Active vs Passive Income – Who cares?

I care and so should you.

Q: Why?

A: You want to minimise the amount of tax you have to pay.

The type of income you earn will influence your structure, and is linked to the tax minimisation strategies you use. Your income might be active, passive or both:

  1. Active income comes from a trading business, where you are supplying a product or service and dealing with customers, suppliers, workers, etc. For example, a building company is a trading business.
  2. Passive income comes from investment activities, where you are doing little or no work, like having an investment property that earns rental income.

If your business is generating active income, your priority will be minimising income tax.  You will likely also want to access Capital Gains Tax (CGT) small business concessions on the eventual sale of the business unless your intention is to pass it down to family.

If your structure is to derive passive income, you are likely to place more importance on the minimisation of CGT liability in the sale of the investment.

While it’s possible to have a business that will derive both passive and active income, it is often advisable to separate the two activities in two separate structures. First, this enables you protect the assets of one business against the assets of the other. Second, having separate structures for the different income types will allow you to minimise tax, as you can choose the most appropriate structure for each income type.

You can see now that it will make a difference.

If you need assistance to determine whether you existing structure is right for you or how to go about starting the right structure, please do not hesitate to contact us.

You will see the impact these changes have on your profit margin, your asset turnover and ultimately your return on assets.

Now you’re starting to really see where your business is financially and what you need to do to get you to where you want to be.

Are you in need of finance or funding to help grow your business? Do you clearly understand the cost of money? Contact us for a free 30 min strategy consultation. Click here to get started

Let us review your business and funding requirements to help you grow your business and achieve your business goals – big and small.

Want to take your business further with your cash? Book a 30-minute cashflow consultation and I’ll give you a copy of my book “Build It & The Money Will Come”. Click here to get started

Tony Dimitriadis
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