Key Factors to Consider When Choosing a Structure

There is a range of factors to be considered when choosing a structure and these will vary according to each case.

It is often difficult to adopt a structure that will suit all needs. Therefore, it is necessary to determine which are the most important factors and choose the structure that best suits your needs.

Important Key Factors to be Considered:

a) Asset Protection
Asset Protection can take two forms:

• • Protection of the assets of the owner; and
  • Protection of the assets of the venture

b) Income Tax Minimisation

Income tax minimisation can take the form of ensuring that income derived by the structure is taxed at the lowest possible rate.

c) Capital Gains Tax Minimisation
If the venture is to derive income that is capital in nature, the main way that capital gains tax (CGT) minimisation can be achieved is by structuring a venture so that both the CGT 50% discount and the small business concessions can be accessed.

d) Ease of Administration

Any structure put in place will give rise to costs. Such costs include but are not limited to:

• The cost of purchasing the entity;
• The cost of initial registration
• The costs of ongoing renewals; and
• The cost of accounting and tax return requirements

Other Factors to Consider When Choosing a Structure
In addition to the four critical factors listed above, certain factors may influence the choice of structure:

• • • Active Income or Passive Income
      Active income is income from a business. If the structure is to be used to derive active income, it is likely that more importance should be placed on asset protection, income tax minimisation, ease of administration and accessing the CGT small business concessions

      Passive income is income from investment activities eg. rent, interest, royalties and dividends. If the structure is to be used to derive passive income, it is likely that less emphasis will be placed on asset protection and more will be placed on minimisation of CGT liabilities. As passive income is being derived accessing the CGT small business concessions will not be an issue.

• • • Legal and Other Requirements
      In some instances, it may be necessary, for legal reasons, to choose one structure over another For instance, medical practitioners in South Australia are not permitted to trade through a trust.

• • • Ease of Understanding
      It is imperative that business owners understand any structure that is put in place. This is important both for the owners’ peace of mind and to ensure the structure is properly administered.

• • Adaptation to Change
    Changing market conditions and changing legislative provisions can require that a structure be altered in a small way, or changed completely. Where possible a structure should be able to adapt to any currently foreseeable changes

You should consider:

• • The potential tax implications of changes – eg. trust resettlements;
  • The structure’s ability to utilise rollover provisions;
  • The ease with which the structure’s governing documents can be amended; and
  • The costs involved

Admission of Equity Participants

Some structures are more suited to the introduction of equity participants than others. Consideration should be given to any future entry of other people.

Borrowing Capacity

In general, the more complex a structure is the more nervous a financier will be to lend to it. A structure for instance, that limits a lender’s capacity to recover a debt will find it very difficult to raise finance.

Control

You may need to consider who will control the income and assets of the structure and how this control can be changed.

The issue of whether income, ownership and responsibility will all best in the same people is an important consideration.

Succession Planning / Family Involvement

If a venture is to be sold later, consideration should be given to the ability to sell the structure tax effectively as well as the ability to sell the assets of the venture. In some instances, it may be more advantageous to sell an interest in a structure than the venture itself because of CGT implication.

A structure might also be intended to enable control of the venture or investment to be passed down through successive family generations.

Superannuation Contributions

Superannuation is an effective savings vehicle due to its concessional taxation treatment. Making superannuation contributions is more attractive proposition when immediate benefits can be gained by claiming a tax deduction.

Minimisation of Other Taxes and Costs

Payroll tax and Stamp Duty are two major taxes affecting businesses. Other major costs can include:

• Workers Compensation
• Superannuation Guarantee contributions for employees and
• Leave entitlements

Stamp Duty and Land Tax are two major taxes affecting investments.

The Role & Impact of Tax Reform on Choice of Structure

There have been a number of tax reforms over recent years and many of these will impact our structuring options.

Some of the reforms that are considered are:

• Goods and Services Tax;
• PAYG Tax Instalments;
• 50% CGT discount and small business CGT concessions;
• Non-commercial losses;
• Alienation of Personal Services Income;
• Transfer and recoupment of Company Losses;
• Consolidations Regime;
• Simplified Imputation;
• Simplified Tax System;
• General Value Shifting (for non-arms length transactions); and
• De-merger Provisions

Part IVA (A Must Consideration in Structure Selection)

Any structure or restructure will need to be considered in light of Part IVA and needs to be justifiable on commercial grounds. You should consider whether it is the case that, if the tax benefit was not obtained, would there still be valid reasons for choosing that structure.

Part IVA applies where a taxpayer enters into a scheme where they or someone else obtains a tax benefit because of the scheme and it can be concluded that the scheme was entered into for the sole or dominant purpose of obtaining a tax benefit.

It is important to seek professional advice concerning the appropriate business structure for your purposes.

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