This article was originally published 28 July 2016.
Since the ATO revised the Division 7A/unpaid present entitlement (UPE) rules in 2010, we are facing the prospect that a trust will need to ‘find’ the cash to pay the UPE’s across to a company beneficiary, the first of which could be as early as 2018. Moving your clients into a company structure could alleviate the need to find the cash and allow clients to retain the money as working capital.
There are three possible options to evaluate when undertaking such a restructure that attract some rollover relief:
- Transfer the business from a unit trust to a company and dissolve the unit trust
- Create a new subsidiary company under the unit trust and transfer the business
- Interpose a new company between the unit holders and the unit trust, with the business remaining in the unit trust.
Each option has different CGT and stamp duty implications; albeit under Options 2 and 3 it may be possible to eliminate both. Under Options 1 and 2 you need to think through the practical implications of stopping a business in the unit trust and starting up again in the company, these include:
- Getting a new ABN
- Notifying all suppliers
- Opening new bank accounts
- Consent of the bank(s) to move borrowing facilities to the new entity
- Having leases of premises assigned by landlord.
Option 3 does not present these problems, however not all existing unit trust structures will qualify for rollover relief.
If Option 3 is selected, more likely than not, you will need to consider entering the tax consolidations regime to address Division 7A issues associated with the UPE’s owed to the company by the unit trust.
An alternative may be to not elect for CGT rollover relief but instead try to access the CGT small business concessions in order to reduce the taxable gain down to nil, which will give you a brand new higher tax cost base.
In moving to a company structure, it is a timely reminder that all aspects of the Corporations Law needs to be adhered to including the possibility of having to audit the financial statements and lodge financial statements with ASIC where the company is considered to be ‘large’, i.e. if it meets two of the three tests - greater than $25 million turnover, more than 50 employees, more than $12.5 million gross assets.
Further, being in a company structure allows claims to be made for research and development concessions which can help reduce the overall tax liability.