Choosing a business structure as you grow

Advanced business structuring and succession planning can create significant tax advantages and wealth preservation opportunities. However, with the ATO’s heightened focus on privately owned wealthy groups and increased penalties for non-compliance, these strategies require expert implementation and ongoing management.

ATO Focus on Advanced Structures

$999 Million Compliance Funding

The Government has allocated $999 million over four years specifically targeting:

• Tax Avoidance Taskforce
• Wealthy groups and high-net-worth individuals
• Complex business structures
• Professional services firms

This funding is expected to return $3.2 billion in additional tax revenue, indicating intensive scrutiny of sophisticated arrangements.

Professional Services Under the Microscope

ATO Focus Areas for Professional Firms:

• Inappropriate income diversion through associated entities
• Distributions from partnerships and service trusts
• Personal services income (PSI) compliance
• “Fit and proper person” requirements for lawyers and other professionals

Warning: Non-compliance findings can result in professional deregistration.

Advanced Business Structures

1. Unit Trust Structures

Benefits:

• Flexible capital and income distributions
• Asset protection from unit holders
• Succession planning opportunities
• Clear ownership percentages

Tax Considerations:

• Trust income flows to unit holders
• CGT events on unit transfers
• Possible Division 7A issues with corporate unit holders

Best Practice:

• Professional unit trust deed
• Clear unit holder agreements
• Regular valuations for related party transactions
• Proper documentation of all decisions

2. Corporate Beneficiaries and Service Trusts

Structure Overview:

• Professional service entity (company/partnership)
• Associated service trust as beneficiary
• Corporate beneficiary of service trust
• Individual shareholders/unit holders

ATO Scrutiny Points:

• Service fees at market rates
• Genuine services provided
• Commercial substance required
• Proper documentation essential

Compliance Requirements:

• Transfer pricing documentation
• Board resolutions for all transactions
• Market rate benchmarking
• Clear service agreements

3. Multi-Layered Trust Structures

Complex Trust Networks:

• Multiple trusts with different purposes
• Cross-ownership arrangements
• International components
• Various beneficiary classes

Risk Factors:

• Circular arrangements triggering anti-avoidance rules
• Section 100A reimbursement agreement issues
• Family trust election complications
• Tracing beneficial ownership difficulties

Best Practice:

• Clear commercial rationale for each entity
• Simplified structures where possible
• Regular review of ongoing compliance
• Professional management essential

Division 7A – The Bendel Case Impact

Current ATO Position

Following the Bendel case appeal to the High Court, the ATO maintains its controversial position that unpaid present entitlements (UPEs) from trusts to companies are loans under Division 7A.

ATO’s Approach:

• Continues to apply TD 2022/11
• Treats UPEs as deemed loans
• Requires complying loan agreements or payments
• No discretion under section 109RB for structural arrangements

Practical Impact:

• Trust distributions to companies must be paid or converted to complying loans
• 7-year maximum loan term at benchmark rates
• Annual minimum repayments required
• Deemed unfranked dividends if non-compliant

Managing Division 7A Risks

1. Sub-Trust Elections

Mechanics:

• Trustee elects to treat UPE as separate trust
• Company is sole beneficiary of sub-trust
• Distributions from sub-trust not caught by Division 7A
• Must be made before income year end

Requirements:

• Trust deed must permit elections
• Irrevocable election
• Separate bank account required
• Ongoing compliance obligations

2. Complying Loan Agreements

Essential Terms:

• Maximum 7-year term (secured) or benchmark rate
• Annual minimum repayments
• Written loan agreement before lodgment day
• Security required for 7-year loans

Documentation Requirements:

• Signed loan agreement
• Security documentation
• Board resolutions
• Repayment schedules

3. Payment Strategies

Same-Day Payment:

• Trust distributes to company
• Company immediately pays for services/goods
• Circular but legitimate if genuine transactions
• Proper invoicing and contracts essential

Succession Planning Strategies

Business Succession Through Trusts

1. Discretionary Trust Succession

Structure Benefits:

• Flexible beneficiary classes
• Income distribution control
• Asset protection
• Capital gains concessions access

Succession Mechanisms:

• Appointor succession provisions
• Trustee replacement strategies
• Beneficiary addition powers
• Vesting date planning

Tax Considerations:

• CGT on trust restructures
• Family trust election impacts
• Stamp duty implications
• Income streaming risks

2. Unit Trust Succession

Progressive Transfer:

• Gradual unit transfers to next generation
• Retain control through different unit classes
• CGT small business concessions
• Valuation discounts for minority interests

