Understandably business owners want to safeguard against the risk of losing their hard earned wealth in the event of unforeseen adverse events.
For businesses who are exposed to the ordinary commercial risks of running a small business a number of strategies can be implemented to protect the exposure of assets to the businesses creditors. Fundamentally the goal of asset protection is to try and ensure valuable assets are not being exposed by 'high risk' entities and a strategy in this regard is for 'high risk' entities to divested of any valuable assets to keep them out of a creditor reach. An example of this would be for a manufacturing business to divest its Plant & Equipment (Machinery) assets away from the trading entity into a new Plant & Equipment hire entity. The Plant & Equipment hire entity leases the equipment to the trading entity, thus the Plant & Equipment assets are protected from the creditors of the trading entity.
The CGT and income tax consequences that flow from transferring assets as part of a restructure is a key reason why so many small business chose not to restructure and instead retain their existing structure. Recognising this impediment to restructuring, the government passed the small business restructure roll-over (SBRR) legislation to ensure the transfer of business assets on or after 1 July 2016 as part of a genuine restructure of a small business is tax neutral.
Whilst the main purpose of having a 'trading entity' and a 'holding entity' is for asset protection purposes, the arrangement itself can potentially give rise to significant tax advantages. The ATO regulates the use of types of service entity arrangements to ensure there is no tax evasion. To reduce ATO audit risk the use of service entity arrangements, it is highly recommended that lease payments charged to the trading entity by the holding entity are on par with market rates and are also on commercial terms. The ATO have Tax Ruling TR 2006/2 "Deductibility of service fees paid to associated entities".
If you would like to discuss this with one of our CPA qualified staff please phone us for a complimentary initial consultation on ph: 1300 360 137