Business restructuring tip 1

Discussion in 'Business Accounting, Tax & Legal' started by Mike A, 3rd Sep, 2019.

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  1. Mike A

    Mike A Well-Known Member

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    It is common for many new business owners to setup a new venture with a company and the shares held by an individual.

    As the business grows and significant cash reserves start to build up in the business the owner becomes concerned about asset protection and the risk of those cash reserves being available to creditors.

    One option available to individuals in this situation is to consider what is called a 122-a rollover.

    Basically this would allow the individual to rollover their existing shares to a newly established company and they hold 100% of the shares in NewCo.

    Ordinarily if they transferred their shares capital gains tax would be payable but using a 122-a rollover allows this transfer to be done tax free.

    Now old co could declare a dividend (fully franked) to newco with no additional tax payable and the cash now sits in newco.

    This restructure has to take into account the dividend stripping provisions but if done correctly then it should be possible to restructure the business tax effectively and mitigate any tax as a result and achieve the asset protection desired.
     
  2. Simon Hampel

    Simon Hampel Founder Staff Member

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    Sorry - perhaps I'm missing something here, but aren't you just substituting owning shares individually in one company, with owning shares individually in another? Where is the benefit in that?
     
  3. Mike A

    Mike A Well-Known Member

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    Quite a significant benefit if you have surplus cash reserves in the company.

    Those cash reserves would be at risk in action taken by someone.

    If you had 500k in cash and took out the funds a massive dividend that will be taxed in the individual shareholders name.

    By interposing a company and substituting the shares you allow a dividend to be paid out without additional tax and the cash moved out of the at risk company.
     
  4. Simon Hampel

    Simon Hampel Founder Staff Member

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    Ahh - hangon, so NewCo now owns the shares in OldCo, so you've effectively just inserted a second company between the individual and the trading company? That makes a bit more sense.

    I take it you couldn't achieve the same thing by somehow transferring the ownership of the shares into a family trust? Would that trigger CGT or something?
     
  5. Mike A

    Mike A Well-Known Member

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    Yep you got it.

    A similar thing may be able to be achieved by transferring the ownership of the shares to a family trust but yes that will trigger CGT and you might be able to use the small business CGT concessions (will do another tip on that for next time) but there are some limitations to those concessions (particularly the final two) that might prevent you reaching nirvana with that type of restructure.
     
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    This is a good asset protection strategy as it removes the retained earnings from the trading company to a separate company, without having to pay them out to an individual shareholder who would have to pay top up tax on the dividends.
     
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  7. Yanca

    Yanca New Member

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    Nice one, Mike.
    Thanks for your tips.
    How can I download your Free book?
    :)
    Yan
     
  8. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    A shareholder isn't liable for its parents acts. Eg Air New Zealand owned 100% of Ansett when it failed. It didn't pay a cent of any debts
     
  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Under the Corporations Act a holding company can be liable for the debts of a subsidiary company under some circumstances.
     
  10. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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  11. Mike A

    Mike A Well-Known Member

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    Thanks yanca just click on the link to the website , enter your details and it should get to you :)
     
  12. Mike A

    Mike A Well-Known Member

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    Ansett Australia was a major Australian airline group, based in Melbourne.
     
  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Why did the chicken cross the road?
     
  14. Mike A

    Mike A Well-Known Member

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    He didnt a car hit him and he died
     
  15. AJP

    AJP Well-Known Member

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    @Mike A , wouldn't the cycle just repeat itself once NewCo distributed its dividends to the same individual who owns OldCo and NewCo?

    Or is the purpose to park the funds there and expense desired items through NewCo?
     
  16. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    one of the benefits is it gets the cash out of the trading entity without any immediate tax issues.
     

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