How to approach business structures and restructures in 2021

COVID-19 has taught us to expect the unexpected. Australians are generally positive people with a ‘she’ll be right’ attitude to all aspects of life including in business. However, COVID-19 has caused many people to question that attitude and as a result many are now understanding the importance of planning for the worst-case scenario.

The impact of COVID-19 has been felt across businesses in many different ways. For example:

  • Where there has been a significant decrease in turnover this may have led to a significant reduction of profits in the business or the business making a loss;

  • By contrast some businesses may have thrived in the period as demand for their goods and/or services have increased or a forced pivot to their offering has led to such a demand and as such they have made additional profits;

  • Reality for many businesses will have been financial difficulty and needing to deal with creditors. For many owners this may have led to the business closing or being sold with the associated ramifications including losing personal assets; and

  • Many owners have reflected on their personal needs and find themselves wanting a sea or tree change and so wanting to sell the business or pass it onto their children.

Whatever the impact COVID-19 has on our clients, many are now looking to review their structure generally. This review will often concentrate on three main areas:

  • The tax efficiency of the structure;

  • How well are assets protected; and

  • Can the business be passed to the next generation easily and tax effectively.

Any review must also keep in mind what the key issues will likely be in the short term as well as the long term. In 2021 three key tax issues are likely to be the ongoing reform of Division 7A, how the ATO applies (or does not apply) section 100A and the ATO’s compliance approach in relation to the allocation of professional firm profits.1 Given the uncertainty of reform in each of these three areas it is not possible to consider them in detail in this paper other than to say that taxpayers need to keep an eye on developments and possibly make changes to their business structure depending on what occurs.

Whilst there are many different types of business structures, for small and medium businesses a company or trust is generally preferred and so most of the discussion in this paper and the related presentation will relate to those two types of entities.

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