Business Structures

COMPANIES, TRUSTS AND PARTNERSHIPS

The need for planning arising from the acquisition of an existing structure and the change from one structure to another is dealt with at the end of this guide before the small business capital gains tax concessions, which are available to all entities to differing degrees, subject to qualifying criteria.

The choice of structure has a significant impact on the amount of tax paid on the ultimate sale of the business. As such great care is required in getting the business structure right at the time of establishment or purchase of the business to be able to take advantage of these considerable concessions.

In deciding which type of structure is appropriate, an assessment of the goals, intentions, members, and types of activities members wish to engage in should be weighed up against the cost and statutory and reporting obligations of incorporation.

Business structures

The structures available for the conduct of a business are:

  1. Sole proprietorship (does not involve a separate legal entity);
  2. Partnership (does not involve a separate legal entity but each partner may be a different legal entity, including an individual, company or trust);
  3. Company (separate legal entity);
  4. Discretionary trust (trust relationship);
  5. Unit trust (trust relationship);
  6. Self-managed superannuation fund (trust relationship).

Several of these structures might be combined in the one undertaking. Those several structures would then be linked by contractual arrangements (formal or informal). It may be that the real estate asset in which the business is conducted is held in a discretionary trust, whilst a company (that rents the premises from the trust) runs the business. It may be that partners run their business in a partnership of their family trusts or own the premises, plant, equipment and goodwill of the business in a partnership of their family trusts and lease and licence those assets to a company that operates the business. Whatever the combination, an analysis of each component will result in an understanding of the final architecture chosen.

In making the choice as to which structure to use, the principal considerations are:

  1. Set up and administration costs;
  2. Protection of the assets of the entity and the client;
  3. Flexibility in the structure and in distribution of the profits of the undertaking;
  4. Minimisation of tax; and
  5. Suitability to  exit strategy/succession plan.

The optimum tax and asset protection structure is not chosen every time because there may be other overriding motives. Some situations influencing the decision include :

  1. The client has an existing company, group of companies or other structure through which they have traded for many years and understand well the use of that structure. They see this as providing a significant administrative and commercial advantage. For instance, profits can be moved within the group easily.
  2. The client has losses in their existing entity and wishes to continue to use that existing entity to try and offset the losses in the new enterprise.
  3. The client has a short to medium term goal of selling the new enterprise and does not plan on accessing profits (if any) of the new enterprise prior to sale.
  4. The client who at present has no immediate family with whom to split income wants the simplicity of being a sole trader. The business risk is perceived to be of no or little concern.
  5. The business is high-risk with little prospect of capital gain and the client seeks the protection of incorporation without the complexity of a trust.
  6. The client envisages rapid business expansion and, whilst retaining control, wishes to be able to give others equity interest in the business in the future.
  7. The client wants to include their family but protect against the risk of their son’s marriage failing.
  8. The client wants to protect this asset, for the benefit of their life partner, from claims under various family provisions legislation.

Sole proprietorship

A sole proprietorship, most often known as a sole trader, is the simplest trading structure whereby the business has no separate legal existence from its owner. It is owned and run by one individual, who is fully responsible for all debts and liabilities of the business. A sole trader does not have to be of a certain age to trade as anyone can enter into a contract, but practitioners should be cognisant of the laws regarding the protection of minors.

Partnership

By law, a partnership is ‘the relation which exists between persons carrying on a business in common with a view to a profit’, so obviously it takes two individuals to form a partnership: see Partnership Act 1892. The maximum number of partners allowed by law is 20 (s 115 Corporations Act 2001) unless the partnership falls within the following exceptions (regulation 2A.1.01 Corporations Regulations 2001):

  • actuaries, medical practitioners, patent attorneys, sharebrokers, stockbrokers or trade mark attorneys: maximum 50 partners
  • architects, pharmaceutical chemists or veterinary surgeons: maximum 100 partners
  • legal practitioners: maximum 400 partners
  • accountants: maximum 1000 partners.

All partners have authority to act on behalf of the business so far as third parties are concerned. However, most partnership agreements contain covenants that partners will not pledge the credit of the partnership without the authority of all or a specified number of the partners. All partners legally share profits, which can be in unequal shares and involve unequal risks and losses, according to the partnership contract. A partner cannot be an employee of the partnership. Admitting a new partner is governed by the partnership agreement, but commonly requires the agreement of all other partners.

General partnership and limited partnerships

There are general partnerships and limited partnerships. A limited partnership must be registered separately with the relevant state’s fair trading and/or consumer affairs authority, but as a business vehicle a limited partnership is not an option in Western Australia and Tasmania.

A limited partnership must consist of at least one general partner and one limited partner. While a partnership can only have a maximum of 20 general partners, subject to exceptions, there are no limits to the number of limited partners who can be involved in a limited partnership. A limited partner does not have the power or liabilities of a general partner. Limited partners cannot take part in the management of the business, and generally do not have authority to act on its behalf, although some of these matters can be modified to an extent by the partnership agreement. More importantly, a limited partner has limited liability.

This type of business structure is useful when an investor, a potential partner, simply wants to contribute capital to the business and share in its success without having control of or any authority over how the business is run. A limited partner is more like a passive investor who bears a risk by injecting capital into a business in an attempt to achieve strategic growth but avoids liability should that strategy fail.

Companies

Unlike partnerships and sole traders, a company is a legal entity separate from its shareholder owners. There are four types of companies:

1. a company limited by shares;

2. a company limited by guarantee;

3. a company with unlimited liability; and

4. a no-liability company (for mining purposes).

Restrictions apply to proprietary companies as regards fundraising. Effectively, this means the shares cannot be offered to the public. Proprietary companies cannot raise funds by engaging in any activity that requires any form of disclosure document to be issued, such as a profile statement, offer information statement, or prospectus. Under Australian law, a proprietary company must be either limited by shares (Ltd) or unlimited. A limited company provides protection to shareholders, as they are only liable to the extent that their shares are unpaid. By contrast, the shareholders of an unlimited company are exposed to unlimited liability.

Proprietary limited company

A proprietary limited company requires a minimum of one director and one shareholder and not more than 50 shareholders who are not employees. The director and shareholder can be the same person. At least one director must be ordinarily resident in Australia. A company secretary is not required by law, but if one is appointed it is possible for that person to be a director as well. The maximum number of non-employee shareholders is limited to 50. If more are wanted, a public company must be set up.

Publicly listed company

A public company requires at least three directors, of which at least two must be ordinarily resident in Australia, and one shareholder. By law, a company secretary is required and must be ordinarily resident in Australia. It is possible for the same person to be a company director and the company secretary.

