Many start their business on a small
scale, operating as a sole trader or trust. Certainly a sensible move,
but what happens when you start to out-grow your structure? The answer
could be simple: make your business a company.
Why make your business a company?
The benefits are clear. Tax on profits
is capped at 30% and it's easier to admit new shareholders. This not
only makes it easier to obtain capital funding, but also increases your
asset protection.
As a sole trader or trust, tax legislation allows you to transfer your business into a new company. No tax is payable at this time and it will only arise in the future when you ultimately sell the company. As bean counters we refer to this as a 'rollover' for tax purposes. It's one of several rollover concessions that can be used to ensure a growing business is operating through the best structure.
Aside from the above 'rollover' concession, our clients have also ultilised the 'scrip for scrip' concession. One client, who was operating as a company, wished to acquire another company that would compliment his existing operations. He acquired the shares in this company and as payment he issued shares of an equivalent value in his own company. Effectively, the two businesses have now merged without any cash changing hands. As a result there has been no impact on cashflow, increased synergy from the combined operations, increased value of the business, and no tax cost. This shows the importance of choosing an efficient structure.
So if growing, or undertaking a merger or acquisition, it is important to be aware of your options. The above concessions are a good alterative when a taxpayer isn't able to access the small business CGT concessions. Income tax is not the only issue; there is also stamp duty, GST, and the need to obtain legal advice in relation to the contracts. There are a wide range of benefits to an efficient structure, including savings on acquiring or merging a business and easier access to equity funding. Ultimately, you can also gain an easier exit from the business through either sale or family succession.
As a sole trader or trust, tax legislation allows you to transfer your business into a new company. No tax is payable at this time and it will only arise in the future when you ultimately sell the company. As bean counters we refer to this as a 'rollover' for tax purposes. It's one of several rollover concessions that can be used to ensure a growing business is operating through the best structure.
Aside from the above 'rollover' concession, our clients have also ultilised the 'scrip for scrip' concession. One client, who was operating as a company, wished to acquire another company that would compliment his existing operations. He acquired the shares in this company and as payment he issued shares of an equivalent value in his own company. Effectively, the two businesses have now merged without any cash changing hands. As a result there has been no impact on cashflow, increased synergy from the combined operations, increased value of the business, and no tax cost. This shows the importance of choosing an efficient structure.
So if growing, or undertaking a merger or acquisition, it is important to be aware of your options. The above concessions are a good alterative when a taxpayer isn't able to access the small business CGT concessions. Income tax is not the only issue; there is also stamp duty, GST, and the need to obtain legal advice in relation to the contracts. There are a wide range of benefits to an efficient structure, including savings on acquiring or merging a business and easier access to equity funding. Ultimately, you can also gain an easier exit from the business through either sale or family succession.
Reap all the benefits you are entitled
to, and get your structure right first time.
