Is it time to review your business structure?
One of the most critical components of business ownership is structuring your business correctly. But what can you can do to make sure your business is set up correctly to avoid the costly impacts?
As part of a business insights series for CCIWA, Vincent Ferraro, RSM Australia Manager Business Advisory, explains.
Which entity should own and operate your business? A company, trust, unit trust, sole trader, or a combination in partnership? What do you do if your business is in a structure that doesn’t suit the business’s needs and what do you need to do to correct it?
All businesses should ask the following questions of their current business structure:
- Can my business income be spread across all members of my family or other related entities, taking advantage of lower individual and corporate tax rates?
- Are my personal assets well protected from creditors?
- Are the business assets protected from the trading business?
- Is my risk of being sued by an employee minimised?
- Can the business smoothly transfer from one generation to the next?
Can you say “yes” to all of the above questions?
Reasons for a poor structure vary, but typically owners have either: received poor initial advice; outgrown their current structure (profits are higher than first anticipated); or perhaps the goalposts of the business have moved (there is a need to introduce more owners).
If your current structure doesn’t serve you well, why not restructure? Typically, restructuring would mean selling your business and incurring income tax on profits and capital gains tax (CGT) on gains from the sale of assets.
Fortunately, the ATO recognises that many small businesses are trading in ineffective structures and allow concessions to reduce the tax cost burden in moving to a more effective structure.
The most common restructuring concession is the Small Business Restructure Rollover (SBRR) which is available to businesses with an “aggregated turnover” of $10 million or less.
In some cases when the SBRR criteria is not met, the Small Business Capital Gains Tax (SBCGT) concessions may be applied. The SBCGT concessions are available to businesses with an aggregated turnover under $2m or net CGT assets under $6m.
Small Business Restructure Rollover (SBRR)
The SBRR is a concession where no income tax is payable on profits of plant and equipment or trading stock as well as no CGT triggered from moving from one entity to another. The key requirements are that there is a genuine commercial reason for the restructure and that there is no change to the “ultimate economic ownership”.
For example, a sole trader may restructure to a company to pay a lower rate of tax and can introduce a new business partner to the business.
Small Business Capital Gains Tax (SBCGT)
SBCGT concessions apply purely to capital gains tax assets, which apply to the sale to third parties or related entities. The concession does not extend to income tax benefits in relation to the sale of plant and equipment and livestock, however, can have additional flexibility in relation to CGT assets that may not be available under SBRR.
If an individual owns shares in a company and wants to transfer the ownership to a trust, the SBRR concession does not allow for CGT rollover as the economic owner is different. In this example, the SBCGT concessions may be applied.
While both the SBRR and SBCGT concessions reduce the cost of restructuring, consideration must be given to other taxes, such as goods and services tax (GST) and Transfer Duty which may vary from state to state.
Regardless of how long your business has been operating, it is important to review which entity owns and operates your business. If eligible, the reward for a more favourable restructure is reaped immediately while also offering ongoing benefits for the long term.