Control Mechanisms:

• Voting vs income units
• Special resolution requirements
• Management agreements
• Employment contracts for key family members

Family Business Succession

1. Management Buy-Out Structures

Vendor Financing:

• Seller finances purchaser
• Installment sale treatment
• CGT spread over payment period
• Retention of some business involvement

Earnout Arrangements:

• Price based on future performance
• Risk sharing between parties
• CGT timing considerations
• Proper documentation essential

2. Share Sale vs Asset Sale

Share Sale Benefits:

• CGT concessions available
• Simpler transaction structure
• Buyer assumes all liabilities
• Lower stamp duty (usually)

Asset Sale Benefits:

• Cherry-pick assets
• Leave liabilities behind
• Depreciation reset for buyer
• More complex but flexible

Superannuation Succession

SMSF Succession Planning

Key Strategies:

• Reversionary pension arrangements
• Binding death benefit nominations
• Corporate trustee structures
• Enduring power of attorney

Tax Considerations:

• Death benefit tax rates
• Dependant vs non-dependant beneficiaries
• Transfer balance cap impacts
• Pension vs lump sum elections

Documentation Requirements:

• Current binding nominations
• Pension documentation
• Trust deed updates
• Powers of attorney

International Succession

Foreign Assets and Beneficiaries

Tax Complications:

• Foreign resident beneficiaries
• Offshore trust structures
• Double taxation issues
• CRS reporting requirements

Planning Considerations:

• Residence timing strategies
• Treaty benefits
• Pre-migration planning
• Ongoing compliance costs

Property Development and Subdivision

ATO Updated Guidance

The ATO has released comprehensive examples covering property development tax treatment, emphasizing that many property projects are taxed as ordinary income rather than capital gains.

Revenue vs Capital Treatment

Revenue Account (Ordinary Income):

• Primary intention to profit from sale
• Systematic and business-like activities
• Multiple transactions over time
• Professional involvement (builders, agents)

Capital Account (CGT):

• Mere realisation of capital asset
• Limited personal involvement
• One-off transaction
• Investment character of holding

Subdivision Projects

High-Risk Indicators:

• Market research and professional advice
• Business loans for development
• Significant improvement activities
• Multiple lot sales over time

Example from ATO: Retired farmer subdivides due to financial pressure:

• No initial intention to profit
• Limited development activities
• Small scale operation
• Held as investment → Capital treatment

GST Implications:

• Revenue account transactions may trigger GST
• “Substantial renovations” test important
• Enterprise vs non-enterprise activities
• Professional advice essential

Property Development Structures

1. Corporate Developer

Benefits:

• Limited liability protection
• Corporate tax rate (25% or 30%)
• Franking credit benefits
• Professional image

Disadvantages:

• Double taxation on distributions
• No CGT discount
• Division 7A complications
• Higher compliance costs

2. Trust Developer

Benefits:

• Flow-through taxation
• CGT discount available (if capital)
• Flexible distributions
• Asset protection

Considerations:

• Trust beneficiaries tax rates
• Potential company beneficiaries
• Distribution planning required
• Division 7A if corporate beneficiaries

3. Partnership Structures

Benefits:

• Flow-through taxation
• Shared risk and capital
• Flexible profit sharing
• Professional combinations

Requirements:

• Clear partnership agreement
• Proper capital contributions
• Decision-making processes
• Exit mechanisms

Advanced Tax Planning Techniques

1. Demergers and Restructures

Tax-Free Demergers:

• Split single entity into multiple entities
• Shareholders receive shares in new entity
• No immediate tax consequences
• CGT cost base allocation required

Requirements:

• Genuine business separation
• 12-month business operation
• Non-portfolio shareholdings
• Commercial rationale essential

2. Scrip-for-Scrip Rollovers

Capital Gains Deferral:

• Exchange shares in target for acquirer shares
• Defer capital gains recognition
• Replacement asset rules apply
• 80% ownership test

Planning Opportunities:

• Business sales to larger entities
• Group restructures
• Family succession transactions
• International structures

3. Value Shifting and Anti-Avoidance

Value Shifting Rules:

• Direct value shifts (Division 725)
• Indirect value shifts (Division 727)
• Can create deemed capital gains/losses
• Complex calculation requirements

Safe Harbors:

• Small shifts (less than $150,000)
• Genuine market transactions
• Pro-rata arrangements
• Arm’s length dealings

Compliance and Governance

Documentation Standards

1. Board and Trustee Minutes

Essential Elements:

