William Buck on Gearing up for Growth in the Tech Industry
31 March 2021
Highlights
- The Queensland Office of State Revenue has helped remove one of the main hurdles to restructuring your business for growth and when combining the transfer duty exemption with the available tax concessions, it is a powerful combination for any business looking to align their structure with their business model. Read more about getting the fundamentals right for your Tech SME, and how you can take advantage of these changes.
2021 is the year for growth, well that is what everyone is saying right? For most of the tech and ICT industry 2020 was a significant growth year and 2021 only looks like continuing that growth. For many businesses though, they have been running faster than they can keep up with and are continuing to play catch-up across the board.
Whether that be continuing to improve efficiencies, adapting to a more permanent work from home model or simply keeping up with demand from clients. And with COVID-19 still impacting the ability to lock down key staff, domestic or international, trying to keep all the plates spinning is continuing to get harder. One thing that has become a little easier however, is the ability to restructure your business to align it for growth.
With the Queensland Government late last year introducing the transfer duty exemption for small business restructures, now may be the time to gear up for growth, starting by aligning your structure with your business model.
Small Business Restructure Exemption
In Queensland, transfer duty is generally payable on the transfer of any business asset, including goodwill, though intellectual property can be exempt where it is the sole asset being transferred. While it is possible to find a tax exemption for any potential capital gain that may arise, the transfer duty will most likely be the hurdle in many restructure opportunities due to its costly nature.
From 7 September 2020 this hurdle has now been lowered, with the Queensland Office of State Revenue (OSR) small business restructure exemption (SBRE).
Eligibility
In general terms, the SBRE is for businesses who have turnover of less than $5 million and business assets of no more than $10 million and are looking to change their structure from a sole trader, partnership, or discretionary trust model to a company.
How does the SBRE apply in practice?
Where you have been operating your business as a partnership (whether this be a partnership of individuals or discretionary trusts for example) and now wish to incorporate into a company, you can sell your business to the new company and be eligible for a full transfer duty exemption, where all partners of the existing partnership become shareholders of the new company, in the same percentage as they were partners in the partnership i.e. 50/50 partnership will mean the partners must own the shares in the new company 50/50.
This methodology also applies for sole traders, however discretionary trusts are a little obscure. For a discretionary trust, the default beneficiaries of the trust must be the shareholders in the new company. This will not always be ideal, given it will reduce the flexibility a discretionary trust offers, however, when thinking outside the box, it may still be an option, especially where a partial exemption can apply.
Full v partial exemption
The SBRE can apply to provide a full exemption in most cases, though, it is not an all or nothing model. Where you decide to change the ownership percentage in the company compared to your previous structure, a partial exemption may apply. For example, consider a partnership that comprises four partners, A, B, C, D who have partnership interests of 40%, 20%, 20% and 20% respectively.
When they restructure the partnership to a new company, they agree to each own 25% of the shares. For A, as they are moving from 40% down to 25% interest, they will only receive a partial exemption of transfer duty on 25% of their shareholding, whereas the remaining partners will increase their holding from 20% to 25% and as a result receive a full exemption on their 20% interests.
In total, there will be a transfer duty exemption applied to 85% of the value of the partnership interests transferred to the new company.
The ability to have a partial exemption provides great flexibility where you may want to bring on a new business partner or investor.
Tax and Transfer Duty Exemptions – a powerful combination
There have always been many tax concessions available to businesses where they were restructuring their business, and this was further enhanced back in 2016 with the introduction of the Small Business Restructure Rollover (SBRR). While each available concession has its own eligibility criteria, in my experience you can generally find one that will fit the circumstances at hand and will either exempt or reduce the amount of tax payable on the restructure or sale of a business.
Being able to now combine these tax concessions with a transfer duty exemption has resulted in a powerful combination, giving business owners the ability to grow their business sooner, without incurring unnecessary transaction costs, a conversation I have been having all too often of late.
Why should I restructure?
While having the ability to pay no tax or transfer duty on a restructure is great, this should not be the sole reason for you deciding to restructure your business. If you are running a business through your family trust and this is working for you, then that structure may be all you need.
However, where your business has been growing steadily and it is now at the point you wish to bring on additional investors or you are starting to think about your legacy and transitioning the business to the next generation, or you did not receive the right advice when you initially started business, it may be worthwhile reviewing your structure to determine whether it is still appropriate for you.
Other considerations
Another key consideration is how you finance the restructure. Is it worthwhile having the new company purchase the business and finance the full amount or is it better to simply transfer the assets to the new company? Could the additional capital be injected back within the business to help it grow or could it be an opportune time to extract the cash value you have built up over the years – this is especially important where you are bringing on new partners. These types of considerations can have a significant impact on the future of your business and need to be contemplated as part of the overall restructure.
Summary
The Queensland Office of State Revenue has helped remove one of the main hurdles to restructuring your business for growth and when combining the transfer duty exemption with the available tax concessions, it is a powerful combination for any business looking to align their structure with their business model. While there are many criteria to be satisfied on both fronts, now is the time to speak with your advisor to see how you can take advantage of these concessions and start thinking about the future of your business by getting the fundamentals right, starting with your business structure.
Upcoming presentations
If this article has got you thinking about the opportunities available to you and your business, make sure you get along to William Buck’s upcoming presentation in April where we will take you through how to combine the available transfer duty and tax concessions to set your business up for growth. Contact Scott Lindeblad scott.lindeblad@williambuck.com from William Buck Queensland to lock in your seat.