Directors generally

A director must be an individual, not a company, and be at least 18 years old. The written consent from the director must be obtained, which should be kept with the company’s records.  It does not need to be filed with ASIC.

A person must not act as a director or secretary or manage a company without court consent if they are:

  • an undischarged bankrupt or the subject of a personal insolvency agreement or an arrangement under the Bankruptcy Act 1966 that has not been fully complied with; or
  • have been convicted of various offences such as fraud or offences under company law, such as a breach of the duties of a director or insolvent trading.

If a person has been convicted of one of these offences, they must not manage a company within five years of their conviction. If imprisoned for one of these offences, they must not manage a company within five years after their release from prison.

If a person becomes bankrupt, enters into a personal insolvency agreement or is convicted of a relevant offence at a time while they hold the office of a director or secretary of a company, then they automatically lose that office. The company must then notify ASIC that this person is no longer a director or secretary of the company. ASIC can also ban a person from being a company director in certain situations. If a person is not allowed to be a company director or secretary, then they are not allowed to manage a company. It is a serious offence to set up dummy directors for another person who really manages the company.

Under section 206G of the Act a person who is disqualified following conviction for an offence or insolvency rather than disqualified by ASIC may apply to the court for leave to manage a corporation. The court may set aside the automatic 5-year disqualification if satisfied that there are considerations in favour of such an order: Re Colin Gregory Ryan [2014] QSC 18.

If disqualified by ASIC under Part 2D.6 then ASIC may give a person who it has disqualified written permission to manage a particular corporation or corporations. The permission may be expressed to be subject to conditions and exceptions determined by ASIC.

Directors’ duties

Directors owe both statutory and common law duties to the company and its shareholders.

Serious penalties for breach include fines, imprisonment and being prohibited from acting as a director.

Common law duties

Common law duties include:

  • To act bona fide in the interests of the company as a whole;
  • To not act for an improper purpose;
  • To exercise care and diligence;
  • To retain discretion;
  • To avoid conflicts of interest;
  • To not disclose confidential information; and
  • To not abuse corporate opportunities.

Statutory duties

Statutory duties include:

  • Section 180 – Care and diligence – civil obligations;
  • Section 181 – Good faith – civil obligations;
  • Section 182 – Use of position – civil obligations;
  • Section 183 – Use of information – civil obligations;
  • Section 184 – Good faith, use of position and use of information – criminal offences;
  • Section 191–195 – Disclosure of, and voting on matters involving, material personal interests;
  • Section 208–210 – Member approval for related party financial benefits;
  • Section 285–318 – Financial reporting; and
  • Section 588G – Director’s duty to prevent insolvent trading by company.

When directors can be liable for company debts

When a company is in liquidation
  • Insolvent trading compensation claims made by a liquidator or creditors.
  • Unreasonable director-related transactions claims made by a liquidator.
  • Loss of employee entitlement claims made by a liquidator or creditors.
Whether or not the company is in liquidation
  • PAYG taxation and superannuation contributions debts.
  • Claims under personal guarantees. The company does not need to be in liquidation or insolvent. An exception is that a personal guarantee cannot be exercised during the period of a voluntary administration, but can be as soon as that period ends.

Company secretary

A public company needs a company secretary, but this is optional for a private company. The secretary can be the same person as the director. In a one-director company, it is common for the same person to be both the sole director and sole secretary. It is necessary to obtain the written consent from a secretary, just like a director.

Shareholders

Every company must have at least one member. Any legal entity may hold shares in a company. This includes any person, company, trust, incorporated association or partnership resident anywhere in the world. A child under the age of 18 years can only hold shares through a trustee or guardian. A trust or superannuation fund can only hold shares through its trustee. A proprietary limited or limited company may be a shareholder in another company. There is no minimum share capital required to incorporate a new company, although there has to be at least one share on issue at the time of formation.

Appointment of public officer

A company must appoint a ‘public officer’ within three months of commencing business or deriving income from property in Australia, and notify the Australian Taxation Office of the appointment, also within the three-month period. The Public Officer must be a natural person ordinarily resident in Australia and be at least 18 years old. The Public Officer is responsible for ensuring that the company complies with the tax law and for liaising with the ATO concerning the company’s taxation matters. See section 252 of the Income Tax Assessment Act 1936. A public officer must be at least 18 years old.

Registered office

All companies need a registered office in Australia: s 142 Corporations Act 2001. This is often the office of the company’s accountant or lawyer. A home address will suffice.  For a proprietary company the office does not need to be open to the public. However, it is a place where documents can be legally served on the company, so it cannot be a post office box. If the company does not own or lease the office, it is necessary to obtain the occupant’s written consent for use as the registered office and the company’s name and the words “Registered Office” must be prominently displayed.

Company Names

The name of a company cannot match any existing registered or reserved company names nor any existing registered or reserved business names, unless of course the same person owns both.

To ensure that a company’s name is not misleading about its activities, certain words and phrases cannot be used without approval, for example ‘university’.

Company names must also not suggest a misleading connection, for example, with the government or the royal family.

ASIC may refuse to register names that are considered offensive or suggest illegal activity.

A proprietary company must include the word ‘Proprietary’ in its name and must also indicate that the liability of its members is limited, unless the members’ liability is unlimited. The approved abbreviations ‘Pty’ ‘Ltd’ may be used.

A no–liability company must be a public company. The Corporations Act limits the activities of a no–liability company to mining purposes only.

A company limited by guarantee must be a public company.

The ACN assigned on registration can be used as a name. It is not necessary to name a company. For example:  ACN xxx xxx xxx Pty Ltd.

Next step
  • Search the ASIC registers to confirm whether the proposed name is identical to a name already registered. To avoid a passing off suit it is prudent to ensure the name is not similar to a name already registered.
  • Check with IP Australia to ensure the name is not similar or identical to any registered or pending trademarks.

Execution by companies

Although most constitutions permit the appointment of an alternate director, not many permit the appointment of an attorney by a director.

A general power of attorney by a director does not enable the attorney to exercise the donor’s directorial duties. The donor is not empowered to make the delegation.

The company constitution may contain a specific power:

  1. empowering a director to delegate their directorial duties which may then be effected by a power of attorney; or
  2. empowering the directors to resolve that a director may delegate his directorial duties which may then be affected by a power of attorney.

The company may by resolution of directors pursuant to s 198D of the Corporations Act 2001 delegate their responsibility, unless the constitution otherwise provides.

If the constitution does permit a director to appoint an attorney, which is rare, then the attorney cannot affix the company seal in a dual role as director or secretary personally and as attorney for another director/secretary if the constitution requires the seal to be affixed in the presence of two people.

