debts and legal claims. This is due to a company being considered a completely separate legal entity to the individual. This is particularly crucial in the construction industry, where the risk of accidents, property damage, and litigation is high. Company structures can also shield owners from personal financial loss in the event of lawsuits or significant debt.

Insurance access

•  Easier to obtain comprehensive insurance policies, further reducing risks associated with construction projects.

Operational security

• A company structure can significantly enhance customer confidence in your business. Companies often signal a higher level of professionalism and stability when compared to a sole trader or a partnership of individuals. This can assist by reassuring customers about the longevity and reliability of your business. By building trust with your customers, your construction business can foster long-term relationships and provide ongoing work by ensuring repeat business and projects.

Additional costs for companies

One important consideration of a company structure for your property and construction business is the additional costs. Running a company in Australia involves higher initial and ongoing costs compared to a sole trader or simple partnership setup. Establishing a company typically costs between $2,000 and $3,000 in registration and legal fees, whereas a sole trader setup costs less than $500. Additionally, companies face annual compliance costs, including ASIC fees and financial reporting obligations. However, these expenses are balanced by the benefit of liability protection.

The final word on setting up a company

Ultimately, setting up a company for your construction business is a significant business decision that can influence your future growth and asset management. With the right structure, you can protect your business assets while enabling strategic business decisions that align with your long-term vision. 

Companies can be fantastic structures for construction businesses due to the lower tax rates available to base rate entities, while the limited liability structure protects personal assets from business risks. Additionally, operating as a company facilitates growth and further investment into the business, providing opportunities for expansion and increased competitiveness in the market. 

It is essential to carefully consider how the company structure will impact your operations, financial outcomes, and overall business unit performance. Consulting with a professional adviser,  can help ensure that your construction business is built on a solid foundation for long-term success.

FOR MORE INFORMATION

With the right knowledge and professional advice, you can navigate the complexities of the tax system and set your construction company up for success. Please contact your local RSM adviser for more information and assistance.