By: Max Newnham
When it comes to tax effectiveness the simpler a business structure is the less tax effective it is. Family discretionary trusts and companies are more complex structures, cost more to set up, are often more costly for accounting services and fees, but can provide flexibility and deliver tax savings over the long-term.
Discretionary trusts allow for a business profit to be distributed among the family of the owners, which provides the opportunity to have the profit taxed at lower marginal tax rates, and have access to all of the small business CGT concessions.
Companies, if the profits can be retained, allow the owners to accumulate profits that can be distributed at a later stage when their taxable income is much lower.
An even more complicated structure is where a company is combined with a discretionary trust with various assets being owned between the two entities.
One of the big downfalls of owning assets that appreciate in value through a company structure alone, such as goodwill or property, is that companies do not benefit from the 50 per cent general capital gains tax discount, and effectively don’t get the 50 per cent active assets discount.
Q. I am the sole owner of a company that has been approached by interested parties to buy into the business. There is commercial real estate owned by the company which I would like to keep separate from the dealings with the interested parties.
Is it viable to set up another company and transfer most or all of the plant, stock, and assets to the new company? The new company would continue to run the existing business, with the original company left with the commercial real estate. How much could feasibly be transferred to the new company for running costs, etc?
A. You have a number of options to choose from in relation to allowing the interested parties to take an ownership share in your business. Transferring the business to a company, and leaving the business property behind in the existing company, would work.
You would then need to enter into a lease between your existing company and the new company running the business for the business premises. In addition to transferring plant, stock, and assets you would need to place a commercial value will on the goodwill of your business.
The working capital for the running costs of the new company can be provided by way of a loan to the new company.
If your business was not purchased the value of the goodwill will result in a capital gain on the transfer and will be taxable in the company. Depending on whether your business is classed as a small business entity you could be eligible for some of the capital gains tax concessions available.
Another option that you have would be to transfer the business property into another structure, possibly a self-managed super fund, and keeps the business in the company. What you are planning to do is complicated and you should seek professional advice before taking any action.
Source: The Sydney Morning Herald