• Rationale for decisions
• Commercial considerations
• Independent professional advice
• Valuation support where relevant

Common Deficiencies:

• Retrospective minute creation
• Insufficient detail
• Missing commercial rationale
• No supporting documentation

2. Transfer Pricing Documentation

Related Party Transactions:

• Service agreements
• Loan arrangements
• Royalty payments
• Management fees

Documentation Requirements:

• Benchmarking studies
• Economic analysis
• Comparable transaction evidence
• Regular reviews and updates

ATO Governance Expectations

Risk Management Framework

Key Components:

• Tax risk assessment processes
• Board-level tax governance
• Regular compliance reviews
• Professional advice protocols

Documentation Requirements:

• Tax policies and procedures
• Risk registers
• Compliance checklists
• Regular board reporting

Voluntary Disclosures

When to Consider:

• Uncertain tax positions identified
• Prior year errors discovered
• Change in ATO interpretation
• Proactive compliance approach

Benefits:

• Penalty reductions
• Interest charge reductions
• Certainty of treatment
• Maintained relationship with ATO

Red Flags and Risk Indicators

High-Risk Arrangements

Structure Characteristics:

• Unnecessarily complex arrangements
• Circular transactions
• Artificial steps
• Tax as dominant purpose

Behavioural Indicators:

• Aggressive tax positions
• Poor documentation
• Inconsistent treatment
• Lack of commercial substance

ATO Audit Triggers

Financial Indicators:

• Significant income fluctuations
• High deduction-to-income ratios
• Unusual related party transactions
• International components

Structural Issues:

• Multiple entity layers
• Offshore connections
• Professional service income
• Large cash transactions

Year-End Implementation Checklist

Immediate Actions (Before 30 June 2025)

Trust and Company Distributions:

• Finalise trust distribution resolutions
• Address Division 7A exposures
• Consider sub-trust elections
• Plan company dividend payments

Documentation Review:

• Update service agreements
• Review transfer pricing arrangements
• Check board minute quality
• Assess related party transactions

Succession Planning:

• Review binding nominations
• Update powers of attorney
• Consider structure simplification
• Plan next-generation involvement

Medium-Term Planning (2025-26)

Structure Review:

• Assess entity efficiency
• Consider consolidation opportunities
• Review international components
• Plan succession implementation

Compliance Enhancement:

• Implement governance frameworks
• Upgrade documentation standards
• Regular professional reviews
• ATO relationship management

Professional Advice: Not Optional

When Expert Help is Essential

Mandatory Professional Involvement:

• Multi-entity structures
• International components
• Succession planning
• ATO audit situations
• Significant transactions

Specialist Expertise Required:

• Tax lawyers for complex structures
• Transfer pricing specialists
• International tax experts
• Succession planning advisors
• Valuation professionals

Cost vs Risk Assessment

Professional Fees vs Potential Exposure:

• ATO penalties up to 75% of tax shortfall
• Criminal prosecution possibilities
• Professional deregistration risks
• Ongoing compliance costs
• Relationship damage with ATO

Investment in Quality Advice:

• Proper structure design
• Ongoing compliance systems
• Risk mitigation strategies
• ATO relationship management
• Long-term wealth preservation

Conclusion: Strategic Implementation

Advanced business structures and succession planning offer significant opportunities for tax efficiency and wealth preservation. However, the current regulatory environment demands:

1. Commercial Substance: Every arrangement must have genuine commercial rationale
2. Documentation Excellence: Comprehensive, contemporaneous records are essential
3. Ongoing Compliance: Regular reviews and updates required
4. Professional Expertise: Complex arrangements need specialist advice
5. Conservative Approach: Aggressive positions carry significant risks

The key is balancing tax efficiency with compliance certainty, ensuring structures serve genuine commercial purposes while delivering sustainable tax benefits.

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Complete Tax Planning Series:

• ← Small Business Tax Strategies for 2025: Essential Planning Before June 30 – Essential tax saving strategies and compliance
• ← Superannuation Planning for Business Owners: 2025 Updates and Strategies – Building wealth through super optimisation
• ← Family Business Tax Planning: Investment Property and Trust Strategies – Smart strategies for family businesses and investors
• Advanced Business Structures: Tax Planning for Growing Businesses ← You are here
• Why Smart Business Owners Never Skip Tax Planning → – The bigger picture beyond tax savings

This information is general in nature and should not be considered as personal financial or tax advice. Advanced tax planning involves complex legal and commercial considerations. Always seek expert professional advice before implementing sophisticated tax strategies.