Can you limit your business risks and tax costs?
Business structuring is about ensuring control and flexibility, while limiting your liability and ensuring you do not suffer tax detriments. Unless care is taken, it is quite possible for income or capital gains from a business to face multiple taxing points. For example, capital gains arising from sales of shares down a chain of companies may generate a string of capital gains tax charges because, unless the companies are able to be consolidated, each share is treated as a separate asset instead of looking through to the underlying asset which created the original gain.
At Dwyer Lawyers, we assist clients in choosing and setting up vehicles for the creation and conservation of family wealth.
The choice of a business or a personal investment vehicle or vehicles can be difficult as there are often conflicting considerations. In particular, business and personal objectives should come before tax considerations.
For example, a superannuation fund is a largely tax-free investment vehicle but access to funds may be limited for persons under 60.
Similarly, a partnership may mean a person can claim losses of the partnership but only at the price of being exposed to full liability.
It is often the case that no one type of business or investment vehicle satisfies all of a business owner’s or investor’s objectives and clients should only rely on direct personal advice tailored to their situation.
With this general caution in mind, the ideal business or investment structure for a business owner or investor would involve –
- limited liability for its owners and asset protection from unforeseen future creditors
- unfettered managerial control
- minimal unnecessary or bureaucratic record-keeping
- provision for continuity
- no adverse regulatory or tax consequences on capital flowing into or out of the business
- the lowest available tax rate
- flow through of cashflow representing tax deductions for depreciation or other tax allowances
- flow through of capital gains tax discount on assets sold
- full use of tax losses by its owners
Perhaps surprisingly there are considerable differences in how different business vehicles rank in terms of securing these objectives. A decision to structure a business in the wrong way at the outset may trigger adverse tax or asset protection consequences later.
The issue – Can you have it all?
Unlike the US or UK, businesses in Australia cannot use a tax-transparent vehicle such as an LLP (limited liability partnership) or LLC (limited liability company). That is the major reason why family businesses or small businesses in Australia use trusts so much as trading or investment vehicles. However, trusts can pose difficulties.
The challenge for Australian business advisers is thus to find a legal structure which will deliver most of the benefits of an ideal business structure while recognizing that, in the real world, there are transitional difficulties (eg transfer of customer relationships, CGT on transferred assets) in the case of converting an existing business into such a new structure. Further, any ideal structure must be able to adapt to change and allow transfer the business or investments over to new owners with minimal costs in case of sale by the present owner.
The good news is that, while all business structuring must be based on individual circumstances, we can help you achieve a business or investment structure much closer to the ideal than many structures commonly used.