Transitioning from a Discretionary Trust to a Private Company in Australia

Restructuring a trading business is a significant decision, especially when transitioning from a discretionary trust to a private company.

This move can offer several advantages, such as asset protection and the potential for lower tax rates. However, it also comes with various tax implications that need careful consideration. Below, we will provide an overview of the key factors involved in such a restructure in the context of Australian tax law.

Why Consider Restructuring?

Businesses operating under a discretionary trust structure may consider transitioning to a private company for various reasons, including:

1. Asset Protection:
   Companies offer a higher level of asset protection. Unlike trusts, which distribute income to beneficiaries, companies retain earnings and protect personal assets of the shareholders.
2. Tax Benefits:
   Companies can benefit from a lower corporate tax rate, which, as of 2024, is 25% for businesses with an aggregated turnover of less than $50m. This is often lower than the marginal tax rates for individual beneficiaries in a trust.
3. Attracting Investors:
   Companies are generally more attractive to investors, as they can issue shares, raise capital more easily, and provide a clear ownership structure.
4. Succession Planning:
   Companies offer better opportunities for succession planning. Shares in a company can be transferred more easily than interests in a trust, providing a smoother transition of ownership.
5. Preparation for sale:
   Selling a business within a company structure can enhance its appeal to potential buyers due to the streamlined nature of the acquisition process. Since a company is a separate legal entity, purchasers can acquire shares in the company, enabling the business to continue operations seamlessly, just as it did prior to the sale.

Tax Implications of Restructuring

When transitioning from a discretionary trust to a private company, several tax implications must be considered:

1. Capital Gains Tax (CGT):
   The transfer of assets from the trust to the company may trigger CGT. The trust may be deemed to have disposed of its assets, resulting in a CGT event. However, there are CGT rollover relief options available under Subdivision 122-A of the Income Tax Assessment Act 1997, which can defer the CGT liability if certain conditions are met.
2. Stamp Duty:
   Depending on the jurisdiction, the transfer of assets may attract stamp duty. Each Australian state and territory has different rules regarding stamp duty on business restructures, so it’s important to seek advice specific to the location of the assets.
3. Dividend Imputation:
   Companies can benefit from Australia’s dividend imputation system, which allows them to pass on franking credits to shareholders. This can reduce the overall tax burden for shareholders, particularly if they are in a lower tax bracket than the company.
4. Losses and Deductibility:
   Losses carried forward in a discretionary trust cannot be transferred to a company. This means that any losses incurred by the trust before the restructure may be forfeited unless the trust continues to operate alongside the company. Additionally, the company may not be able to claim deductions for expenses incurred by the trust prior to the restructure.
5. Goods and Services Tax (GST):
   If the business is registered for GST, the transfer of assets may have GST implications. The sale of business assets could be subject to GST unless the transaction qualifies as a GST-free supply of a going concern.

Steps to Restructure

1. Valuation of Assets:
   Conduct a thorough valuation of the business assets to understand the potential CGT and stamp duty implications.
2. Legal and Tax Advice:
   Engage with legal and tax professionals to ensure compliance with all relevant laws and to explore options for CGT rollover relief and stamp duty exemptions.
3. Company Formation:
   Establish a private company, ensuring it meets all regulatory requirements, including ASIC registration and the issuance of shares.
4. Asset Transfer:
   Transfer the assets from the trust to the newly formed company. This may involve the sale or assignment of business assets, contracts, and intellectual property.
5. Update Contracts and Licenses:
   Update any contracts, licenses, and business agreements to reflect the new company structure.
6. Notify Stakeholders:
   Inform customers, suppliers, and employees about the restructure. Update any necessary business documentation, such as letterheads and website information.

Restructuring a trading business from a discretionary trust to a private company can offer numerous benefits, including enhanced asset protection, potential tax savings, and improved succession planning. However, the process involves navigating complex tax implications, particularly concerning CGT, stamp duty, and GST. It is crucial to seek professional advice to ensure a smooth transition and to fully understand the financial impact of the restructure. By carefully planning and executing the transition, businesses can position themselves for future growth and stability under the new company structure.

If you would like to discuss how you could potentially restructure your business, please feel free to contact us today.