It is very common that businesses will find that as their business grows, their business structure no longer suits their needs. As such, it is vitally important to review your business structure to ensure it allows the business to achieve its goals now and well into the future.
Common structuring issues
Businesses often encounter a range of issues relating to their business structure which can include:
- Asset protection – A business structure should provide for protection from two types of risks, protecting personal assets (e.g the family home) from business risk and protecting business assets (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 for the business.
- Finance and Investment flexibility – A business structure should allow for efficient financing (either internally or externally) and the entry and exit of investors where appropriate.
- Future divestment efficiency – A business should also provide flexibility for the efficient disposal of assets in the future in relation to minimising capital gains tax and other transaction costs.
- Entry & exit/succession planning – The business structure also needs to allow for the entry and exit of business owners and potential succession planning, particularly in family businesses 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 including:
- 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 to change 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 enabling small businesses to access roll-over tax relief where they restructure into a more appropriate and efficient structure. Also, the turnover threshold for a business to qualify as a small business for the purposes of this roll-over has been increased from $2m to $10m. 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 Roll-over, the Small Business Capital Gains Tax Concessions provide a range of tax concessions which 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 concession has remained at $2m, however there is an alternative eligibility criteria where the net assets of the taxpayer (and related entities) does not exceed $6m.
- Stamp Duty Changes – The state government has introduced a range of stamp duty measures in recent years aimed at assisting businesses restructure their businesses. These measures include abolition of stamp duty on the transfer of shares and non-real property (e.g plant and equipment), a phased reduction in stamp duty on qualifying land (land not used for residential or primary production), and corporate reconstruction relief where the purpose is to change the structure of the group. These measures have allowed many businesses to restructure at a greatly reduced cost.
A business structure is not something that should be simply put in place when the business commences but instead should be reviewed regularly to ensure the business structure is appropriate for the needs of the business now and into the future.