Is your business ripe for restructure?
People start their business in a particular tax structure that suits their start up needs. But sometimes business growth plans or changing legislation can result in this original business structure not being the best vehicle to carry the business forward.
If so, there are some circumstances where you can use existing tax laws to restructure into a more appropriate business structure.
We recently looked at this type of situation for one of our clients.
The business was being run in a company with one shareholder. This shareholder was the individual who started the business from scratch.
There were existing tax issues (Div 7A loans) from when money was withdrawn from the company to purchase their current commercial property.
The company was accumulating cash and franking credits, but getting cash out of the company could mean paying significant amounts of tax.
The owner and his partner (both life and business partner) were looking at further investments in another entity, so needed to get cash out of their existing company.
What we did
We looked at selling the shares from the individual to another entity. This, of course, triggered a capital gains tax event so we needed to see if we could apply the CGT Small Business concessions.
Overall the couple were all getting close to the $6million net asset value test. This is important because breaching the $6million of net assets would have meant that they would not be able to access the small business CGT concessions, which allow for significant discounts and deferrals to the tax payable.
And with the original shares valued at $100, but the company now valued at about $4.5million, there would have been significant capital gains tax liability if the clients did not pass the tests.
Fortunately, the facts were such that we were able to ensure the clients qualified for the small business CGT concessions.
This was a detailed and complex process. It included assisting the client in getting valuations for the goodwill of the business, then valuing the shares and then considering whether there were any other related assets that needed to be considered.
The outcome was that the new entity could be used as an investment entity, with dividends paid out of the existing company used to fund the purchase of new investments. In addition, the clients can start reducing the Division 7A loans through franked dividends.
The new structure also provided some asset protection to the new assets, by separating them away from the ownership of the operating business.
The overall result was a new business structure that allows the operating company to reduce it’s Div 7A tax liabilities and enables it to use other excess cash to purchase investments in an entity that provides some asset protection.