Posted on 16th August 2016 by Tom Francis
Legislation that was recently passed allowing small businesses to change their legal structure without incurring capital gains tax was touted by the Government as a simple solution for organisations that have experienced substantial growth since inception. Businesses started as a partnership or sole trader were now able to roll their operation into a new structure that would provide greater opportunities to grow further or access additional legal protections.
Unfortunately restrictions contained in the legislation have meant many small business owners, especially those who have been operating for several years already, are unable to take advantage of the new concessions.
However options do exist for entities locked out of the concessions and at GeersSullivan we have put together several successful strategies in the past few months utilizing the methods detailed below. Each method has been fully endorsed by the ATO as complying with current tax legislation or tested in the Court system, providing additional comfort that your affairs are within the letter and spirit of the law.
For businesses operating as a trust one of the major concerns is how to reduce tax on profits re-invested in the business. Setting up a corporate beneficiary allows profits to be taxed at the fixed corporate tax rate and retained within the business for up to 10 years. During this time we work with clients to actively manage their tax liabilities each year which results in a lower average rate of tax.
For professionals such as doctors, pharmacists and lawyers, setting up a service trust allows the administration and retail function of the business to be separated from the professional and with it a share of the profits. These profits can be distributed to beneficiaries with a lower tax rate or the strategy can be combined with a Corporate Beneficiary to assist with profits being reinvested in the business.
Companies remain a popular choice for operating a business due to their fixed tax rate, options to split ownership with unrelated partners and limited liability. With careful planning they can also be very flexible especially around admitting or retiring an owner. Share buy backs can be employed to exit an owner using a franked dividend where a capital gain is not practical. New shares are also able to be issued, subject to the value shifting limit, to an existing or new owner for no consideration without generating a tax liability. This is especially popular where a new owner brings necessary skills to a business rather than cash or assets.
Small Business CGT Concessions
While the whole-business rollover may not be available, the criteria for applying other small business CGT concessions can be lower and this can be used to move certain business assets from one entity to another without generating large tax debts. This concession also allows for tax effective super contributions to offset tax liabilities.
Economic conditions in Australia, and especially in Perth, are currently challenging and set to remain so for 12 months or more. For businesses struggling with a tough market the additional burden of an ineffective tax structure can be the straw that breaks the camel’s back. If you believe your structure is no longer suitable, we would like to hear from you and encourage you to contact your accountant to schedule a complimentary exploratory meeting to see if there is anything we can offer.