As a business owner, the thought of issuing equity to key staff members or a new business partner as part of your growth or succession strategy has likely crossed your mind. It’s a significant step that can ensure the longevity of your company while also rewarding those who have contributed to its success. Just this week, I had the opportunity to advise a client on this very topic, and I’d like to share some insights that could help you navigate this complex terrain.
Our client has been at the helm of their business for many years, and with retirement on the not-too-distant horizon, they’re considering a gradual exit strategy. The goal? To transition their business to the capable hands of their dedicated team. But how does one go about this, especially when the business is structured as a discretionary trust?
The structure of your business is the bedrock upon which your equity issuance plan must be built. In the case of our client, their discretionary trust setup, while excellent for tax planning and asset protection, doesn’t allow for fixed equity percentages. This means that a straightforward issuance of equity interests to employees isn’t possible within the current framework.
However, this isn’t where the story ends. The next logical step is to explore restructuring options. We contemplated converting the trust into a company, which would indeed allow for fixed equity through share distribution. But such a transformation doesn’t come without its hurdles—namely, capital gains tax and stamp duty implications.
When considering the transfer of a business from a trust to a company, we must examine the capital gains tax (CGT) consequences. The aim is to seek out available concessions and discounts that could potentially reduce or even eliminate the capital gains tax liability. For example, the small business restructure rollover under subdivision 328-G of the Income Tax Assessment Act 1997 could defer the capital gain entirely if specific conditions are met.
Another avenue is the Division 122-A rollover relief, which again allows for a potential deferral of CGT until the business is sold out of the new company structure. These options are attractive because they can minimize the immediate financial impact of the transfer.
But what if we chose to crystallize the capital gain? By applying the 50% general CGT discount for assets held for more than 12 months and layering it with the small business active asset discount, we could significantly reduce the taxable gain. For instance, a business valued at $1 million could see its assessable gain reduced to just $250,000.
Even then, there’s more to the story. With the client being over 55, the retirement exemption could potentially wipe out the remaining capital gain, making the shift to a company structure even more appealing. This would not only eliminate immediate CGT liability but also establish a higher cost base for the company, reducing future capital gains.
Then there’s the matter of stamp duty. Recent legislative changes, such as those introduced in Queensland in response to COVID-19, have opened the door to stamp duty exemptions for certain business restructures. Meeting the criteria for these exemptions could save a substantial amount in transfer costs.
While these are the major considerations, there are numerous details that need to be addressed to ensure a smooth transition. But by tackling the big-ticket items like CGT and stamp duty, we’ve laid the groundwork for a successful equity issuance strategy.
If you’ve been pondering how to issue equity in your business and are uncertain about the tax implications, rest assured that with the right guidance, you can find a path that aligns with your goals. Equity issuance is not just a transaction—it’s a strategic move that can shape the future of your company and provide well-deserved rewards to those who have helped build it.
Remember, every business scenario is unique, and it’s crucial to seek personalized advice tailored to your specific situation. If this is a journey you’re ready to embark on, I’m here to help you explore your options and navigate the complexities of business restructuring and equity issuance. Let’s make your business transition a success story.
Book a Discovery Call with Ryu at https://impalatax.com.au/discovery/
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