Is it time to review your business structure?

The right business structure is essential for growth and long-term success. So what do you do when your current business structure no longer suits your needs?

As a business owner, you’ve probably encountered the advice to “make sure your business is well structured” many times. You had to decide which entity should own and operate your business: a company, trust, unit trust, sole trader, or a combination in partnership? The problem is that life happens and needs change – or your understanding of your needs changes – and the business structure you have isn’t right for your current needs. 

Fortunately, there are options available to address and correct an ineffective structure.

Key questions to ask about your current business structure

• Can your business income be spread across all members of your family or other related entities, taking advantage of lower individual and corporate tax rates?
• Are your personal assets well protected from creditors?
• Are the business assets protected from the trading business?
• Is your risk of legal action from employees minimised?
• Can the business smoothly transfer from one generation to the next?

If you cannot confidently answer ‘yes’ to all of these questions, it may be time to reconsider your structure.

Need help choosing the right family business structure? Learn how with thinkBIG
DOWNLOAD REPORT

Why might your structure be unsuitable?

There are several common reasons for a poor business structure:

• Poor initial advice when establishing the business
• The business has grown beyond early expectations, especially if profits are higher than anticipated
• Changing business goals, such as the need to introduce new owners

If your current structure is no longer serving your business well, restructuring may be the answer. 

Restructuring concessions for small business owners

Traditionally, restructuring was similar to selling your business, incurring income tax on profits and capital gains tax (CGT) on asset sales. Thankfully, the tax office recognises that many small businesses operate in ineffective structures and has introduced concessions to make restructuring more affordable.

Small Business Restructure Rollover (SBRR)

The SBRR is designed for businesses with an aggregated turnover of $10 million or less. This concession allows you to move assets such as plant and equipment or trading stock from one entity to another without incurring income tax or triggering CGT, provided there is a genuine commercial reason for the restructure and no change to the ‘ultimate economic ownership’.
For example, a sole trader may move to a company structure to access a lower tax rate and the flexibility to bring in a business partner.

Small Business Capital Gains Tax (SBCGT) Concessions

If your business does not qualify for the SBRR, the SBCGT concessions may be available. These apply to businesses with an aggregated turnover of less than $2m or net CGT assets under $6m. SBCGT concessions apply only to CGT assets, such as goodwill, and are relevant for sales to third parties or related entities. While these concessions do not apply to income tax on the sale of plant, equipment, or livestock, they offer greater flexibility for certain CGT assets than the SBRR.
For instance, if an individual owns shares in a company and wishes to transfer them to a trust, the SBRR does not provide a rollover because the economic owner changes. In this case, SBCGT concessions may be used.

Additional considerations for restructuring

While both the SBRR and SBCGT concessions can reduce the tax costs associated with restructuring, it is important to also consider other taxes, such as goods and services tax (GST) and transfer duty, which may vary depending on your state or territory.

Reflect on your business structure and ensure it still meets your needs

Regardless of how long your business has been operating, it is important to regularly review which entity owns and operates your business. If you are eligible for the available concessions, restructuring to a more favourable structure can provide immediate benefits and ongoing advantages for your business’s future.
 

FOR MORE INFORMATION

If you would like to discuss whether your current structure is the most suitable, please contact your local RSM office.