Challenges of Operating a Business Through a Trust

1. Challenges of Operating a Business Through a Trust and Alternatives for Perth Family Businesses In Perth, many family businesses have traditionally opted to operate through trusts, largely due to the tax advantages these structures once provided. However, with evolving tax laws and changing advice from Perth tax accountants, running a business through a trust has become increasingly complex and less beneficial. Why Trusts May Not Be Ideal for Business Operations While trusts offer benefits beyond tax savings, they present several challenges when used to run a business. Key difficulties include: 1.Employee Incentives: Implementing employee incentive programs through a discretionary trust can be difficult. Although trusts offer flexibility and potential tax efficiency, their discretionary nature makes it challenging to provide team members with fixed profit entitlements. 2.Company Tax Rates: Trusts do not qualify for the lower tax rates available to companies on business income. Although profits can be allocated to a company, qualifying it as a base-rate entity, tax law requires that these profits must be distributed. 3.Working Capital: Since trusts distribute all profits to beneficiaries, retaining working capital for reinvestment can be challenging. Unitholders or beneficiaries must agree to delay their payment rights and convert them into loans to reinvest profits back into the business.

2. 4.Accounting Ratios: A trust's lack of net equity complicates the calculation of many accounting ratios used by banks to assess financial health. Although cloud accounting software and a CFO’s expertise can help address this issue, many Perth family businesses prefer simpler, more transparent accounting reports. Tax Options for Transitioning from a Trust to a Company As businesses grow, some find that their trust structure is no longer suitable, making restructuring into a company necessary. This is especially true for larger family businesses transitioning to a corporate structure, driven by factors such as: • Aligning with long-term business strategies and succession plans. • Strengthening relationships with customers. • Meeting family and financial objectives. • Exploring international expansion opportunities. • Accessing government grants and company tax rates. • Addressing working capital needs. Restructuring into a company can also provide additional tax benefits, such as the ability to form a tax-consolidated group, which allows for single-entity tax returns. The Australian Taxation Office (ATO) recognises the validity of such restructuring efforts. Capital Gains Tax (CGT) Considerations Restructuring from a trust to a company often triggers Capital Gains Tax (CGT), which typically arises when the market value of the business’s goodwill exceeds the cost base of its assets. However, a CGT rollover can defer these liabilities. The appropriate rollover option depends on the business’s specific circumstances and objectives. Potential Capital Gains Tax Rollovers Several CGT rollover options are available for Perth family businesses transitioning from a trust to a company. These options can be used individually, sequentially, or in combination with other tax strategies: 1.Subdivision 122-A — Transfer from a Trust to a Fully-Owned Company: This option allows trustees to transfer business assets to a newly created company wholly owned by the existing trust. This enables the retention of working capital within the company, while future profits can be distributed at the directors’ discretion. 2.Subdivision 124-N — Transfer of Assets from a Trust to a Company: This option involves transferring all assets from a fixed trust to a company, effectively replacing the trust. In exchange for the business assets, trust owners receive company shares, allowing the business to continue operations as a company. 3.Section 328-G — Small Business Restructure Rollover: This rollover is available to small businesses, allowing assets to be transferred to a company with deferred CGT. The resulting structure is similar to one achieved through a Subdivision 124-N rollover.

3. 4.Subdivision 615 — Conversion of Units in a Unit Trust to Shares in a Company: This rollover places a company between the unit trust and its unitholders, converting units into company shares. The business can continue operating within the trust structure, but profits are retained within the company. 5.Small Business Capital Gains Tax Concessions: For businesses that qualify as small entities, assets can be sold to a company, with the potential application of CGT concessions, such as: o15-Year Exemption o50% Active Asset Reduction oRetirement Exemption oSmall Business Rollover Relief These concessions also present opportunities to bolster superannuation funds for business owners in Perth. Leveraging Capital Gains Tax Rollovers Various CGT rollover options can facilitate the transition to a more appropriate business structure. However, it’s important to note that the ATO closely monitors these rollovers, especially for significant transactions. Seeking a pre-transaction private ruling from the ATO is advisable for high- profile or financially substantial restructures. Given these considerations, obtaining professional tax advice and maintaining comprehensive documentation are essential when contemplating a rollover or restructuring. This approach ensures the protection of both your business and personal interests while helping you select the most beneficial option. Every business is unique, and while the outlined CGT rollover options provide a useful starting point, it’s also crucial to consider other taxes, such as income tax, GST, and stamp duty, during restructuring. At Westcourt, we are uniquely positioned to assist Perth family businesses with their restructuring needs. Our exclusive focus on family businesses, global network of independent advisors, transparent pricing, and deep expertise in taxation and business advice distinguish us from the competition. If you need guidance on restructuring your family business or trust, feel free to contact us.