As a business grows, it’s very common for the business structure to lose its suitability. Consequently, it’s vital to review your structure to make sure it allows the business to achieve both its current and future goals.
Common structuring issues
Businesses often encounter a range of issues relating to their business structure:
- Asset protection – A business structure should provide protection from two types of risks – protecting personal assets (e.g. the family home) from business risk and protecting business assets (e.g. business real property, goodwill, etc.) from external risks.
- Income tax efficiency – Tax efficiency is an important consideration in any business structure to ensure the overall tax rate is efficient and appropriate.
- Finance and Investment flexibility – A business structure should allow for efficient financing (either internally or externally) incorporating entry and exit of investors where appropriate.
- Future divestment efficiency – Flexibility should be provided for the efficient disposal of assets in the future that relate to minimising capital gains tax and other transaction costs.
- Entry and exit/succession planning – The business structure also needs to allow for the entry and exit of business owners, as well as potential succession planning, particularly in family businesses handing over to the next generation.
Risks of getting it wrong
A business structure that doesn’t suit the size and nature of the business can have a number of adverse implications:
- Assets exposed to creditors
- Unutilised tax losses
- Unnecessary costs
- Lack of availability of CGT and other tax concessions
- Tax rate inefficiency
- Restructuring costs
There are a number of options that a business can consider when reviewing their business structure to address these issues:
- Small business restructure roll-over – As part of the 2015-16 Federal Budget, the Federal Government introduced legislation that enables small businesses to access rollover tax relief when they restructure into a more appropriate and efficient structure. The turnover threshold for a business to qualify as a small business for the purposes of this rollover has been increased from $2 million to $10 million. This roll-over has the potential to provide many businesses with the opportunity to restructure their businesses without any immediate tax implications.
- Small business capital gains tax concessions – In addition to the small business restructure rollover, the small business capital gains tax concessions provide a range of tax concessions that can assist in significantly reducing the tax burden of altering the business structure, in particular where the changes involve the retirement of a family member and succession to the next generation. It is worth noting that the turnover threshold for eligibility for these concessions has remained at $2 million; however, there is an alternative eligibility criteria where the net assets of the taxpayer (and related entities) does not exceed $6 million.
- Stamp duty changes – In recent years, there have been a number of measures introduced by Australian state governments which are aimed at reducing the impediments and costs associated with business restructures. Some of these measures include the abolition of stamp duty on the transfer of shares and non-real property (e.g. plant and equipment), and a phased reduction in stamp duty on qualifying land (i.e. land not used for residential or primary production).
As we’ve identified, a business structure is not something that should be simply put in place when the business commences and then forgotten; it needs to be reviewed regularly. Ensure the structure of your business is still appropriate and you will go a long way to meeting the needs of your growing enterprise.
If you would like to review your current business structure, please contact your local William Buck Advisor.