Thursday, 10 April 2014

Choosing a Business Entity


Choosing a Business Entity www.bantacs.com.au
The final choice should be made with your accountant who understands your situation completely. This article covers just some of the issues.
My favourite entity is a discretionary trust with a company as trustee. This provides asset protection, creates an employee situation, allows any CGT benefits to flow straight through to the beneficiary and provides flexible profit distribution even into another trust that may hold negatively geared properties.
A discretionary trust is fine when it is just a family business but if there is more than one family involved then a more defined right to profit distribution is necessary. I still recommend that you consider a discretionary trust but one for each family then bring them together to form the business entity. The idea being that the profits, which are strictly defined in the business entity, flow through to each family’s discretionary trust where they can be dealt with as best suites that particular family.
There are a few ways that the discretionary trusts can come together;
Company - The business entity is a company in which the discretionary trusts own shares so their profit entitlement is clearly defined by the number of shares they hold. The main problem here is the difficultly in getting the tax free amounts from the small business CGT concessions out of the company and those companies do not qualify for the 50% CGT discount.
Unit Trust - Similar to above a unit trust where the individual discretionary trust own units in the trust that define their right to profit. Any capital gains made by the unit trust may qualify for the 50% CGT discount and other small business concessions and these should flow all the way through to the discretionary trusts and then through to the beneficiaries. There is a bit of mucking about with CGT event E4 when it comes to the tax free portion of the small business retirement and active asset concessions but it will all work out in the wash. What is concerning with unit trusts that combine more than one family is the controlling individual and significant individual test are going to be very difficult to meet at the Unit trust level so these small business concessions might not even get to first base.
Further Problems - Another problem with both of the above is that it will be necessary for the company or unit trust to be the entity to choose how to utilise the small business concessions. It could be possible that each family would benefit from a different approach especially if there is a difference in ages. There is also the risk that the venture will make a loss. This will be locked in the company or unit trust and can only be offset if the families continue with the business or take on something else. In reality if the business fails they will just close the entity and go their own ways so the tax benefits of the loss will be lost. In a partnership the loss flows through to the partners so each discretionary trust would be able to keep their share of the loss to use in another venture in that discretionary trust.
- If the discretionary trusts came together in a simple partnership where the partnership agreement gives
each discretionary trust a fixed right to the profits then as is the case with the other entities, each family’s discretionary trust can distribute the profit as it suits their particular family situation. In a partnership the assets are considered to be owned by the partners not by the business entity. So when the business makes a capital gain it is really made by each individual discretionary trust. Accordingly they can distribute it as it suits but also have a far better chance of meeting any controlling individual or significant individual
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requirements within their own family unit. All the CGT concessions are available to discretionary trusts and they all flow through to the individual beneficiaries without any change in their status. Further a partnership can distribute a loss so if the business does not work out each family trust can take its share of the loss into another venture without being tied to the same partnership. 


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What Is New on www.bantacs.com.au
Want more? Please go to bantacs.com.au/publications.php for back issues of newsflash or download our free booklets where past newsflash articles are collated according to their topic. There are over 30 topics, for example How Not To Be A Developer, Claiming Your Trip Around Australia As A Tax Deduction,
Claimable Loans, Rental Properties, Overseas, Fringe Benefits Tax, Claiming a Motor Vehicle, GST etc. With the forum and the Ask BAN TACS Notice Board the information on the site regularly changes.
Two very generous askbantacsers have allowed their question and answer to be placed on the notice board. Askbantacs is becoming quite popular; it is a shame so few allow their questions to be placed on the notice board.
http://www.bantacs.com.au/QandA/index.php?xq=533 looks at the problems associated with holding a pre CGT property in a company and one of the shareholders wants out. http://www.bantacs.com.au/QandA/index.php?xq=531 Discusses using company funds to reduce your home loan.
Disclaimer: Please note in many cases the legislation referred to above has only just passed through parliament. The full effect is not c lear yet but it is already necessary to make you aware of the ramifications despite the limited commentary available. On the other side of the coin by the time you read this information it may be out of date. The information is presented in summary form and intended only to draw your attention to issues you should further discuss with your accountant. Please do not act on this information without further consultation. We disclaim any responsibility for actions taken on the above without further advice as to your particular circumstances.