The majority of our music touring and recording clients will start off with a sole traders or partnership structure. Its an easy and cost effective way to get up and running. As the band starts to commercialise and build up revenue there comes a point in time where the question comes up, is it time to set up a company now?
For the purpose of this blog I just wanted to share some two cents on some considerations when it comes to upgrading the business structure.
I’m generally a fan of straight company structures (Pty Ltd’s) for certain types of businesses, but less so for artists or bands that plan to tour and receive royalty revenue outside Australia (which in todays era is a large chunk of the Australian music world).
Without going into a technical web of issues and scenarios, if a band has set up a Pty Ltd company to operate their business through, it can lead to double taxation issues that can become very costly in the long run as revenue and profitability increases.
When bands tour globally they are generally subject to foreign withholding taxes from their gross revenue. Those foreign withholding taxes then become a foreign income tax offset (FITO) when it comes to lodging the business tax return.
Assuming that the business passes the rules to firstly claim the foreign income tax offset, these FITO credits get deducted against tax payable but don’t count as franking credits. So what’s the problem? Well when the band want to take cash out of the business, it means we may have to declare unfranked dividends which in laymen’s terms means that we may create a double taxation issue…
So how do we avoid this double taxation scenario? Don’t set up a PTY LTD company and instead set up a trust to operate the business. The FITO credits then flow through to the beneficiaries of the trust instead of getting trapped at the business level.
If you need any help with this complex area, reach out to us on firstname.lastname@example.org