Redline changes

At the moment, we are assisting a client in relation to the sale of shares in their trading company.

Last week, we received suggested changes to the share sale agreement for the lawyers acting for the purchaser.

As is usual commercial practice, this top tier law firm provided the document to us confirming that all of their suggested changes were made in 'redline'. While we had no particular reason to doubt that all changes would have been shown in mark-up, we used the 'DeltaView' (i.e. document comparison) function in Word to be certain of this before commencing our review.

The DeltaView confirmed that while almost all changes were shown in redline, there were a handful of words changed to one particular clause in the warranties that had not been marked up. These words (if gone undetected) would have potentially left our client in an unnecessarily weak position following settlement.

As we understand it, the oversight of not marking up these changes was a simple mistake, however it highlights the importance of always using the DeltaView function (or another document comparison program) regardless of whether the amendments are otherwise promised to have been marked up.

Until next week.

What are some of the issues with a professional partnership ‘rolling over’ into a company structure?

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.

What are some of the advantages of a professional partnership incorporating?

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 advantages of a professional partnership incorporating?’. If you would like a link to the video please let me know.

As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below –

The biggest thing I guess with incorporation is that, if only from a perception perspective, but in reality from many other perspectives as well, the ability to facilitate the entry and exit is significantly easier.

Probably the greatest example of that is in relation to transaction costs. In most Australian states already - and in those that haven't done it, it's not very far away – there has been the abolishment of stamp duty on the transfer of shares in unlisted companies.

So what that means in a very practical sense is that shares can be moved without any immediate transaction costs between current owners and future owners. That obviously significantly simplifies and reduces the transaction costs that would otherwise be involved.

Conceptually as well, the ability to create employee share type arrangements or have partial sell downs is significantly easier in a corporate environment than it has historically been in a trust environment, or if there's individual partners involved.

In relation to the stamp duty side of things, it is an important consideration to take into account. Basically every Australian state now has abolished stamp duty. Victoria and Tasmania actually led the way originally by abolishing stamp duty on transfers of unlisted shares. The only major Australian state now that hasn’t done it is New South Wales and the government has released a timetable that would see the abolishment of that duty very soon.

Until next week.

What are the tax consequences of assets passing via a testamentary trust

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘what are the tax consequences of assets passing via a testamentary trust ?’ at the following link - http://youtu.be/pqngu0EddtQ

As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below -

The reality has been that ever since the Practice Statement was released in around 2003, there has been a really implicit acceptance across the industry, and one would hope from the Tax Office as well, that the interpretation of Division 128 that allowed the transfer of assets, not only from a legal personal representative down into a testamentary trust, but then from that testamentary trust to another testamentary trust under some form of cascading arrangement, would be free from capital gains tax.

More importantly, any ultimate transfer out of the testamentary trust, whether it be the initial trust or a subsequent trust, would also be free of capital gains tax.

What that Practice Statement did was effectively give that approval from the Tax Office that that approach, that really had been the approach across the industry for many, many years, was not going to be challenged by the Tax Office.

What we've seen in very recent times, particularly with the 2011 federal budget, is that even though that approval seemed to be there from the Tax Office, the level of uncertainty that was created when you read that back with Division 128, meant that legislative reform was required.

We're seeing that coming through the system now with the announcement in the 2011 federal budget, which effectively looks to replicate the position under the Practice Statement from 2003.

Until next week.

Corporate trustee duty (part 2)

Last week, I mentioned the unique way in which the Queensland stamp duty rules can operate in relation to the transfer of shares in companies that act as trustees for discretionary trusts.

As touched on last week, the provisions are such that the transfer of shares in these companies can be charged with standard stamp duty rates based on the underlying market value (ignoring any debt) of the dutiable assets in the discretionary trust located in Queensland or Western Australia.

In Queensland there is however the ability to legitimately avoid this stamp duty cost, if the transaction comes within an exemption set out under the stamp duty rules.

Broadly these rules provide that so long as the transfer of shares is between individual members of a family group, and the trust is established primarily for the benefit of members of that family, then there will be no duty payable.

As the ability to access the stamp duty relief is subject to the discretion of the Stamps Office, there is the ability to get an indication on whether stamp duty relief is likely to be available and with the client that I mentioned last week, we have submitted a ruling application on their behalf.

If an unfavourable ruling is received, we will need to explore other, less commercially appropriate, alternatives to achieve the client’s overall objectives.

Until next week.

Matthew Burgess