As a business owner, what should I consider?
Each structure will have features and benefits, and it is important that you consider which one best suits your long-term business goals. Needs of the business will change over time and it’s important to review the structure regularly, however there are a few considerations to keep in mind when deciding on a structure:
Commercial and risk
- Asset protection – are your personal assets at risk?
- Access to funding – are you able to scale up your business?
- Flexibility – are there many barriers to restructuring in case you need to bring in new investors, or offer your key employees equity in the business?
- Availability of grants – can you access certain grants if you carry on a particular type of business? For example: research and development tax incentive
- Future growth profile and plans (ie listing)
Tax matters
- Tax regulation for different structures – is your structure tax effective or is it creating unnecessary headaches by being overly complex?
- Tax rate and where tax is levied
- Exit strategy – ease and tax costs to exit
- Capital gains considerations – including general 50% discount and access to small business concessions
Succession planning
- Ease of passing control during life or on death
- Exit options available
- Flexibility with passing different assets to different people
What works well for passive investments (e.g., shares, properties)?
Other than asset protection, tax is generally the main factor in choosing an appropriate structure for making passive investments.
Discretionary Trusts have traditionally been the structure of choice for passive investments because of the availability of the 50% capital gains tax (CGT) discount. The flexibility of Trusts may work well when you have a wide range of beneficiaries you can distribute to, however, the inability for Trusts to retain income makes it hard during the wealth accumulation stage because Trusts must distribute all their income to avoid a 47% tax bill.
Companies are gaining more popularity to conduct passive investments. As a wealth accumulation tool, they work well and generally people need to accept the loss of the CGT discount as a trade-off and there is a further tax sting where the shareholders want access to the company’s cash via dividends or loans. Unlike Trusts, during the accumulation of wealth stage, companies can retain the income and keep the tax rate capped at 30% (or 25% depending on the circumstances).
It’s also important to check whether there are any special rules in relation to the asset class you are investing in. For example, legislative changes were made to limit interest deductions that can be claimed on vacant land by Discretionary Trusts and certain other entities. So, if you have substantial borrowings to purchase land for income producing purposes, you may be better off buying it in a company so you have access to the interest deductions, but you would lose out on the CGT discount on the eventual sale.
Why are Discretionary Trusts losing their popularity?
During the early to late 2000’s, many businesses were conducted through discretionary Trusts which allow flexibility on how income can be distributed to the business owners, their family members and/or related entities. However, changes introduced in December 2009 made it significantly difficult for Trusts to retain working capital without triggering additional tax burdens.
More than 12 years later, we are again at a juncture where the ATO’s interpretation on some long forgotten (and ignored) tax rules will limit the ability to make tax effective distributions to certain lower tax paying family members / entities.
That’s not to say Trusts are no longer appropriate, but it is very much dependent on your own individual circumstances and additional factors such as the type of income generated and the class of assets being acquired by the Trust.
Where do people make mistakes?
Getting into structures without speaking to an advisor on the options available, may cause unnecessary stress. With the increasing popularity of website-based registration businesses, it has become much easier to set up companies and Trusts at a low cost, without requiring professional help.
For your peace of mind, our recommendation is to seek advice from an advisor to ensure you have considered all the angles.
In conclusion
The structure your accountant or lawyer set up for you may no longer be appropriate – this applies equally to businesses or structures set up for the purposes of holding passive investments (shares, property etc.). Generally, the main hurdle of any restructuring transaction is tax - capital gains tax or transfer duty. However, it’s important to keep in mind that there are numerous concessions and rollovers available which may work in a tax-effective manner to get you to a suitable structure.
Speak to one of your local Moore advisors if you would like to conduct an assessment on whether or not your structures are fit for purpose.