Structuring Overview

Many clients believe that the use of a company structure will provide personal and business asset protection - this is not necessarily the case.  Companies simply provide limited liability for shareholders, but not protection of assets of the company.  An unsecured creditor would not normally have the right to sue shareholders personally for debts of the company.  In some circumstances, directors of the company may be personally liable for debts and liabilities, even to unsecured creditors, in circumstances of an ASIC prosecution, liquidation of the Company, misconduct of directors, workplace health and safety breaches, and environmental law proceedings.

At the very least, for asset protection purposes, discretionary trusts ought to be used as equity holders.  Preferably the assets/business ought to be owned in an appropriate trust structure.  A significant benefit of trusts includes not only income distribution flexibility, but asset protection. A properly drafted trust structure will ensure that: 

1. No beneficiary has any automatic or default right to income or capital of the trust, and therefore any misadventure by beneficiaries ought not adversely affect the trust assets;
2. The trustee is not ordinarily able to call on beneficiaries to pay debts of the trust;
3. Control of trusts; it is possible to ensure that the trust structure is drafted to enable assets to be passed from one generation to another without any CGT, stamp duty or other taxation imposts.
4. Flexibility is the key to the ability of a trust to allow beneficiaries to "come and go" with a minimum of cost and complexity. The rules of the trust can be updated to keep pace with the commercial and taxation environment, as the business or investment base of the trust grows.

Income Tax Consequences 

1. Trusts do not pay tax provided the income of the trust is distributed to a beneficiary.  Beneficiaries pay tax at the rate applicable to their own income. 
2. There is some scope for income of a trust to be spread amongst a wide range of beneficiaries and to, therefore, cap or manage the rate of tax payable in each year.  Flexibility is the key to the ability of the trust to properly provide superior taxation results for business and investment income.
3. Through the use of a corporate beneficiary, the tax rate for income distributed by a trust ought not exceed the company rate of 30%, and in many cases will be able to provide a much better result.

Trusts will achieve a much better CGT result than the use of companies.  Although a company can usually claim the 50% Active Asset Reduction for business assets, it is often difficult for shareholders to access those funds tax effectively.  Companies cannot claim the 50% CGT General Discount which is available to individuals, trusts and superannuation funds.  Trusts can access all of these CGT concessions.  In most circumstances, it ought to be possible to have a taxable capital gain on sale of a business of up to $4 million in a trust and, through the use of the General Discount, Active Asset Reduction and Retirement Exemption, have no taxation liability on that sale.

Companies cannot access the 50% General Discount and are unable to pass the capital gains tax free portion of any Active Asset Reduction through to shareholders (CGT Event E4), unless it is to be an unfranked dividend.  A Company structure severely limits your ability to move income between related entities. 

If the revenue generated by your Company is not "Personal Services Income", options for distributing the business income can be explored.  In the context of the estate planning and asset protection objectives, we suggest that the business structure can be updated and improved to allow, not only a superior asset protection position, but more flexibility for the purposes of future asset accumulation, protection, and tax efficiency.