structuring

SME Structuring (Part 1) (Summary)

1. Overview of Structuring Objectives

• Asset Protection: Structuring to shield personal and business assets from risk.
• Optimizing After-Tax Returns: Ensuring the structure is tax-efficient.
• Future Exit Strategy: Preparing for a smooth transition or sale in the future.
• Effective Financing: Setting up structures that allow for efficient financing options.

2. Structuring Stages

• Set-Up: Establishing the business structure, whether a proprietary company or partnership.
• Introduction of Outside Parties: Bringing in investors or new partners, often through the sale or allotment of shares.
• Exit or Sale: Preparing for a business sale or restructuring, with a focus on tax concessions and asset protection.

3. Costs of Getting Structuring Wrong

• Administrative Burden: Incorrect structuring may lead to complex administrative tasks.
• Trapped Losses: Inability to fully utilize losses if the structure doesn’t allow it.
• Missed Tax Concessions: Structuring may prevent access to CGT or other tax concessions.
• Restructuring Costs: The financial and administrative burden of having to restructure a company.

4. Proprietary Companies

• Large vs Small: Companies are classified based on financial results:
  • Large Proprietary Companies: Have at least $50M in revenue, $25M in assets, and 100 employees.
  • Small Proprietary Companies: Below these thresholds but still subject to certain regulatory requirements.

5. Set-Up: Asset Protection

• Family Trusts and Corporate Trustees: Often used for asset protection.
• Bankruptcy Considerations: Ensuring that key family assets are controlled by individuals not financially exposed.
• Limited Liability: A major benefit of corporate structures, though courts can pierce the corporate veil in cases of insolvency.

6. Set-Up: Streaming Income

• Trust Structures: Family trusts owning shares can stream income effectively to reduce tax burdens.
• Franking Credits: Consideration of how franking credits are passed to beneficiaries.

7. Set-Up: Accessing Tax Losses

• Continuity of Ownership Test (COT): Requires 50% or more of the company’s shares to be held by the same persons in order to carry forward tax losses.
• Same Business Test (SBT): If ownership changes, the company must continue the same business to utilize losses.

8. Set-Up: Benefit of Franking Credits

• 45-Day Rule: Shares must be held for at least 45 days to claim imputation credits on dividends.
• Trust Beneficiaries: Beneficiaries must have a fixed interest in the trust’s assets to claim franking credits.

9. Set-Up: Company Loans and Division 7A

• Division 7A: Prevents interest-free loans to shareholders by requiring compliant loan terms and repayment schedules.

10. Introduction of Outside Parties

• Allotment of Shares: Selling or issuing ordinary shares to new investors.
• Value Shifting: Ensuring that share allotments don’t unfairly reduce the value of existing shareholders’ interests.

11. Exit Strategy and CGT Concessions

• Small Business CGT Concessions: These can provide planning opportunities for exiting or selling a business.
• Significant Individual Test: Key for accessing CGT concessions, requiring an individual to hold at least 20% of the business.

12. Summary of Key Considerations

• Legal and Financial Advice: Always seek professional advice when setting up, restructuring, or exiting a business.
• Tax Efficiency and Asset Protection: The right structure can balance these two crucial objectives.