Equity Nominees Ltd v Tucker [1967] HCA 22
Mancini v Mancini [1999] NSWSC 799

If the company is a single-director company and the constitution does permit the director to appoint an attorney, the attorney will have effective control of the single-director company. The affixing of the common seal may be undertaken in the presence of just the single director, and the attorney represents that director.

s 127(2) Corporations Act

Corporations may now execute documents without the use of the common seal, and any document that could have been executed on behalf of the corporation by a director may be executed by an attorney for the director, provided that the constitution authorises the appointment of an attorney by the director.

Trusts

A trust is a business structure whereby the trustee holds property, incurs liabilities, and earns and distributes income on behalf of the beneficiaries. The trustee is personally liable unless otherwise agreed with the counter party. The trust deed normally provides for the trustee to be indemnified by the assets of the trust but not by the beneficiaries. The trustee’s powers are set out in the trust deed and in trustee legislation.

The most common types of trusts are:

  • fixed trusts;
  • unit trusts;
  • hybrid trusts; and
  • discretionary trusts.

The features of these trusts are discussed below.

Fixed trusts

These are typically used when an investment is held for an infant beneficiary or a property is held by a trustee to protect the identity of the beneficiary.

Unit trusts

Units held by the unit holders confer a proprietary interest in all the property of the trust estate but in no particular asset of the trust. Various rights may be attached to different classes of units providing the opportunity to ‘stream’ different forms of income, such as revenue income and taxable capital gains, to different unit holders.

Hybrid trusts

Hybrid trusts come in many shapes and combine the discretionary features of a discretionary trust with the fixed features of a unit trust. Under a hybrid trust deed, the trustee might for instance be empowered to apply income, or a particular form of income, to one class of units to the exclusion of other classes providing that if the discretion is not exercised the income is divided equally between all unit holders.

Discretionary trusts

Under a discretionary trust, the trustee has the discretion to decide to whom to distribute the income and capital of the trust. The beneficiaries have the right to require the trustee to make the distribution decision but no equitable interest in the income or capital of the trust estate. This structure is very popular with family businesses because of the flexibility they offer in income distribution and splitting.

A family trust is generally established by a family member for the benefit of members of the family group. The beneficiaries are generally defined as a class of beneficiary – for example, the children and grandchildren of X as distinct from the nomination of particular individuals. This provides great flexibility in who may benefit under the trust in the future. They can protect family assets from the liabilities of one or more of the family members in the event of them becoming bankrupt or insolvent. They provide a mechanism to pass family assets to future generations and may avoid issues such as challenges to the will of a deceased senior family member. They also provide a means of accessing favourable taxation treatment by ensuring all family members use their income tax free thresholds. In the event that a discretionary trust is created by will then there is the added benefit that infant beneficiaries are taxed at normal marginal rates. In relation to losses and franking credits a family trust election can secure tax advantages otherwise unavailable provided that the trust passes the family control test and makes distributions of trust income only to beneficiaries of the trust who are members of the family.

The settlor

The trust may be declared by the trustee but is usually set up by the gift of a small sum of money by a settlor to the trustee for the benefit of the beneficiaries. That initial gift is then increased by the investment and other activities of the trustee. It is to be appreciated that the trustee holds the legal estate on behalf of the beneficiaries, of which the trustee may be one. The beneficiaries hold the equitable beneficial estate. If both the legal and equitable estate were vested in one person, then there would be no trust as there would be complete ownership.

The trustee

A trustee is the entity to whom property is conveyed in trust for another. The trustee holds the property as the legal owner but for the ultimate benefit of the beneficiaries. The trustee can be a natural person or a company. For asset protection purposes and because a company does not die, it is common for the trustee to be a company.

It is not unusual however for discretionary trusts to have the parents as trustees as well as beneficiaries, together with their children, spouses and remoter issue, and entities in which they may have an interest. A so-called bucket company is often a beneficiary, providing a haven for income that would otherwise be taxed at more than the company rate of 30%. The parents then control the division of the income and capital of the trust, and take some care in appointing successor trustees or naming an appointor to take this responsibility. If a company is trustee, then care needs to be taken as to the successor shareholders who appoint the directors who in turn exercise the trustee powers.

The beneficiaries

Beneficiaries do not hold legal title in the property held in trust, but they receive the benefit of the legal title that is held by the trustee. The trustee can be a beneficiary of a trust, but cannot be the only one. A beneficiary can be a body corporate thus providing further taxation benefits. In the case of a discretionary trust, the trustee may pay the capital and income to any one or more of the beneficiaries at its discretion. In the case of a unit trust, the beneficiaries are entitled to a fixed share of the capital and income of the trust with no trustee discretion.

Vesting dates

The vesting date is the day on which the trust will officially end, and the trustee is required to wind up the trust and distribute the assets of the trust to the beneficiaries. This date can be no more than 80 years from the date of commencement. However, the perpetuity period is often set much sooner than 80 years.

Trusts can also be created to vest on a specific event, such as the death of a person.

Vesting needs to be planned well in advance of the vesting date to avoid unintended tax and revenue implications such as liabilities for capital gains tax and transfer duty.

Vesting dates on shorter trusts can be extended to the maximum of 80 years if the trust deed contains the power to do so; otherwise an application has to be made to the Supreme Court under trust legislation to extend the date. When any change is to be made to a trust, it needs to be considered whether the circumstances constitute an amendment to the trust, or amounts to a resettlement, thereby perhaps triggering a capital gains tax event or other tax or duty implications.

BUSINESS STRUCTURES – COMPARATIVE TABLE

The following table considers:

  • the status of each structure in relation to income tax, capital gains tax and land tax;
  • the status of each structure in relation to asset protection;
  • control of the structure and succession;
  • the flexibility to change as circumstances might dictate;
  • the initial and ongoing costs associated with setting up and running the structure.

The table rates each structure against the other on a scale of 1 for the least desirable to 10 for the most desirable.

