Restructuring an existing business: what to consider before you move

Many businesses outgrow the structure they started with. A sole trader now carries real risk, a partnership has taken on new owners, or a company holds valuable assets right beside its trading risk. Moving to a better structure can make sense, but restructuring an established business is a transaction with tax, legal and practical consequences. Getting it wrong can cost more than staying put.

Start with the reason

A restructure should solve a specific problem. Common reasons include:

• Asset protection. Separating valuable assets from trading risk; see Holding and operating companies: separating risk from assets.
• Tax efficiency. Profits are consistently taxed at top personal rates, or the family has no flexibility in distributing income.
• Bringing in owners. Admitting a partner, investor or key employee, which a sole trader or partnership handles poorly.
• Preparing for a sale. Making the business easier to sell and positioning the owners for the right tax outcome; see Structuring your business today for a sale tomorrow.
• Succession. Planning for the next generation, or for the owners' retirement.

If you cannot name the problem, you probably do not need to restructure yet.

The tax costs of moving

Moving a business from one entity to another is generally treated as a disposal of the assets by the old owner and an acquisition by the new one. Several taxes can apply.

Capital gains tax

Transferring goodwill, property, intellectual property or shares can trigger CGT, even though no cash changes hands and the same people end up owning the business. The market value of the assets is usually what matters, not the price written in the transfer documents.

Rollovers and concessions

Several rollovers can defer CGT on a restructure if their conditions are met. These include rollovers for moving from a sole trader or partnership into a wholly-owned company, rollovers for certain share-for-share swaps, and the small business restructure rollover, which allows eligible small businesses to transfer active assets between entities where the ultimate economic ownership does not change. Each has detailed conditions, and whether the small business CGT concessions are available is a separate question with its own tests.

Some rollovers reset or affect important tax attributes. For example, assets transferred into a company lose access to the 50% CGT discount on a later sale by the company, and the acquisition date used for the discount may change. These effects can matter more than the immediate saving.

Stamp duty

Each state and territory charges duty on transfers of certain assets, particularly land and sometimes business assets and shares in landholding entities. Some states offer exemptions for corporate reconstructions or small business restructures, with conditions. Duty is frequently the largest cost of a restructure and must be checked before you move anything.

GST

A transfer of a business between entities may be a taxable supply unless it qualifies as the supply of a going concern, which has specific requirements that must be met and documented.

Other tax attributes

• Losses generally stay with the old entity and are not transferred.
• Division 7A balances, unpaid trust entitlements and loan accounts need to be dealt with, not left behind in an entity that is being wound down.
• Depreciation and trading stock values may need to be reset or rolled over.
• Anti-avoidance rules can apply where the main purpose of a restructure is to obtain a tax benefit, so the commercial reasons should be real and documented.

The question is not only what the new structure saves each year. It is what the move costs today, what tax attributes you give up, and how long it takes to recover that cost.

The practical side

A restructure touches almost every relationship the business has. Before moving, map out:

• Contracts. Customer, supplier and franchise agreements may need consent to assign or novate to the new entity.
• Leases. Landlords usually need to consent to a transfer, and may ask for new guarantees.
• Finance. Banks need to approve the change, and loans and security may need to be refinanced.
• Employees. Staff need to transfer to the new employer with their entitlements recognised. Leave balances, superannuation, payroll registrations and workers compensation all need attention.
• Registrations. ABN, GST, PAYG withholding, business names, domain names and any industry licences.
• Insurance. Policies must name the right entity from the right date.
• Intellectual property. Trade marks and other rights should be held by the entity intended to own them.
• Banking and systems. New bank accounts, payment details for customers, accounting files and payroll software.

An illustration

Consider a sole trader with a profitable business, some valuable goodwill and plant and equipment. Moving it into a company owned by a family trust might give better asset protection and more flexibility for profits. But the transfer of goodwill and plant is a disposal. If a rollover is available, CGT may be deferred, but the company will not get the 50% CGT discount when it later sells the business. Duty may apply to the transfer depending on the state. Contracts, staff and registrations all need to move. The owner needs to weigh those costs against the expected annual benefit and their likely exit plans. This example is illustrative only.

A checklist before you move

1. Write down the problem the restructure is solving.
2. Model the annual benefit of the new structure using realistic numbers.
3. Identify every asset that will move and its market value.
4. Work out CGT, duty and GST on the transfer, and which rollovers or exemptions apply.
5. Consider the effect on CGT discount eligibility, losses and the small business concessions on a future sale.
6. List every contract, lease, licence and registration that must change.
7. Plan the transfer of staff and their entitlements.
8. Agree the effective date and sequence of steps.
9. Engage a lawyer to prepare the transfer documents, new constitutions and trust deeds.
10. Keep records of the commercial reasons for the restructure.

How we can help

We help owners decide whether a restructure is worth it, model the costs and benefits, and coordinate the move with your lawyer and bank so nothing is left behind. If you are thinking about changing your structure, contact us or read about our business structuring services.

This article is general information only and does not take into account your circumstances. Speak to a qualified adviser before acting on it.