How Should Business Assets Be Held?

On 22 March 2001, the Federal Treasurer announced the withdrawal of the proposed "Entity Taxation Regime" that would have effected the taxing on discretionary trusts and other non-fixed trusts. In light of this announcement, how should the holding of business assets be structured?

There are a number of relevant Capital Gains Tax ("CGT") concessions available. They include the following:

• The 50% discount for individuals and trusts contained in division 115 of the 1997 Tax Act;
• The small business 15 year retirement exemption;
• The small business 50% active asset exemption;
• The small business retirement roll-over; and
• The small business active asset roll-over.

The above small business concessions apply to individuals, trusts or companies (except for the 50% active asset exemption).

The simplest way to access and maximise the benefits from the various CGT concessions is to hold assets in individuals’ names. This may be desirable in a low-risk business. However, in a high-risk business this is often not desirable due to issues of asset protection. Another undesirable factor in holding a business under an individual name is the ability to split income.

If asset protection and income splitting is an important factor, then company or trust structures should be considered. Acquiring assets in a company will not entitle the individual shareholders to the 50% discount that is available for individuals and trusts under division 115 and will not entitle them to the small business 50% active asset exemption unless they sell their shares in the company as opposed to selling the underlying assets held by the company. However, the other small business concessions are available to companies. It is also important to note that where assets are held by a company the small business concessions are only available if the company has an individual controller with at least 50% of the interest in that company.

The Federal Treasurer’s announcement on 22 March 2001, confirm that the 50% discount under division 115 will continue to be accessible by trusts in addition to all small business concessions. This makes the holding of business assets in trust structures very desirable. There are different types of trusts for different circumstances. For example, discretionary trusts are often used to accommodate closely related parties whilst unit trusts are often more appropriate for commercial ventures involving arm’s length parties.