Labor Law Talk

There are a range of reasons that business owners may need to consider re-structuring their business. If:

* Your business is experiencing cash flow problems;

* Your creditors are demanding payment of outstanding accounts and threatening legal action;

* You’re finding it hard to remain within your overdraft limit;

* Your bank is making demands;

* You have inherited company liabilities as a result of personal guarantees provided;

* You are unable to make payments to the ATO on time

Then you may need to look at restructuring your business as a method of getting it back on its feet and heading in the right direction.

Taking action to get a distressed business back on track is generally the best option for all involved. Following a comprehensive independent review of the business, if it is deemed that restructuring is a viable option the next step is to determine which particular restructuring components best suit the individual situation. Some possible options include restructuring the business, the disposal of some divisions/assets that are not performing well or possible refinancing.

The range of areas that a business restructure can affect reach far and wide. Such areas can include control of the business, asset protection planning, capital gains tax, stamp duty, income tax, GST, land tax, payroll tax, estate planning and succession issues. Depending on the individual situation this can have either be a positive or a negative effect.

Specific examples include that if a sole trader or partnership decides to incorporate, under certain conditions, they may be eligible to deduct, over five years, costs incurred by them in relation to the incorporation such as legal, search or lodgement fees. On the flip side, another entity may be liable for stamp duty on the transfer of assets, capital gains tax and possible loss of tax benefits that the current business structure is eligible for.

It is said there are two types of expertise that are required in order to implement a successful restructure, traditional and contemporary. A knowledge of traditional legal and accounting practices is necessary in order to address areas such as taxation, the rights and shares of owners and the ownership of various types of assets.

Additionally, an up-to-date, working knowledge of the modern business arena is needed to aid the development of modern business models, as well as to improve workflow management and online business and leverage with third parties. This contemporary expertise assists many businesses to operate cheaper, faster and better than their competitors.

As has been demonstrated, there are many issues to be aware of when looking to restructure a business, which is why it is extremely important to enlist the help of professional lawyers and accountants.

At The Quinn Group the highly qualified team of both accountants and lawyers are well equipped to assist you with your business restructuring needs. Having all your needs met by one firm ensures timely and cost effective solutions for you business. Contact us on 1300 QUINNS or click here to email your enquiry.

As a result of the current harsh economic climate there has been a notable increase in the amount of businesses, and consequently business owners, that are having to reconsider the way in which the business is currently operating. Unfortunately, for many small to medium enterprise operators they are having to reassess whether or not it is financially viable for the business to continue functioning at all.

There are various options for a business that finds it is no longer able to trade such as Members’ Voluntary Liquidation or de-registration. The best option for each individual situation is different, which is why it is important to note that choosing the wrong method could prove to be a costly decision. Making the correct choice is not only important in terms of the initial monetary cost to the business but also in relation to the tax implications of each.

Members’ Voluntary Liquidation refers the process of winding up a solvent company. This means that the business is in a financial situation where it is able to pay its debts if and when they are due prior to the execution of the liquidation process.

De-registration is the formal process of removing a company from the Australian Securities and Investments Commission (ASIC) register of companies. The removal usually takes place following the completion of Members’ Voluntary Liquidation. However, provided that the following conditions are met a company can be de-registered without first going through the liquidation process.

If:

-all company members agree to the De-registration
-the company is not carrying on business
-its assets are worth less than $1000
-all company fees and penalties payable under the Corporations Act have been paid
-there are no outstanding liabilities, and
-the company is not a party to any legal proceeding
-then De-registration can take place.

Whilst from a cost-to-the-business perspective Member’s Voluntary Liquidation is more expensive, when viewed from a taxation perspective there are many benefits, particularly to the shareholder, when using the Members’ Voluntary Liquidation method.

For example, the winding up of a company will no doubt result in the necessary distribution of its accumulated profits and capital reserves to the company’s shareholders. If the distribution of the assets is done via a liquidator there are specific tax provisions and capital gains tax regimes that are applied, proving advantageous for the shareholders. Conversely, if the assets are distributed without the use of a liquidator the usual tax provisions in relation to shareholder dividends apply.

The basic application of this can be demonstrated using the following simplified example.

Holiday Getaway Pty Ltd was incorporated in 1984 with $100 in share capital. The shareholders, Sally and Alex were allotted 50 shares each. In the same year Sally and Alex lent $500,000 to the company in order for it to purchase a property. Years later, property was sold for $950,000. This is a capital-gain of $450,000 for the company. After repaying all of its debts the company has approximately $400,000 in the bank at the time that Sally and Alex decide to wind-up the company.

Using the De-registration option, Holiday Getaway Pty Ltd are required to distribute the remaining cash to Sally and Alex before De-registration can occur. Apart from the initial $100 that was invested in the company, the rest of the cash is considered an unfranked dividend and will be taxed as such. Based on the top marginal tax rate of 45% there will be $179,955 owed in tax on the remaining $399,900.

If Holiday Getaway Pty Ltd elects to undertake the process of Members’ Voluntary Liquidation the distribution of assets will be tax-free to Sally and Alex.

As demonstrated in the above example there can potentially be significant tax benefits to the shareholders of a company if Members’ Voluntary Liquidation is implemented. However this may not be the optimal outcome for every situation. It is also necessary to consider the administration, legal and other costs associated with this process. This is why it is increasingly important that you seek the advice of professional accountants and lawyers when considering winding-up your company.

At The Quinn Group we have a team of highly qualified lawyers and accountants who will be able to advise you on the best method for your situation. If you require advice on the winding-up of your company or would like more information please contact us on 1300 QUINNS or submit an online inquiry form.