Should I restructure my business entity to a Company?
There is no shame or blame in needing to restructure a client.
It doesn’t mean that someone has gotten it wrong, be that you, a former advisor or the client themselves. Clients’ circumstances change, the ATO’s view change, sometimes, though rarely these days, even tax laws change!
For a business entity there are many moving parts to what they do and how they do it, and these days, even who does it. As these things change, so will the need to reconsider your client’s structure.
In our view, the most effective legal structure for a business is a company. That is, a company owned by a discretionary trust, or trusts if there are multiple unrelated shareholders.
That is not a controversial view, however it is likely a view borne out of experience gained over the last 10 to 15 years where other legal structures have, for various reasons, become less attractive as a vehicle from which to conduct a business.
Choosing the most appropriate structure(s) often requires the following competing factors to be taken into account:
- Risk issues;
- Growth and/or succession requirements; and
- Tax management.
Ordinarily when advising on the choice of a structure for a client, all of the above factors will need to be considered. Importantly, the advisor will need to ensure that the structure has the maximum flexibility to facilitate the clients’ changing requirements.
Why Restructure?
Once a client has established their structure, it doesn’t mean the job is done. As their trusted advisor, we need to regularly review and consider their structure and whether it still works for them.
Regard still needs to be had to whether the client’s current structure still achieves the following broad objectives:
- Limiting the risk associated with the conduct of their activities;
- Facilitate any potential change in ownership requirements; and
- Take account of both the immediate and future taxation implications of the generation of their profits as well as the exit strategy of a business client.
When considering the current state of existing clients, it is always worthwhile going back to these core objectives to question whether the client’s current structure is still fit for purpose.
The Mechanics of Restructuring to a Company
Simply put, a restructure is effectively the sale or transfer of an asset/s (including a business) from an existing entity to a company.
Therefore, once the decision has been made to restructure into a company, the first step is to identify all of the assets that exist within the current structure and which of these assets will be moved to the corporate structure.
A decision will then need to be made on what specific mechanisms and concessions are going to be utilised on the sale or transfer of that asset to the company.
The first option is a straight sale of the assets to the company and utilising any CGT concessions available.
The second option is to utilise one of the various CGT rollovers available in legislation.
The benefit of the straight sale and utilisation of a CGT concession is that overall, the taxpayer will be paying the least amount of tax and will reset the CGT cost base of the transferred business assets to their current market value. Whereas the benefit of utilising a CGT rollover is that it will defer (but not reduce), the taxpayer’s tax liability to the time an actual sale occurs.
Careful consideration of the facts will ultimately dictate what option is best for the clients’ individual circumstances.
At MKT we are regularly involved in restructuring business entities for many and varied reasons, if you need any assistance please call Sean, Ross or Mimi.