Entity Sole trader Partnership of individuals Company Unit trust Discretionary trust Superannuation fund
Income tax 1
No income splitting. Must substantiate business deductions. Losses can be offset against profits. Tax at marginal rates of up to 46.5%.
1
Limited income splitting. Losses not trapped in partnership, distributed to partners & can be offset against other income of those partners. May be able to vary profits & losses payable to partners year to year. Tax at marginal rates of up to 46.5%.
6
30% flat tax payable on profits of company. Dividends taxed to shareholders. Franked dividends pass on tax paid. Restrictions on loans to shareholders. Losses trapped in company. Limited splitting through classes of shares.
8
Profits taxed at unit holder level so depends on structure of unit holders. Good for joint ventures. Losses trapped in trust.
8
Profits usually taxed at beneficiary level so depends on tax profile of the beneficiary. Maximum ability to split income. Biggest range of recipients. Losses trapped in trust.
10
15% tax or 0% where income derived from assets supporting pensions being paid by the funds.
Sole trader Partnership of individuals Company Unit trust Discretionary trust Superannuation fund
Capital gains tax 6
50% discount for certain assets or rights held for more than 12 months. Main residence exemption. Small business concessions.
6
Not part of partnership income. Capital between partners in accordance with interest in partnership. 50% discount for certain assets or rights held for more than 12 months. Main residence exemption. Small business concessions.
3
No 50% discount. No main residence exemption. Tax free gains to company are taxed to shareholders without imputation as dividends if distributed. Small business concessions available but partly clawed back on distribution to shareholders. Losses trapped in company.
8
Depends on unit holders. 50% discount applies to unit trust. No main residence exemption. Small business concessions available. Losses trapped in trust.
8
50% discount for certain assets or rights held for more than 12 months. No main residence exemption. Maximum ability to split capital gains. Small business concessions. Losses trapped in trust.
9
33% discount for certain assets or rights held for more than 12 months, meaning 10% tax, or no tax where capital gains derived from sale of assets supporting pensions being paid by the fund. Limited gearing. Cannot own main residence or other personal use assets.
Sole trader Partnership of individuals Company Unit trust Discretionary trust Superannuation fund
Asset protection 2
None except by insurance. Business & non-business assets exposed.
1
None except by insurance and may also be exposed to partners’ debt due to joint and several liability of partners. Business and non-business assets exposed.
8
Shareholders protected from company debts but value of their shares available to their creditors on bankruptcy. Directors potentially liable if trading while insolvent.
8
If trustee a company. Unit holders protected if deed correctly worded from business debts but value of their units available to their creditors on bankruptcy. Deed usually limits trustee’s indemnity against unit holders. Trustee personally liable for debts of business but indemnified out of trust assets to extent available.
10
If trustee a company. Beneficiaries protected if deed correctly worded from business debts. Beneficiaries usually have no value in their potential interest in the trust for their creditors but can be attributed value where they have sufficient control of the trust. Trustee personally liable for debts of business but indemnified out of trust assets to extent available.
10
If trustee a company. Borrowings now available but lender has no recourse against fund only against particular asset. Beneficiary’s account protected from creditors of the beneficiary in most cases, however lenders usually insist upon the beneficiaries providing personal guarantees to secure the borrowing.
Sole trader Partnership of individuals Company Unit trust Discretionary trust Superannuation fund
Control & succession 8
Total control but can’t move income between family members. Can move capital in and out at will. Can change nature of business at will. Business ceases on death.
5
Regulated by the agreement. Usually continuing partners have pre-emptive rights. Can move capital in and out. Can change nature of business by agreement of partners. Partnership ceases on death of partner.
5
Bound by constitution. Must act in interests of share holders. Directors make most decisions. Can have single director control. Perpetual succession.
5
Bound by trust deed. Usually arms length parties involved so should consider pre-emption rights. Life of trust usually limited to 80 years.
10
Bound by trust deed. Usually high level of control. Life of trust usually limited to 80 years.
6
High level of control over investment decisions. Regulated by SIS Act. Must wind up on death of last surviving spouse OR beneficiary.
Sole trader Partnership of individuals Company Unit trust Discretionary trust Superannuation fund
Set up & running costs 10
Least expensive. No reporting requirements except business name registration and taxation obligations. No compulsory super. No workers comp. No pay roll tax.
5
Agreements need care and may be costly. Notionally a separate tax entity requiring tax return and ongoing accounts. No super, workers comp, or pay roll tax for partners’ drawings.
5
Shareholders agreement recommended. Ongoing compliance & accounts. Super and payroll tax and workers comp apply to payments to principals.
4
Incorporation of trustee and trust deed and unit holders agreement required. Ongoing compliance and accounts. Super and payroll tax and workers compensation apply to payments to principals.
4
Incorporation of trustee and trust deed required. Ongoing accounts. Super and payroll tax and workers compensation apply to payments to principals.
4
Trust deed required. Highly regulated. Ongoing accounts and yearly audit required.
Sole trader Partnership of individuals Company Unit trust Discretionary trust Superannuation fund
Flexibility 3
All income to principal. No opportunity to ‘split’ income.
4
Limited as agreement with other partners required & few choices.
3
Anything in interests of shareholders.
5
Similar to company except unit holders share in gross income rather than franked income.
10
Maximum discretionary powers.
4
Little as highly regulated.
Sole trader Partnership of individuals Company Unit trust Discretionary trust Superannuation fund
Land tax – NSW 10
Threshold available. Principal residence exemption available.
10
Threshold available. Principal residence exemption available.
8
Threshold available. Principal residence exemption not available. Related corporations may be assessed together.
7
Principal residence exemption not available. Special wording of trust deed required in order for threshold to be available. Special notifications required to gain threshold for certain trusts created prior to 31/12/05 if fixed beneficiaries of same family group own 95% and combined taxable value of land less than $1m.
3
No threshold.
10
Threshold available to complying fund.
Land tax – VIC 10
Threshold available.
10
Threshold available.
10
Threshold available but related companies may be assessed together.
7
Threshold available but related trusts are taxed together.
5
Threshold available then surcharge rates. Related trusts are taxed together.
10
Threshold available to complying fund.
Land tax – QLD 10
Threshold available.
10
Threshold available.
10
Reduced threshold available.
7
Reduced threshold available.
5
Reduced threshold available.
10
Reduced threshold available.
Land tax – SA 10
Threshold available. Principal residence exemption available.
10
Threshold available. Principal residence exemption available.
7
Threshold available. Principal residence exemption not available. Related corporations may be assessed together.
7
Threshold available. Principal residence exemption not available.
7
Threshold available. Principal residence exemption not available.
7
Threshold available. Principal residence exemption not available.

Income tax

The principal way in which tax is minimised is by the ‘splitting’ of income or by having the flexibility to divert income to the lowest tax rate entity. Therefore a sole trader and a partnership of individuals rate poorly in the table. Companies pay tax at a rate of 30% on their taxable income. Individuals pay tax on a sliding scale in accordance with the attached table.

