Ownership Structures for Appreciating Assets
The ownership structure in which businesses and / or assets are held can have significant implications, which can include:
- financing and security;
- asset protection;
- legal liability;
- statutory, regulatory and compliance obligations; and
- administration and operations.
This is particularly relevant to decisions relating to how to hold an asset that is expected to increase in value. For example, the ideal structure for the holding of a building may need to consider:
- Protecting the building from liability, either directly or indirectly through relationships with other entities.
- Conversely, protecting the ‘owners’ from any risks associated with the building.
- The benefits of capital growth versus negative gearing, which may have competing structural issues.
- The effective tax rate paid on any income.
- Availability of the Capital Gains Tax (CGT) concessions and exemptions that may provide a significant benefit on realisation of the asset.
- The effective control of the asset and passing that control to future generations and other beneficiaries.
The following points compare some of the potential implications of owning such an asset under different ownership structures.
- No asset protection or limitation of liability.
- Any capital gains or other income are taxed at the individual’s marginal tax rate in the year it was generated.
- Any capital losses can be carried forward and offset against future capital gains. Income losses, such as in instances of negative gearing, may be offset against other income, and then carried forward if necessary.
- Small business Capital Gains Tax (CGT) concessions may be available in certain circumstances.
- Where assets are held for longer than 12 months, any capital gains are eligible to the 50 per cent CGT discount.
- Succession of the asset readily addressed in the owner’s Will.
- As a separate legal entity the company structure may provide a level of asset protection and liability limitation.
- A flat 30 per cent tax rate is applied to any capital gains or other income. This tax provides a level of franking to any dividends.
- Income is ultimately taxed at marginal tax rates in the form of dividends, but the timing of this will be based on the declaration and/or payment of such dividends, rather than the timing of asset generation by the building.
- Any capital losses can be carried forward and offset against future capital gains subject to passing certain tests. Similarly, any income losses may be carried forward but the offset against future income is subject to the passing of certain tests.
- Small business CGT concessions may be available in certain circumstances. However, the ability to realise the benefit of these concessions to shareholders is dependent on being able to access this income in a form other than an unfranked dividend.
- Companies are not eligible to the 50 per cent CGT Discount.
- Succession of both the share ownership and officeholders needs to be addressed in some way.
- This structure may provide a level of asset protection and liability limitation, particularly when combined with the use of a corporate trustee.
- Any capital gains and other income are included in the net income of the trust, which is distributed to beneficiaries and this income generally retains its character. Therefore, the taxation implications are based on the status of the receiving beneficiary.
- The beneficiaries are subject to tax in the year they are currently entitled to income from the trust.
- Capital gains tax concessions and discounts may be available and passed to beneficiaries. However, the benefits of these concessions may be reduced in the case of a unit trust.
- Subject to legislation and the trust deed, there may be opportunities to ‘stream’ such income in a tax effective way to certain beneficiaries.
- Any capital and income losses are carried forward and access to these losses is dependent on the application of the trust loss provisions.
- Succession through control of the trust needs to be addressed in some way.
Self- Managed Superannuation Fund
- The asset is well protected from potential creditors and the use of a corporate trustee may assist in limiting any liability.
- Any capital gains and other income are taxed at 15 per cent. This may reduce to nil where the fund is in pension mode. Further, a low rate, or zero rate, of tax may apply to the drawings of the resulting proceeds from the fund.
- Any capital losses can be carried forward and offset against future capital gains. Income losses, such as in the case of negative gearing, may be offset against other income.
- Where assets are held for longer than 12 months any capital gains are eligible to the CGT discount at 33⅓ per cent.
- The asset and/or the proceeds are not available to the member until a condition of release is met and the member cannot receive any benefit, including enjoyment, from the asset.
- Rules apply to the purchase of such assets from members.
- Succession of the asset is readily addressed by making binding death nominations.
- Funds are subject to significant compliance obligations.
- Funds do have the ability to borrow under certain conditions, but this is generally at a higher cost, both at implementation and ongoing.
- - The purchase of such assets must be consistent with the fund’s investment strategy.
The implications of these issues to the ultimate after tax benefit realised from the asset may be significant; therefore, the ownership structure is a key consideration. Once the asset is purchased it can be difficult and costly to change the structure in which the asset is held.
Such investments are generally made with a long term view, so it should be noted that the current tax legislation on which the above implications are based is subject to change which may have material long term impacts. These may, or may not, be able to be managed at the time.
Purchasers considering the acquisition of such assets should seek appropriate professional advice with consideration to their individual circumstances prior to making the purchase.
Proposed Changes to the Small Business Depreciation Rules
Over the last 18 months the Federal Government has made a number of announcements that include proposed changes to the small business deprecation rules. Legislation to enact these rules has now been introduced into Parliament.
Small businesses are generally those with an aggregated annual turnover of less than $2 million.
The proposed measures include:
- Increasing the small business immediate asset write off threshold from the existing $1,000 to $6,500 (originally proposed as $5,000 in the 2010 Federal Budget), effective 1 July 2012.
- Combining the long-life small business pool and the general small business pool into a single pool to be depreciated at 30 per cent per annum, also effective from 1 July 2012.
- Allowing small businesses to claim an upfront deduction of $5,000 for motor vehicles purchased from 1 July 2012, with the balance of the cost depreciated in the single pool.
- Cessation of the 25 per cent entrepreneurs’ tax offset from 1 July 2012.
The cessation of the entrepreneurs’ tax offset will negatively impact some micro and recently commenced businesses. However, the other measures will provide timing benefits where available.
Where small businesses have the flexibility to manage their depreciable asset purchases and requirements, there should be consideration about the timing of such purchases in light of the potential availability of these effectively accelerated depreciation write-offs.
The application of these measures is dependent on the Minerals Resource Rent Tax and Carbon Scheme packages of Bills receiving Royal Assent.