What is your business structure?
There are a number of reasons why a business owner may need to reconsider their current business structure.
Some business structures provide asset protection (others don’t)
The most important is asset protection.
A structure established while the business was in its infancy, such as a sole trader or a partnership, may now pose unnecessary risks to the proprietor or partners. You see it is not unusual for businesses to outgrow their initial form.
Often an existing structure will cease to be appropriate because the growing business and/or its owners are accumulating significant, valuable assets which may be put at risk due to unexpected events, such as cash flow pressures, litigation or creditor action.
Business structures for bigger business
Restructuring into a company may also be a preliminary step to obtain access to a broader range of equity participants, including new business partners or key employees. It may also be a pre-exit step for an owner as part of a succession plan and the selling down of the business.
Recent changes in tax law, as well as the ATO’s changed interpretations, also mean some existing business structures may no longer be appropriate. In some cases where a trust is used to operate a business the ATO’s changed approach in treating unpaid distributions in favour of corporate beneficiaries as loans subject to Division 7A, has caused many business owners to reconsider how they operate.
Managing trust cash flow, particularly during a growth phase where working capital is in short supply, has become significantly more complex under the ATO’s new view, and this together with the Government’s ongoing reform of the taxation of trusts has caused many to question whether the trust structure is still suitable.
Tax need not be an impediment to a new business structure (it can even provide a windfall)
The good news is with careful planning a restructure can be done efficiently and effectively with minimal tax consequences.
In fact in some cases, where the restructure plan is able to incorporate the Small Business CGT Concessions a significant long term tax saving could be achieved.
It is possible a credit loan account could be created allowing drawing of funds from the business with no immediate tax consequences for the foreseeable future. Equally, a cost base (from a capital gains tax perspective) could be created where one either didn’t exist before, or where it did but was a relatively low value, it could be increased. This means when the business is eventually sold, less of the sale price is subject to capital gains tax.
Finally, where a business is approaching the thresholds for qualification as a Small Business, a restructure could potentially take advantage of the concessions before it is too late, even if the business is to be retained for a period of time.
Call to action (while the opportunity still exists)
If you have doubts about the effectiveness or appropriateness of your existing business structure, or would like to learn more about the potential tax advantages of restructuring, contact us today!
P.S. Remember, tax laws change continually, and while some strategies may be available today, they may not be available tomorrow. Further with Tony Abbott on the war path when it comes to legislative changes and balancing the Government’s books, you never know what changes are around the corner (especially with the 2014 Federal Budget to be handed down in a little under two months time)!