 Taxable income
 Tax on this income
 $0-18,200  Nil
 $18,201 – $37,000  19c for each $1 over $18,200
 $37,001 – $80,000  $3,572 plus 32.5c for each $1 over $37,000
 $80,001 – $180,000  $17,547 plus 37c for each $1 over $80,000
 $180,001 and over  $54,547 plus 45c for each $1 over $180,000

Trusts are required to lodge tax returns but do not pay tax to the extent the income of the trust is distributed to beneficiaries. The beneficiaries assessed as being entitled to the income of the trust pay tax on that income as their entitlement to that trust income is added to the other income (if any) of the beneficiary. If the trustee does not distribute all of the income, the undistributed income is taxed at maximum marginal tax rates of 47% (including the 2% Medicare levy).

The lower company tax rate of 30% allows a tax effective long-term accumulation of income in the company. Eventually the net profits of the company are paid to the shareholders as a dividend, which is what most small clients want and those profits are then liable to tax at the shareholder’s rate of tax but with a credit for the company tax paid. If shareholders have an average rate of tax of less than 30% then they will receive a refund from the ATO. If however, shareholders have an average rate of tax in excess of 30% then additional tax is payable by those shareholders.

It is also worth mentioning that the use of a company structure to achieve a flat 30% rate of tax does not preclude the Commissioner of Taxation from assessing the principal personally if the company’s income is in fact derived from the personal exertion income of the principal. The same applies to partnerships and trusts.

Also the practice of any entity distributing profits by way of wages to family members is regulated by the need to satisfy the Commissioner that the wages paid to such family members is reasonable. Income Tax Assessment Act 1997 – S 26-35 Reducing deductions for amounts paid to related entities.

The lower rate of tax for companies is beneficial only if shareholders are subject to a higher rate of tax. The average tax rate for individuals does not exceed 30% until approximately $105,000.

For the purposes of tax in the table, unit trusts are rated the same as companies. However the trustees of unit trusts are not taxed before dividing the profits amongst unit holders and therefore if units are owned by tax advantageous entities such as discretionary trusts then better tax consequences can be achieved. The unit holders can do their own tax planning. The potential advantages of using a unit trust over a company structure are readily illustrated by a project that is conducted, not by a company, but rather by a unit trust in which one unit holder has losses from other ventures. These losses can be offset against his proportion of the profits of the project without 30% tax having firstly been deducted.

However, as with companies, losses are trapped at the trust level and cannot be passed to the unit holders.

The discretionary trust is the most effective vehicle for the purposes of ‘splitting’ income. Each and every year the amount paid to any beneficiary is at the discretion of the trustee as is the type of income paid to that beneficiary whether it be interest, dividends, capital gain or otherwise. Any beneficiary can be preferred to any other beneficiary.

Unearned income paid to infants is not tax effective as such amounts are subject to the maximum rate of tax to such distributions. Minors cannot use the low income tax offset to reduce tax payable on unearned income. Only $1307 (after low income thresholds) can be paid to such infant beneficiaries before the maximum marginal rate of 45% is payable.

Family controlled companies that are beneficiaries of a family discretionary trust provide an opportunity to accumulate excess trust income at a 30% tax rate rather than incur the maximum rate applicable to undistributed income. The benefit of paying such income to a corporate beneficiary has been recently reduced by the ATO treating such distribution as a loan from the company to the trust, which requires the trust to pay interest at prescribed commercial rate and repay the amount in equal instalments over 7 years.

Capital gains tax

The taxable capital gain is added to the total taxable income of the taxable entity and marginal rates of tax then applied.

The taxation of capital gains is however preferential to that of ordinary income because of the existence of numerous concessions including the general 50% discount and the small business CGT concessions. To qualify for the 50% discount the asset must have been owned for 12 months from the date of acquisition to the date of disposal. The 50% discount is available to all taxpayers except for companies.

It is vital to remember the date of acquisition for CGT purposes is the date of the contract, not completion; and the date of disposal for CGT purposes is also the date of the contract, not completion. Further, there are numerous anti-avoidance rules, particularly relating to options which reduce the period of ownership for the purposes of the 12-month holding rule in the general 50% discount.

Partnerships do not pay capital gains tax. Rather, each partner is assessed. Any capital gain in a partnership is included in each individual partners return in an amount equivalent to their percentage interest in the partnership. For these purposes real estate interests are treated as tenancies in common in the respective shares equivalent to the partners’ interest in the partnership assets. The gain is not included in the partnership return.

This means that each partners’ component of the gain is treated in accordance with his circumstances. For some partners the capital gain may be a pre CGT asset whilst for others it may be post GGT and taxable. The 50% discount may be available to some partners and losses from other activities of each partner can be offset against their proportion of the capital gain.

What this also means of course is that a change in the ownership of the partnership asset by the retirement or entry of a partner can have significant CGT implications.

The small business concessions are available to qualifying partners.

A unit trust gets the benefit of the 50% discount and this flows through to unit holders who must reassess whether they are entitled to claim the 50% discount.

The discretionary trust again leads the field in that the capital gain can be ‘split’ and paid to such beneficiaries so as to achieve the best tax result with the availability of the 50% discount. Individuals, partnerships and companies have no such flexibility.

Losses are trapped in the trust and cannot be distributed to beneficiaries.

It is important to remember that an amendment to a trust deed may cause a resettlement. For stamp duty and CGT purposes, a resettlement is treated as if the entire trust assets are transferred to a new trust creating a significant tax liability.

Taxation Determination 2012/21 has confirmed that the majority of amendments to trust deeds, where the amendment power is validly exercised, will not create a new trust over the trust assets. This includes changes to beneficiaries, insertion of income and streaming provisions (including definition of net income, income characterisation and Bamford prompted amendments), expanding powers of investment for the trust, and extending the vesting date.

Most small clients over many years accumulate the largest part of their asset in the equity in their home, which is exempt from capital gains tax on sale. This main residence exemption is not available to companies or trusts. Given this and land tax considerations it is usually recommended that most main residences are in personal ownership.

Companies suffer the further serious setback in that they do not get the benefit of the 50% discount in the capital gain. This is somewhat offset by the companies 30% tax level as against the maximum marginal rate of tax if that is applicable. Losses are trapped in the company and cannot be distributed to shareholders.

Superannuation funds can only claim a 33% discount rate; nevertheless the applicable rate is an acceptable 10% if the fund is in fact taxable at all.

Land tax

Land tax in New South Wales

In NSW all entities that are ‘owners’ of land in NSW are subject to land tax. Several taxpayers do not get the benefit of the tax-free threshold of currently $412,000, increasing to $432,000 in 2015. At a present rate of 1.6% this adds an annual cost of up to approximately $6,600 to entities without the benefit of the threshold.

Trusts that qualify as fixed trusts with specific wording relating to the entitlement to income and capital of the trust get the threshold. In such circumstances however, the liability to land tax is pushed to the beneficiaries of the trust. If the beneficiaries of the fixed trust cannot benefit from the land tax threshold there is no value in including the special wording to be entitled to the threshold.

