As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘What are some of the issues with a professional partnership ‘rolling over’ into a company structure?’at the following link - http://youtu.be/pIwVOyEAeBA
As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below –
The rollover at face value is always the easiest way to go, because it removes one seriously significant transaction cost being the capital gains tax implications. The problem though is that when you dig a little bit deeper, that is a little illusionary at times, particularly for a group of individual partners rolling over to a company. The attraction of taking that style of rollover can be diminished by the fact that they will still individually own the shares in the company.
So if it's a standard rollover, for example a partnership to a company under Division 122B of the Tax Act, ultimately, the individuals would still actually own the shares in the company. What they will have done is taken away 100 cents in the dollar, if that’s the right way to say it, of income that they’ve historically been enjoying and replaced that with 70 cents in the dollar and an imputation credit or franking credit.
This can lead to a situation where people, having done a rollover are then looking to restructure again anyway. So effectively it's a double restructure because they'll want to divest themselves individually of shares and make those shares be owned via some sort of discretionary trust arrangement.
It can also lead into a range of other potential restructures, dividend access shares and these types of arrangements that certainly get away from the overall goal in the first place, which was to simplify arrangements and get true limited liability.
The other areas (and some of these touched on in other parts of today's program) that obviously need to be taken into account include that while there is no stamp duty on unlisted shares, there is certainly stamp duty in every state moving from an individual or partnership arrangement into a company arrangement. That's a significant transaction cost that cannot be avoided in any way, shape or form currently and needs to be paid upfront effectively to get yourself into the new structure. The other ancillary costs that go around an incorporation include issues such as payroll tax, which is inevitably a lot more expensive if you've moved into a company structure as opposed to remaining in a partnership structure.
Until next week.
Showing posts with label Shareholder. Show all posts
Showing posts with label Shareholder. Show all posts
Monday, February 11, 2013
Monday, May 14, 2012
What are some of the steps taken in relation to regulating control of testamentary trusts
As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘What are some of the steps taken in relation to regulating control of testamentary trusts?’ at the following link - http://youtu.be/A104L8JfGGw
As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below –
The reality I think for many people in this area at the moment that estate planning as a whole, and particularly the use of more bespoke forms of testamentary trusts, is the ‘new black’.
What that has meant I think for a lot of advisers in this area, particularly for those with legally trained advisers is that many of the concepts that you see in wider corporate law or corporations law are now actually being filtered back into traditional estate planning.
What we're finding, particularly where people are wanting to use trusts that are going to last at least 2 generations, possibly even 3 or 4, is that the regulatory regime, if you like, sitting around the control of those structures is becoming far more sophisticated.
Probably the biggest thing we're seeing in that area is the use of specifically set up trustee companies. Not in terms of the government setup structure, but in terms of the actual client setting up a corporate structure and being very particular about the way the constitution of that company is crafted, the way shareholders can be nominated, the way directors are appointed and the way voting takes place within that structure all overseeing the way in which the actual trust is going to be run moving forward.
Until next week.
As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below –
The reality I think for many people in this area at the moment that estate planning as a whole, and particularly the use of more bespoke forms of testamentary trusts, is the ‘new black’.
What that has meant I think for a lot of advisers in this area, particularly for those with legally trained advisers is that many of the concepts that you see in wider corporate law or corporations law are now actually being filtered back into traditional estate planning.
What we're finding, particularly where people are wanting to use trusts that are going to last at least 2 generations, possibly even 3 or 4, is that the regulatory regime, if you like, sitting around the control of those structures is becoming far more sophisticated.
Probably the biggest thing we're seeing in that area is the use of specifically set up trustee companies. Not in terms of the government setup structure, but in terms of the actual client setting up a corporate structure and being very particular about the way the constitution of that company is crafted, the way shareholders can be nominated, the way directors are appointed and the way voting takes place within that structure all overseeing the way in which the actual trust is going to be run moving forward.
Until next week.
Monday, November 14, 2011
Financiers being financiers
With apologies for the lack of post last week (for reasons that I won’t bore you with), this week’s post looks at one area where financiers seem to have had a continued focus on recently. In particular, with the continuing economic uncertainty, we are seeing a number of clients being asked to comply with the financial assistance rules.
Financial assistance can be a relatively complex area of the Corporations Act, however essentially it centres around situations where a company provides some form of help to shareholders (or associates of shareholders) in relation to the provision of finance.
What amounts to ‘financial assistance’ can be an issue of some debate in many transactions, however ultimately the 'golden rule' invariably applies. That is a financier will normally have the last word as to whether they believe there is a financial assistance issue.
