The structure of your business is critically important for the success of your business. The advantages of rolling over a business from a sole trader structure to a company include:
- Reduced risk – as companies operate with limited liability.
- Reduced tax – a company has a 27.5% flat tax rate (if revenue less than $50m).
- Ability to retain profits – companies can retain profits to fund future growth.
- Can apply Tax Strategy 1 – Salary Packaging Private Motor Vehicles ($9,000 tax deduction).
- Can apply Tax Strategy 86 – Employee Meal Expenses on Business Premises ($5,000 tax deduction).
The sale of a sole trader business to a company is a capital gains tax event and would normally create a taxable capital gain for the sole trader. Under the replacement asset rollover the capital gain on sale of the sole trader business to the company is deferred if the transaction is structured as follows:
- The sole trader transfers the business assets (including any business liabilities) to the company in exchange for ordinary shares in the company.
- After the transaction is complete the sole trader must own 100% of the ordinary shares in the company.
These are the steps you need to take when you want to change your business structure:
- Establish company structure.
- Prepare business sale agreement.
- Transfer (sell) the sole trader business assets and liabilities to the company in exchange for ordinary shares in the company.
- After the transaction is complete the sole trader must own 100% of the ordinary shares in the company – This does not prevent the company from subsequently issuing additional shares to another party so as to bring a new investor or ‘partner’ into the business.
Please Note: Many of the comments in this publication are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstances.