Changing Your Trust Structure Is Not Just a Tax Exercise - 7 Things That May Need to Change with It
The proposed trust-tax rollover may reduce the income-tax cost of restructuring - but that does not mean the restructure itself is simple.
Written by: Melissa Cunliffe (CA)
When the Government first announced its proposed 30% minimum tax on discretionary trusts, one obvious question was: Should family businesses restructure?
Treasury has now released draft legislation offering expanded rollover relief intended to make certain restructures easier from a federal income-tax perspective.
That can be useful. But there is a critical distinction:
A tax-free rollover does not mean a cost-free or consequence-free restructure.
Changing the legal entity that owns or operates a business can affect contracts, licences, finance, insurance, employees, property, customers and suppliers.
Why a trust structure rollover is only part of the story
Normally, transferring a business or assets can create capital gains, balancing adjustments, trading-stock consequences and other tax issues. The proposed rollover is designed to reduce or defer some of those federal consequences.
But it does not automatically rewrite every legal and commercial relationship the business has.
1. Stamp duty may still apply
The Commonwealth controls federal income tax. States and territories control their own duty regimes.
If a trust owns land, commercial property, valuable business assets or interests in land-rich entities, duty can materially change whether a restructure is worthwhile.
2. Business licences may belong to the old entity
Builders, plumbers, labour-hire providers, transport operators and other regulated businesses may hold licences or approvals in the name of the existing legal entity.
A new company or trust may need its own approval, potentially involving financial tests, responsible persons, insurance, waiting periods and fees.
The new entity may not be able to lawfully operate until the licence is in place.
3. Finance facilities may need to be renegotiated
Overdrafts, equipment finance, property loans, debtor finance, guarantees and security interests often sit with the existing entity.
The lender may require fresh applications, new guarantees, revised security or different pricing.
Finance consequences should be modelled before the restructure, not discovered afterwards.
4. Contracts may not automatically transfer
Customer contracts, supplier agreements, leases, franchises, government contracts and software agreements may require consent to assignment or novation.
A business cannot assume that changing the ABN on an invoice transfers the legal contract.
5. Insurance may need to be rewritten
Public liability, professional indemnity, workers compensation, vehicles, plant, cyber and management liability policies are issued to specific entities.
If the entity changes, insurance needs to follow it before the new entity starts trading. Otherwise a gap may only become obvious when a claim occurs.
6. Employees and payroll may need to move
A change of employer can affect employment contracts, leave balances, long service leave, super, payroll tax, workers compensation, Single Touch Payroll and employee communications.
Even where continuity of service is preserved, payroll and registrations may still need updating.
7. Customers, suppliers and systems need to know who they are dealing with
A restructure can require new bank accounts, invoices, ABNs, GST registrations, merchant facilities, direct debits, accounting systems, customer records and supplier accounts.
A technically perfect tax restructure can still create operational disruption if implementation is poorly managed.
What about the proposed fixed-distribution election?
Treasury's proposed Excluded Election Trust may allow some trusts to remain outside the minimum-tax regime without legally restructuring.
That may avoid many of the operational issues above. But it creates a different trade-off: the family gives up significant flexibility over future distributions.
So the choice may be:
• retain the trust and accept the minimum tax;
• make the election and reduce flexibility; or
• restructure and deal with the wider commercial consequences.
Each option creates a different risk profile.
There is no universal best structure
Two businesses can have the same profit and tax calculation but completely different restructuring consequences.
A business with no real property, little debt and simple contracts may be relatively straightforward. Another with commercial property, specialist licences, bank facilities and government contracts may be extremely complex.
The tax calculation can look similar while the practical restructure is entirely different.
Build a restructure checklist before calculating tax
Compare each alternative across:
• tax;
• state duty;
• finance and guarantees;
• contracts and leases;
• regulatory licences;
• employees and payroll;
• insurance;
• succession; and
• asset protection.
The cheapest tax option may not be the cheapest overall option.
Where the 4P's framework fits
At 4P's Future Accounting, structures start with People. What does the family want? Who will own and run the business? What assets need protecting? What should happen next?
Then we Preserve wealth without unnecessary tax or restructuring cost, Protect legal rights, licences, finance and business continuity, and choose a structure that helps the family Prosper.
The purpose of a structure is not simply to produce the lowest tax bill. It needs to work for the business and the family.
What should trust owners do now?
Do not rush while the legislation remains draft. But begin documenting assets, property, licences, contracts, finance, guarantees, employees, insurance, key registrations and succession objectives.
When the final rules arrive, the real question will not simply be “Can we restructure without triggering CGT?”
It will be:
Can we restructure without damaging everything else that makes the business work?.
A tax rollover may reduce the immediate income-tax cost of restructuring, but it is only one part of the decision. Before making changes, assess how the restructure could affect your property, finance, licences, contracts, insurance, employees, succession plans and asset protection.
At 4P's Future Accounting, we help families and business owners compare their options through the People, Preserve, Protect and Prosper framework.
Disclaimer
This article does not constitute financial advice and is for general information only. It does not take into account any individual’s personal objectives, situation or needs, and is not intended as professional advice. Any similarity to an individual’s personal circumstances and the examples provided in this article is purely coincidental. Any person acting upon such information without receiving specific advice, does so entirely at their own risk.
Authorisation under an Australian Financial Services Licence (AFSL) is not required in the provision of this article and the author plus Future Accounting Group Pty Ltd is not acting in its capacity as an Australian Financial Services Licence holder
Liability limited by a scheme approved under professional standards legislation.