Special trusts (defined to include all discretionary and non-fixed trusts) do not get the benefit of the threshold. They include:

  • Trusts, which do not qualify as fixed trusts, including discretionary trusts and non-complying superannuation trusts.
  • Deceased estates may become special trusts after 12 months following the death of the deceased.
  • Unit trusts do not get the threshold if:
    • they do not include the specified wording to qualify as a fixed trust; or
    • they do not qualify for the transitional concession as a ‘family fixed trust’ where the unimproved value of their holdings exceeds $1,000,000 and at least 95% of the unit holders are not both fixed and held by the same family group.

Land tax in Victoria

All trusts except excluded trusts are subject to the tax, however several do not get the benefit of the whole individual tax-free threshold, currently $250,000. The top of the sliding scale of rates is 2.25%, which kicks in at a value of $3,000,000, and applies to individuals, companies and trusts. The scales are set out in the First Schedule to the Land Tax Act 2005.

‘Excluded trusts’ to which this regime does not apply include charitable, concessional, public unit and superannuation trusts: see Land Tax Act 2005, s 3(1). Primary production land outside greater Melbourne is exempt (s 65(1)). So is sporting, recreational and cultural land (s 72), if the Commissioner so determines, and rooming houses (s 75).

If notification is given to the Commissioner under s 46H that a beneficiary under a discretionary or unit trust is the nominated beneficiary of the trust, (s 46B), the principal place of residence entitlement applies (s 46I(2)).

Compliance limits under the Act are strict (generally one month), and include an obligation to notify the end of the administration of a deceased estate (s 46K(5A)).

If the trustees of discretionary trusts lodge the nominations, they avoid being subject to the General Land Tax Surcharge under Part 3 of Schedule 1.

Note that from 1 April 2012 the period of time in which to lodge and pay duty is reduced from 3 months to 30 days.  Transitional arrangements affecting late payment are in place until 30 June 2012.  For further information refer to State Revenue Office bulletin Changes to the period for payment of duty.

Land tax in Queensland

All entities (other than not for profit and primary producers) are subject to the tax however only individuals get the benefit of the highest tax-free threshold.

The Office of State Revenue provides a land tax estimator.

Land tax in South Australia

In South Australia all entities (other than not for profit and primary producers) are subject to the tax however several do not get the benefit of the tax-free threshold, currently $316,000 (2014/15). In accordance with s 4, s 5 and s 5A of the Land Tax Act 1936, an exemption from land tax may be granted in the following circumstances:

  • Land used as the owner’s principal place of residence;
  • Land used for primary production; and
  • Land used for religious, hospital or library purposes;
  • Land owned, let to or occupied by an association whose objects are/include supplying assistance to helpless persons;
  • Land owned, let to or occupied by an association which receives an annual grant or subsidy from money voted by Parliament;
  • Land owned by an association whose object(s) is/include the conservation of native fauna or flora;
  • Land owned or occupied without payment by a person or association carrying on an educational institution not for profit;
  • Land owned by an association established for a charitable, educational, benevolent, religious, or philanthropic purpose;
  • Land owned by specific types of sporting or racing associations; an ex-servicemen (or their dependents) association; an employer or employee industrial association; an association for the recreation of the local community; an association for the hosting of agricultural shows or similar exhibitions; or an association for the preserving of buildings or objects of historical value on the land;
  • Land owned by a prescribed body and used for the benefit of the Aboriginal people.
  • Land that is a caravan park; and/or
  • Land that is a supported residential facility and licensed as such under the Supported Residential Facilities Act 1992; a retirement village occupied by a natural person as his or her principal place of residence; or a retired persons’ relocatable home park occupied by a natural person as his or her principal place of residence.
  • Other exemptions in unusual situations are found in s 4, s 5 and s 5A of the Land Tax Act 1936 if certain criteria are met.

From 1 July 2014 the following applies:

(a) The threshold is $316,000;

(b) The next land tax bracket is $316,001 to $579,000 at a tax rate of 0.5 per cent;

(c) The next land tax bracket is $579,001 from $842,000 at a tax rate of 1.65 per cent; and

(d) The next land tax bracket is $842,001 from $1,052,000 at a tax rate of 2.40 per cent; and

(e) The top tax bracket over $1,052,000 at 3.70 per cent will remain unchanged.

The Office of State Revenue provides a land tax calculator.

Asset protection

The sole trader fairs badly in that they are liable to the full extent of his assets.

The partnership is in even worse shape in that it is possible to be liable for debts incurred by a partner without the knowledge or authority of the other partners. (See, for example, Higgins & Fletcher, The Law of Partnership in Australia and New Zealand, 5th ed., LBC, 1987, pages 100-104, 166-169 and Chapter 8).

Companies protect the shareholders from liabilities of the company in that they are only liable for any amount not paid up on their shares. However their shares are valuable in that they represent the value of the assets of the company and they are available to the shareholder’s creditors.

Directors have several potential liabilities to be concerned about arising from the obligations under the Corporations Act 2001. Directors escape liability for the company’s debts, provided that they conduct the company’s business in an appropriately prudential manner, do not trade while insolvent and ensure that the company meets its obligations and pays such things as superannuation and taxes – for instance, group tax and payroll tax – as they fall due.

Trust deeds usually indemnify the trustee out of the trust assets but usually specifically deny the trustee (and therefore creditors) access to the assets of the beneficiaries.

The holders of units in a unit trust are usually presently entitled under the trust which gives value to their units just as with shares in a company. This value is available to the creditors of the owners of the units in the trust.

With discretionary trusts the beneficiaries usually have no vested interest in the assets of the trust, any interest usually only arising at the discretion of the Trustee. Beneficiaries therefore usually have no interest of value in the trust and creditors of beneficiaries therefore have nothing against which to recover. With limitations and exceptions the lesser protection applies against applicants under the family provisions Acts and the family law and de facto legislation.

Control and succession

Most clients seek to minimise their tax liability, provide for the protection of their assets and retain full control of their affairs.

The sole trader has full control but as seen above has no opportunity to split income and is exposed to creditors to the full extent of his assets. Succession is by way of devolution by will, by sale or by gift inter vivos.

Partnerships are regulated by agreements or otherwise by the relevant state partnership Act. Income of the partnership must be paid to the partners in accordance with their partnership interests except where a real business is being conducted, in which case profits may be paid to any partner, irrespective of their partnership interest. Succession is usually dealt with in the partnership agreement giving the continuing partners the pre-emptive right to buy the interest of the outgoing partner leaving cash for devolution by will.