There is a specific process set out under the Corporations Act that allows a transaction to proceed despite the existence of financial assistance, however there are a number of strict timelines that must be satisfied in order to comply with these provisions. Therefore, unless all parties are aware of the possibility that financial assistance approval may be required, significant difficulties can arise.
Until next week.
Financial assistance can be a relatively complex area of the Corporations Act, however essentially it centres around situations where a company provides some form of help to shareholders (or associates of shareholders) in relation to the provision of finance.
What amounts to ‘financial assistance’ can be an issue of some debate in many transactions, however ultimately the 'golden rule' invariably applies. That is a financier will normally have the last word as to whether they believe there is a financial assistance issue.
There is a specific process set out under the Corporations Act that allows a transaction to proceed despite the existence of financial assistance, however there are a number of strict timelines that must be satisfied in order to comply with these provisions. Therefore, unless all parties are aware of the possibility that financial assistance approval may be required, significant difficulties can arise.
Until next week.
Friday, October 22, 2010
Company owned business succession insurance
Last week, we revisited with an adviser a strategy that had been put in some years prior by a trading company.
The trading company had obtained insurance policies for death and permanent disablement over each of the core principals who also controlled the ownership of the shares in the company.
The discussion centred on the tax consequences of a receipt by the company of the insurance proceeds and practically how the transfer of shares to the surviving principals would take place.
While from a simplicity (and Division 7A) perspective, company ownership of business succession insurance can be attractive, the disadvantages do normally outweigh the benefits.
Last week’s situation was no different given that on receipt of the insurance pay out by the company, steps would still need to be taken to:
1. Have the funds transferred to the exiting shareholder or their estate.
2. Ensure that the exiting shareholder transferred their shares.
As it turns out, primarily due to the significant increase in premiums that would be incurred to rearrange the current ownership structure, the adviser here is looking at other solutions to ensure that the existing structure can work as well as possible. It was however a timely reminder that business succession arrangements do require regular review.
Until next week.
The trading company had obtained insurance policies for death and permanent disablement over each of the core principals who also controlled the ownership of the shares in the company.
The discussion centred on the tax consequences of a receipt by the company of the insurance proceeds and practically how the transfer of shares to the surviving principals would take place.
While from a simplicity (and Division 7A) perspective, company ownership of business succession insurance can be attractive, the disadvantages do normally outweigh the benefits.
Last week’s situation was no different given that on receipt of the insurance pay out by the company, steps would still need to be taken to:
1. Have the funds transferred to the exiting shareholder or their estate.
2. Ensure that the exiting shareholder transferred their shares.
As it turns out, primarily due to the significant increase in premiums that would be incurred to rearrange the current ownership structure, the adviser here is looking at other solutions to ensure that the existing structure can work as well as possible. It was however a timely reminder that business succession arrangements do require regular review.
Until next week.
Monday, March 29, 2010
When is a share not a share?
Special classes of shares have, at least in recent years, always been a hallmark of company structures.
One of the most common descriptions of shares that provide no other rights than simply a dividend at the complete discretion of the directors from time to time is a 'dividend access' or 'dividend only' share.
Last week, we helped an accountant whose client was the subject of a wider ATO audit. For the third time I am personally aware of in the last twelve months, one of the core issues the ATO was pursuing related to the application of the debt equity rules to a purported dividend access share.
For anyone that has spent time considering the debt equity rules, they will know how complex they are (indeed the position paper from the ATO on this point ran to around 15 A4 pages).
The bottom line in a practical sense is if you have clients wanting to implement a dividend access share arrangement and they are not willing to have you provide formal advice about the application (or otherwise) of the debt equity rules, you should get as a minimum confirmation from them that they understand the consequences of a share being treated as debt instead of equity.
More conservatively, you should probably refuse to implement the structure at all, although obviously commercially, this raises a number of difficulties.
For the client last week, if the ATO is successful in arguing that the dividend access share was in fact a debt instrument for tax purposes, it will mean that the 7-digit dividend that had been declared will be completely unfrankable.
Until next week.
Matthew Burgess
One of the most common descriptions of shares that provide no other rights than simply a dividend at the complete discretion of the directors from time to time is a 'dividend access' or 'dividend only' share.
Last week, we helped an accountant whose client was the subject of a wider ATO audit. For the third time I am personally aware of in the last twelve months, one of the core issues the ATO was pursuing related to the application of the debt equity rules to a purported dividend access share.
For anyone that has spent time considering the debt equity rules, they will know how complex they are (indeed the position paper from the ATO on this point ran to around 15 A4 pages).
