Why would a professional partnership incorporate?

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘Why would a professional partnership incorporate?’. 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 listen to the presentation is below –

The number of answers to this question are probably only limited to the number of professional practices there are out there.  There are a range of reasons. 

Tax is one and we keep coming back to that, but that can sometimes be in the eye of the beholder from that perspective. 

We're seeing, certainly from a risk management perspective and asset protection and the credit crunch and everything else that’s going on and the changes to the bankruptcy rules in the recent past mean that everyone is much more aware that when things go wrong, it's very attractive to have your liability limited.  

Obviously, that’s probably the biggest advantage of an incorporated model. 

There's also I guess the sense from people talking about retaining key staff and the skills shortage that many professional organisations are facing these days that it tends to make sharing of equity a lot easier if you've got a true corporate model. 

That can sometimes be as simple from a perception viewpoint that a lot of times staff or key employees are much more aligned and find it much easier to understand a company setup as opposed to some sort of fancy trust arrangement or a service trust arrangement for that matter. 

Certainly, the transaction costs side of things, in terms of the hard costs, particularly stamp duty, in most states now, the concept of having to pay stamp duty on the transfer of listed shares is basically a thing of the past.  So that can be very attractive to people. 

The last main reason and perhaps this is touching on the perception side of it again, I think the corporate model from a governance perspective, it tends to be a lot easier for people to understand.  We've done a lot of work in this area and it is interesting that by becoming a director, and by having a board and by having shareholders and all of these sorts of more formal things, even though the deck chairs haven't really changed in the organisation, there seems to be an air of governance around the place that just wasn't there while they remained as a partnership.

Until next week.

How should a partnership of discretionary trusts be structured?

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘How should a partnership of discretionary trusts be structured?’ by way of audio podcast (not video) at the following link - http://youtu.be/qPJJ_1NRwcw

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

There's a number of aspects relevant here. 

The biggest one, if we pick up on that idea of it being a little bit of a messy structure, is that ideally there should be some sort of corporate entity that’s the face to the outside world.  We see that being used very regularly. 

Now whether that's a standalone nominee or agent company that’s appointed to act on behalf of all the trusts or whether in fact you just have one company acting as trustee for all of the trusts is probably a mute point. 

The outcome that’s delivered to the outside world is that they're not having to deal with numerous separate trusts; as far as the clients know, all they see is that standalone Pty Ltd company.  That would probably be the biggest thing. 

The other types of things that need to be thought about I guess are looking at the constitution of that company and making sure that you've got an appropriate balance between directorship powers and shareholder powers. 

You'd also obviously, particularly if you're going to use the same company as trustee for a number of trusts, need to have a fairly good understanding of how an appointor or principal or nominee type power under the trust documents work, to give everyone the comfort of knowing that they do have ultimate say over ‘their’ particular trust. 

Probably, the final point would be, and we've got recurring themes coming through here, (this harks back to this concept of asset protection) and that is, if you're serious about maintaining protection against issues that might go wrong in the practice, it would really be quite important in our view that the trust that is involved as a partner in the partnership of trusts do nothing else but be a partner in that partnership. 

So in other words, you don’t buy the investment property in that trust and you don't have a listed share portfolio in that trust, because otherwise you're potentially exposing all those passive assets to the risks of the business.

Until next week.

Appointor succession - read the deed

As highlighted in previous posts, it is critical to 'read the deed' when providing advice that involves a trust.

Following last week's post (and again with thanks to Tara Lucke) about Montevento Holdings, this post reinforces the importance of reading a trust deed before taking any step. 

In Montevento Holdings, a disgruntled beneficiary sought to rely on a technical interpretation of the way the appointor could exercise their power under the trust deed to change the trustee to support the argument that the change was ineffective. 

The relevant clause precluded individual appointors from personally being appointed as trustee.  As mentioned last week, the individual appointor appointed a company as trustee of which he was personally the sole director and shareholder. 

The High Court held that the ordinary and natural meaning of the clause was that an individual person holding the office of appointor could not personally appoint themselves as trustee.  However, because the trust deed consistently distinguished between individuals and companies, it did not prohibit the appointment of a corporate trustee, even if that trustee was controlled by the individual appointor.

Until next week.