Companies are run by their directors. The client may well be the sole director or retain control by appropriate provision in the rules of the company. However far from being a personal fiefdom the director must run the company in the best interests of the shareholders. In the event that the client is the only shareholder then complete control is his. However, even with a small outside shareholding, the remedies for oppression of a minority restrain unfettered decision-making.

The company of course never dies and therefore control requires a mechanism for passing on the Directorship. As directors are usually hired and fired by the shareholders, effective control is vested in the majority shareholders and therefore succession to the shares is the paramount consideration.

Unit trusts usually provide the trustee with wide powers of investment and wide powers to make all business decisions in running the affairs of the trust.

However the trustee is usually obliged to account to the unit holders in proportion to the number of units they hold for the annual profits of the trust and for the capital of the trust on the vesting day which can usually be brought forward from the perpetuity period of 80 years by decision of the unit holders.

Control lies with the trustee and the appointment of successive trustees is dealt with as desired by the client in the trust deed. In the event that the client owns all of the units in the trust and is the trustee then complete control is his. If not then he is obliged to account to the unit holders in accordance with the deed. He is, if you will, a mere conduit between the business and the unit holders.

The trustee of a discretionary trust on the other hand usually has complete control in that he not only determines the investment policy of the trust but determines what benefits flow to which beneficiaries. The only recourse available to a discretionary beneficiary is to require the trustee to make a decision. With ongoing complete control for the perpetuity period of 80 years and subject only to the normally very wide powers in the trust deed, the trustee has complete control of the business undertaking equivalent to that of the sole trader. Succession is a matter of regulating the identity of the trustee by the trust deed. With the added advantage of maximum income splitting ability and the maximum opportunity for asset protection, it is not difficult to understand the popularity of this structure.

NSW

If at any time it is desired to register a new trustee of real property then, unless the trustee is precluded from any benefit under the trust, full stamp duty is payable on the deed or instrument effecting the change: Duties Act 1997 – section 54 Change in trustees.

VIC

If it is desired to transfer dutiable property from a transferor to a trustee without any change in beneficial ownership, then no duty is payable: Duties Act 2000, s 35. If a trustee is to be replaced by another trustee then, provided that the commissioner is satisfied that transfer is made solely to effect the retirement of the old trustee and appointment of the new trustee, no duty is payable: Duties Act 2000, s 33.

QLD

If at any time it is desired to register a new trustee of real property then, in some cases, exemptions from stamp duty are available under chapter 2 Part 13 of the Duties Act 2001.

Set up and running costs

There are no set up costs for the sole trader and the least running costs as against other structures. In addition, the principal is not an employee of the business and therefore compulsory employee superannuation contributions, payroll tax and workers compensation do not apply.

Partnerships usually require a partnership agreement, often accompanied by put and call options and funding agreements. Running costs include regular production of management accounts for partnership meetings. A partnership tax return is required as well as the partner’s individual returns.

Companies incur incorporation expenses and often a shareholders’ agreement having similar ongoing account requirements.ASIC and other compliance regimes add further administrative costs and burdens.

Trusts without corporate trustees are relatively cheap to set up and run, and with a corporate trustee it is necessary to add the cost of a company. Stamp duty is usually payable on the trust deeds.

Superannuation funds, in terms of set up and running costs, equate to a trust. The development of investment strategies and compliance with the governing rules may see the less knowledgeable client incurring cost in obtaining advice from professional advisers specialising in this field.

Flexibility

Each structure is given a flexibility score from the least flexible to the most flexible. All have wide choices when it comes to investments and all have wide general powers.

Superannuation funds are limited by their restricted ability to borrow and by their requirement to have a prudential investment strategy. They also deny access to funds held by them until beneficiaries are of prescribed retirement age, thereby usually having appeal only to older clients.

Sole proprietors and partnerships of individuals have no ability to split income to non principals.

Unlike unit trusts, companies pay tax before distribution of income. Funds retained by companies are difficult to access without further taxation. Payments to shareholders are taxed as dividends and strict rules govern loans to those shareholders. The share buy-back provisions of chapter 2J of the Corporations Act 2001 provide some flexibility in returning paid up capital of companies. Corporations Act 2001 – s 256A Purpose. However, such returns of capital are taxed as dividends rather than under the potentially more generous CGT provision.

Unit trusts are similar to companies in that they are separate from the unit holders. However tax is paid by the unit holders not the trust. This has advantages previously discussed. The units in a trust may also be divided into different classes giving some further flexibility.

Discretionary trusts maximise income splitting and asset protection but do not get the benefit of the threshold for land tax purposes in NSW. Tax losses are trapped in the trust.

Hybrid trusts are given no rating as they display the features in varying degrees of both discretionary and unit trusts.

OTHER CONSIDERATIONS

Small business capital gains tax concessions

Income Tax Assessment Act 1997 – s 152-1 What this Division is about

To qualify the basic conditions for relief must be satisfied (Income Tax Assessment Act 1997 – s 152-10 Basic conditions for relief) – that is:

  1. Have net assets of a value not greater than $6m or annual turnover of less than $2m. Income Tax Assessment Act 1997 – s 152-15 Maximum net asset value test. This includes the assets of the taxpayer, connected entities or affiliates of the taxpayer or entities connected with the affiliates. Income Tax Assessment Act 1997 – s 328-125 Meaning of connected with an entity, Income Tax Assessment Act 1997 – s 328-130 Meaning of affiliate.
  2. Where the CGT asset is a share in a company or interest in a trust then the taxpayer must be a significant individual, that is a CGT concessional stakeholder, which means a beneficiary having a small business participation percentage of at least 20% in the company or trust (‘significant individual’), or the spouse of such a significant individual who has some interest in the company or trust. The alternative test is that significant individuals, that are CGT concessional stakeholders, have an indirect small business participation percentage in the company or trust together of at least 90%. Section 152-50 Significant individual test, s 152-55 Meaning of significant individual.
  3. Must satisfy the active asset test. Section 152-35 Active asset test, s 152-40 Meaning of active asset. This test is satisfied if the taxpayer owned the asset for 15 years or less and for half the period of ownership was an active asset or if owned for more than 15 years it was an active asset for at least 7.5 years of the previous 15 years. The period begins on date of acquisition of the asset and ends on date of the CGT event.

An active asset is one used or ready for use in the course of carrying on a business or is an intangible asset inherently part of a business such as goodwill. A share in a company can be an active asset if the total market value of the active assets of the company is at least 80% of the total assets of the company.

The concessions available to a small business entity are set out in Income Tax Assessment Act 1997 – s 328-10 Concessions available to small business entities.