The bottom line in a practical sense is if you have clients wanting to implement a dividend access share arrangement and they are not willing to have you provide formal advice about the application (or otherwise) of the debt equity rules, you should get as a minimum confirmation from them that they understand the consequences of a share being treated as debt instead of equity.
More conservatively, you should probably refuse to implement the structure at all, although obviously commercially, this raises a number of difficulties.
For the client last week, if the ATO is successful in arguing that the dividend access share was in fact a debt instrument for tax purposes, it will mean that the 7-digit dividend that had been declared will be completely unfrankable.
Until next week.
Matthew Burgess
Monday, March 15, 2010
In times of peace - prepare for war
Two weeks ago, I explained the importance of reviewing all loan accounts and unpaid present entitlements in the context of asset protection issues.
As flagged, that particular client situation was also problematic for a further two reasons. Those reasons were:
1. Both the husband and wife were directors of the trading company, even though the wife had no active involvement in the business.
2. Both the husband and wife were shareholders in the trading company.
Aside from the fact that the trading company had a large asset on its balance sheet (being the loan or UPE), the wife was also personally liable (automatically) due to her directorship. This issue could have been avoided by simply resigning her as a director. There is a further related practical tip in this regard that all advisers should be aware of and I will explore this further within the next couple of weeks.
The second issue was that the husband (who had to be a director because of the level of involvement he had in the day-to-day operations of the business) personally owned shares in the trading company.
As a director, the husband carried personal liability and this means that his personal assets (including his shares in the trading company) were exposed.
Unlike the loan account issue, the strategies available in relation to the share ownership were ones that could only really be implemented subject to the bankruptcy clawback rules which (at a minimum) would delay any protection in relation to the shares until four years after divestment.
As usual, until next week.
Matthew Burgess
As flagged, that particular client situation was also problematic for a further two reasons. Those reasons were:
1. Both the husband and wife were directors of the trading company, even though the wife had no active involvement in the business.
2. Both the husband and wife were shareholders in the trading company.
Aside from the fact that the trading company had a large asset on its balance sheet (being the loan or UPE), the wife was also personally liable (automatically) due to her directorship. This issue could have been avoided by simply resigning her as a director. There is a further related practical tip in this regard that all advisers should be aware of and I will explore this further within the next couple of weeks.
The second issue was that the husband (who had to be a director because of the level of involvement he had in the day-to-day operations of the business) personally owned shares in the trading company.
As a director, the husband carried personal liability and this means that his personal assets (including his shares in the trading company) were exposed.
Unlike the loan account issue, the strategies available in relation to the share ownership were ones that could only really be implemented subject to the bankruptcy clawback rules which (at a minimum) would delay any protection in relation to the shares until four years after divestment.
As usual, until next week.
Matthew Burgess
Monday, March 8, 2010
Can a company own shares in itself ?
A couple of days ago, a financial adviser and I were looking at helping a client to implement an insurance funded buy-sell arrangement.
Particularly since the downturn over 2008 and 2009, there seems to have been an increasing focus on insurance protection in the context of business succession (quite aside from any keyperson insurance) and we are regularly seeing bank funding approvals being made conditional on the insurance at least covering the bank’s lending exposure.
As part of the audit process that we were jointly performing on the client's circumstances, the financial adviser identified that one of the shareholders in the trading company was the trading company itself.
This was not a simple case of the trading company having done some sort of share buyback arrangement – the company was listed under the ASIC records as a one third shareholder in itself.
Although it is an area that is not often considered, the Corporations Act expressly prohibits companies owning shares in themselves and there are a series of practical consequences (as well as potentially significant penalties) that can flow.
It looks as though there will be a solution for this client, however as with most breaches of the law, prevention would have been infinitely more palatable than the cure.
And no - a company can not own shares in itself.
Until next week.
Matthew Burgess
Particularly since the downturn over 2008 and 2009, there seems to have been an increasing focus on insurance protection in the context of business succession (quite aside from any keyperson insurance) and we are regularly seeing bank funding approvals being made conditional on the insurance at least covering the bank’s lending exposure.
As part of the audit process that we were jointly performing on the client's circumstances, the financial adviser identified that one of the shareholders in the trading company was the trading company itself.
This was not a simple case of the trading company having done some sort of share buyback arrangement – the company was listed under the ASIC records as a one third shareholder in itself.
Although it is an area that is not often considered, the Corporations Act expressly prohibits companies owning shares in themselves and there are a series of practical consequences (as well as potentially significant penalties) that can flow.
It looks as though there will be a solution for this client, however as with most breaches of the law, prevention would have been infinitely more palatable than the cure.
And no - a company can not own shares in itself.
Until next week.
Matthew Burgess
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