Appointor succession – choose wisely

With thanks to co View Legal director Tara Lucke, today’s post looks at how the role of the appointor is often the most important to consider when establishing or reviewing a trust. There does not necessarily need to be an appointor provision under a trust deed, however where there is, a trust deed will normally set out in some detail the way in which the role of appointor is dealt with on the death or incapacity of the person (or people) originally appointed.

Failing to understand succession arrangements of an appointor can create a range of difficulties as highlighted in the recent case of Montevento Holdings Pty Ltd v Scaffidi (2012) HCA 48. A full copy of the case is available at http://www.austlii.edu.au/au/cases/cth/HCA/2012/48.html

The case concerned a challenge by a beneficiary of a discretionary trust to a change of trustee by the appointor. The challenging beneficiary was Guiseppe Scaffidi who, along with Maria (his mother) and Eugenio (his brother), was within the range of potential beneficiaries of the Scaffidi Family Trust.

The original appointor of the trust was Antonio Scaffidi (the father). On Antonio’s death, Maria became the appointor and by deed Maria subsequently appointed Eugenio Scaffidi as the appointor.

After his appointment, Eugenio appointed Montevento Holdings Pty Ltd (a company of which he was the sole director and shareholder) as the sole trustee, effectively giving him complete control over the trust and its assets.

Guiseppe’s challenge to the appointment of the trustee company ultimately failed before the High Court, essentially because the appointment complied with the provisions of the trust deed. The decision highlights that the role of appointor can often give ultimate control of a trust. Furthermore, it is a timely reminder of the importance of regularly reviewing the appropriateness of the appointor role in the context of succession planning, particularly where multiple beneficiaries are arguably intended to benefit from a discretionary trust over time.

The mechanics of the decision will be explored further in next week’s post.

Until next week.

How do business, or goodwill, licences work?

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘How do business, or goodwill, licences work?’. 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 listen to the presentation is below –

The key idea, and it’s probably not dissimilar to some sort of service trust arrangement, is having the two arms of the business being conducted by different entities.

An example, particularly for those that are currently in a partnership of individuals is that if the right to run the business was able to be utilised by someone else or by another entity, for example a partnership of trusts, then there's arguably the ability to create a licence arrangement that would say that the partnership of trusts has the ability to do everything to conduct the business and to enjoy the fruits of conducting the business, the income that’s generated for the payment of invariably a relatively nominal fee back to the actual original owners of the business.

Now the idea of that arrangement obviously, particularly from an asset protection perspective is that, if you can get the risks associated from running the business away from the individuals, that’s obviously a very attractive thing.

It also gives the partners the ability to think a little bit strategically about how they would want that income derived. So in other words, rather than earning the income in their own name, they have the ability to earn it through a company or trust environment.

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.

Company owned insurance policies for business succession

We recently had an adviser seeking more detailed comments about company owned business succession insurance policies.

In particular, feedback was requested about the specific reservations with insurance policies for business succession being owned by a company. In summary, and with thanks to co View Legal director Tara Lucke, we provided the following reasons:

1   while capital gains tax (CGT) should not be payable on receipt of life insurance proceeds, it will be payable on any total and permanent disablement or trauma proceeds that are paid to a company. In contrast, no CGT should be payable on receipt of the insurance proceeds where the policies are self owned;

2   there can also be significant practical difficulties in extracting insurance proceeds from a company to the appropriate recipient. This is particularly important when the main purpose of the policy is for an equity payment, as opposed to debt cover. Again, where the policy is self owned, the exiting principal or their estate will receive the proceeds directly and none of these practical issues will arise, as long as an appropriate agreement is implemented;

3   where insurance proceeds need to be accessed by the exiting principal (or their estate) this is generally only achievable via a share buy-back or dividend. A dividend will likely be tax inefficient and generally a buy back will also have an inefficient tax outcome for the following reasons:

(a) the consideration will be split between an assessable capital gain and a dividend, which restricts access to the full benefit of the CGT 50% discount and small business CGT concessions;

(b) while a company may be able to pay the proceeds to the exiting shareholder/s as a partially or fully franked dividend, this will use franking credits that would otherwise have been available for distributing profits; and

(c) the surviving owner/s will own 100% of a company after a share buy-back, however their cost base in the shares will not have increased;

4   insurance proceeds will be under the control of the remaining director/s of a company, in contrast with a self owned or superannuation owned policy where the estate directly receives the benefit of the proceeds; and

5   finally, the legal documentation required for company ownership is comparatively complex to all other policy ownership approaches.

Until next week.