  1. The 15-year retirement exemption is available for the whole capital gain if the asset has been owned for at least 15 years and the retiree is over 55 years and retires. Section 152-100 What this Subdivision is about.
  2. A 50% reduction in the capital gain. If the gain has already been reduced by the general 50% discount then it is the reduced gain that is halved. Section 152-200 What this Subdivision is about.
  3. $500,000 lifetime limit retirement exemption. This requires a payment to a complying superannuation fund unless the relevant CGT concession stakeholder is 55 years or older. Section 152-300 What this Subdivision is about.
  4. Rollover relief if a replacement active asset is acquired. This in effect simply defers the position whereas all of the other concessions are an exemption from tax. Section 152-400 What this Subdivision is about.

Trust losses and family trust elections

In the event that a family trust incurs losses, then it will be prudent to seek appropriate advice on whether or not they can be carried forward and whether or not a family trust election needs to be made. The consideration of the complex rules involved are outside the scope of this writing but mention is made as the use of a family trust for share trading purposes needs careful consideration of the Income Tax Assessment Act 1936 – Schedule 2F Trust losses and other deductions.

Relationship between entities, names and trade marks

It is also important to educate your client as to the difference between entities, names and trade marks. Many clients believe that they have protected a trading name by registering a company name or even by registering a business name or domain name. This is unfortunately not the case.

A business name is a name under which a business operates. The purpose of registration is merely to allow ASIC to maintain a register of those who operate a business under a name other than their own. It allows customers and suppliers to the business to search and identify the person behind the business should it become necessary to do so.

A domain name is merely the address of a website. It does not of itself confer proprietary rights in the use of that name. For this reason, many owners of a trade mark have successfully challenged domain name registrations.

On the other hand trade marks, patents and designs are capable of registration in Australia. Generally speaking, once these things are registered, the client obtains an Australia-wide monopoly for the use of the trade mark, patent or design. It is usually also possible to ride on the coat-tails of the Australian registration, once obtained, to register rights overseas.

If clients do not register a trade mark, and their business name or company name infringes someone else’s trade mark, the business or company concerned may have to forego use of that name. This can lead to an expensive exercise of rebranding, the loss of goodwill associated with the name and probable legal action from the party whose registered trade mark has been infringed.

Trade mark registration is a relatively straightforward matter that can readily be performed for the client at a reasonable fee. It can be undertaken online at www.ipaustralia.gov.au, where the process is fully explained.

For further information please refer to the Trade Marks for Business Step-by-Step Guide.

NSW – Duty on land rich companies and trusts

The transfer of land is usually liable to ad valorem rates of stamp duty of up to 5.5% and possibly 7%. Special provisions apply to charge similar rates of duty on a transfer of shares or units which effectively relates to a change in control of NSW land.

In summary duty is payable on the acquisition:

  1. Of 50% or more of a company’s shares or a trust’s units;
  2. If the company or trust owns land in NSW with an unimproved value of $2 million or more;
  3. At the current scale arriving at 4.5% between 300K and $1 million and 5.5% thereafter;
  4. But calculated on the total unencumbered value of the land and goods in NSW of the company or trust.

Note

  1. There is no longer a requirement that 60% of total assets be land. This means many companies and trusts in manufacturing and other enterprises that are not land developers are caught.
  2. The duty is payable on not just the land but also the goods of the company such as plant and equipment. See the Act for the exclusions such as stock, registered motor vehicles, goods under manufacture.
  3. The provisions apply from 1 October 2009 to the acquisition of 90% or more of the shares or units in listed or public entities, but the duty is reduced to 10% of the full rate.

For more information OSR factsheet:

Landholder duty fact sheet

VIC – Duty on land rich companies and trusts

A landholder is a private company, private unit trust scheme, or wholesale unit trust scheme and is land rich if:

  • It has land holdings in Victoria with an unencumbered value of $1,000,000 or more; and
  • Its land holdings in all places, whether within and outside Australia, comprise 60% or more of the unencumbered value of all its property.

Duty is payable on the acquisition of a significant interest – 20% of private unit trust or 50% or more of a wholesale unit trust or private company.

See the SRO for more information or duty calculations.

Note that the time for lodgement of documents and payment of duty for transactions occurring after 1 April 2012 is 30 days.

QLD – Landholder duty

From 1 July 2011, landholder duty replaces the land rich provisions.
Landholder duty applies when a person makes a relevant acquisition in a landholder.
A landholder is a listed unit trust, an unlisted corporation or a listed corporation that has land-holdings in Queensland with an unencumbered value of $2 million or more. There are 2 types of landholders:

See Chapter 3, Part 1 of the Duties Act 2001 for more information.

Relevant acquisitions
A relevant acquisition is when:

  • a significant interest in a landholder is acquired
  • an interest in a landholder is acquired which, when aggregated with other interests held results in a significant interest in the landholderor
  • a significant interest in a landholder is already held (on which landholder duty was imposed) and the interest increases.

If the relevant acquisition results from an aggregation of the interests of related persons, each person is jointly and severally liable to pay the duty.

What is an interest?
A person has an interest in a landholder if the person has an entitlement as a shareholder or unitholder to a distribution of the landholder’s property on its winding up (for a corporation) or termination (for a listed unit trust).
A person has a significant interest in a landholder if they have an interest of:

  • 50% or more in a private landholderor
  • 90% or more in a public landholder.

Example
A husband and wife each acquire a 30% interest in a private landholder. Together they have made a relevant acquisition that would be liable to landholder duty.

Acquiring an interest
An interest in a landholder is acquired if an interest is obtained or the interest in the landholder increases, regardless of how the interest is obtained or increased.

For example, an interest can be acquired by:

  • the purchase, gift or issue of a unit or share
  • the cancellation, redemption or surrender of a unit or share
  • the abrogation or alteration of a right for a unit or share
  • the payment of an amount owing for a unit or share
  • changing the capacity in which a person holds an interest (e.g. starting to hold the interest as a trustee).

SA – Duty on land holding entities – Companies and trusts

As of 1 July 2011, land rich provisions in Part 4 of the Stamp Duties Act 1923 have been replaced with land holder provisions.

If the control of an entity changes, such as where a person or group acquires a prescribed interest – for instance, shares or units – in the entity, then conveyance rates of duty will apply to the land assets being acquired, provided the encumbered value of the entity’s underlying local land assets is $1 million or more.

In relation to a private company or a private unit trust scheme, a prescribed interest means a proportionate interest in the entity of 50% or more.

In relation to a listed company or public unit trust scheme, a prescribed interest means a proportionate interest in the entity of 90% or more.

Duty for a listed entity is charged at a concessional rate of 10% of the amount of duty otherwise payable.

See the Revenue SA circular for more information.

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