INTRO

In this webinar, you'll learn the basics of deciding on the best structure for a business, including:

Step-by-step info on how to restructure into the ideal structure for your business using a real-life case study, with numbers and all.
A framework on how to select the right structure for your business or your clients' business.
How hybrid unit trusts work and whether it is worth the complexity.

CURRENT SITUATION AND GOALS

Joyce's Situation

Joyce is the sole shareholder/director of her company, Tax Nuggets. She owns a rental property as well as a main residence co-owned by her husband.

Her business is just starting to be profitable, and she needs to tidy it up before it goes gangbusters! This is a great time to change the structure, as the more profitable you are, the more complex it becomes.

Joyce's Goals

1. Growth and allowing future investors to come in

2. Retaining profits

3. Good structure for future sale

4. Not too complex

Her options are:

Sole Trader
Partnership
Company
Trust
… or a combination!

OPTION 1 – DO NOTHING – KEEP THE BUSINESS IN A COMPANY

For Joyce, having her business structured as a sole trader or partnership doesn't allow for investors to come in later, so these are not suitable options. She needs her business to be a company or some type of trust.

Joyce's first option is to do nothing and stay as things currently are in a company.

Benefits of Keeping the Business in a Company

A company has a good tax rate for retaining profits, so it is potentially the best tax position for Joyce.
This will also cover her for asset protection, and she can sell shares in the future to access the 50% CGT discount.

Potential Disadvantages

If she sells the business asset itself in the future, she could be eligible for small business concessions, but she will miss out on the general 50% CGT discount.
Tax upon exit could be tricky if she has a lot of money sitting within the company which may be subject to tax when it is extracted.

OPTION 2 – DISCRETIONARY TRUST OWNS THE SHARES

In this scenario, Joyce would be the beneficiary of a trust that owns shares in the company. The business remains in the company, but Joyce transfers her 100% shareholding over to the trust.

Benefits of Discretionary Trust Owning the Shares

When the time comes to sell, Joyce might be able to broker a deal where she can sell the shares, meaning that she can still access the capital gains general discount, and even stream the capital gain to whoever she likes.
Joyce can still retain earnings because the company pays its own tax on its own profits. Any income that she leaves in there gets paid at that circa 25% concessional rate.
Any earnings that she wants to take out go through the trust and can be split between people in her family or any other named beneficiaries.
It's an excellent idea for Joyce to change structure now before she becomes profitable - changing the structure could be a capital gain event, and she may be liable for CGT when transferring the shares.
It's best if Joyce pays herself a wage because she'll pay less tax on that money as an individual vs as a company. So even though she wasn't planning on paying herself, it's best to do so 'on paper' to setup a good habit and structure.

Setting up a Trust

There are many practical considerations when setting up a discretionary trust including ensuring the trust is stamped and there is a settled sum.

OPTION 3 – MOVE THE BUSINESS INTO A DISCRETIONARY TRUST

This is when you run the business from the trust itself. This option won't work for Joyce because she can't retain earnings as easily, and she'd end up paying a higher tax rate. Also, having people invest later through a discretionary trust is not easy.

Who is a Discretionary Trust Suitable For?

Those not planning to bring in investors in the future.
Have a few adult children over 18.
Someone who has a spouse not earning much - income splitting.
As you can see, a discretionary trust only benefits a very specific subset of people.

OPTION 4 – SEPARATE STRUCTURE FOR IP

Some people choose to have their intellectual property (IP) or assets held in one company and lease them back to a trading entity. This is an asset protection strategy. In Joyce's case, it would mean holding the Tax Nuggets IP in one entity and leasing that back to a trading entity.

Benefits of Separate Structure for IP

Joyce could put the IP in a unit trust in case she wants to sell the IP outright and could still access the 50% discount.
She can bring in future revenue by selling part of her IP.
Great if you have costly assets you need to protect – but Joyce doesn't.
If the business goes under, Joyce can still keep her IP.

Beware Of

You'll need excellent legal documentation to move your company to an IP company.
The lease does have to take place, and you'll need to register it to the PPSR.
All of this adds some complexity and legal costs.

OPTION 5 – MOVE BUSINESS INTO A HYBRID TRUST UNIT

A hybrid unit trust has two types of units: income and capital gains. Income is owned by the company, while capital units are owned by someone else – usually, someone that qualifies for the 50% CGT discount.

This option gives you the best of both worlds – income taxed at the corporate rate, but you still receive the discount on CGT.

Hybrid Unit Trusts are also used to manage Division 7A through unitisation arrangements.

Benefits of Unitisation

Joyce could keep the cash in her business.
Retain the 50% CGT discount.
She can take the cash out as a loan from the trust whenever she wants to.

Unitisation Drawbacks:

Not great for small businesses – better for larger businesses
More risky and likely to attract ATO attention
More expensive, as business owners need to check with their accountants every time they want to do anything new.
Tricky to bring on investors in future given the complexity.

KEY TAKEAWAYS AND FRAMEWORK

The best structure for Joyce's business would be option 2 – a discretionary trust owns the shares.

Key action points:

She's going to start paying herself a salary
Transfer the shares to a new discretionary trust once the business breaks even.

Framework: The Steps to Decide on a Structure

1. Understand the situation

2. Layout all of the options and the cost

3. Make a recommendation

4. Provide key action points

In respect to the options, pros and cons of each structure should be laid out according to tax planning opportunities, asset protection, selling the business/introducing investors and cost and complexity. Also, consider every factor at different stages including entering into the structure, ongoing and exiting the structure.

Date recorded: 30 September 2021

Transcripts and captions are in progress

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