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  • #987082
    Daniel Mitchell
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    Good morning and thanks in advance for any advice.

    I’m establishing a new business in the IT industry. Revenue streams will come from developing and selling our own software, plus contracts to clients to develop custom software, and potentially some other IT consulting services. A rough estimate has revenue upward of $200k per annum, but could be as low as $100k in the first year and potentially a lot more in the future – a bit of an unknown at this stage how far we can grow. At this stage I will be the only person working at the business but will have a small investment from my parents and if I established a company they would get 10% ownership. Over time there is the possibility of bringing in additional shareholders or of selling the company or rights to our software. Assuming the business grows as I predict we will bring in employees, but at this stage it will be myself and any outsourcing will be to external contractors.

    I have had a meeting with 3 different accountants and they all suggested a different company structure – a single Pty Ltd company, a 2-tiered company structure with one owning software IP and the other trading, and a discretionary trust – suggested that I act personally as trustee at this stage but can add a company as trustee at a later date. I have done a lot of reading and it seems there are pros and cons to each structure. I like the idea of keeping things simple at the early stages but I have been told that it is something that needs to be right from the start as there will be difficulties and tax implications if I decide to change it at a later date.

    I understand that a trust will give the best tax flexibility as I can stream income to family members, but in reality I just have myself and my parents and as I will be a shareholder and employee and they will be shareholders I don’t think the trust really offers much. I understand the concept of CGT but it seems to be a tricky area so I can’t quite work out whether the concessions offered to the trust are worth looking at that structure – our assets are really our IP. I believe the only benefit a 2-tiered structure offers is in protecting our assets, so really we are paying for security.

    I’ve read some other threads with a similar topic and it seems people are split as to whether a trust is right for operating a business. Any advice you have would be much appreciated. It seems I have been presented with 3 viable options but with my limited understanding I can’t get a clear pro/con balance to actually pick one. If I had to choose I would go a single company to keep it simple, but I am just concerned that by doing that I am being short-sighted.

    Thanks

    Daniel

    #1161081
    TehCamel
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    I’m not an accountant.

    My take though, is if you want to have the possibility of future investors or shareholders (even employee shareholders) you’ll need to go the Pty Ltd route.
    You can’t add shareholders to a trust – you also can’t change the beneficiaries in the deed.

    there’s also a difference in taxation and retaining profits:
    A trust does not pay any company tax on the profit. But it MUST pay out all the profit, every year.
    A company pays 30% company tax. It may retain earnings.

    What you could consider if you wanted to go the trust method, is have a Unit trust, rather than a discretionary trust. With a unit trust, there are a certain number of units, say 100. These are owned by whoever owns them, in whatever structure they own them.
    At the end of the year, the income then gets streamed to the unit holders, based on the units they hold. So, 50 units to you, 50 units to Joe over there.
    This should give you the flexibility later to sell units to another person, or to provide the units to your parents as an “equivalent” of a share.

    Personally – I don’t ever expect any outside investors. I’ve got a discretionary trust, with a Pty Ltd as the trustee. While technically I “Can” stream income to whichever family member is named in the deed, it’s not realistic.

    If there’s profit of 400,000 – I’m not neccessarily going to give 100K to me, 100K to my wife, 100K to my mother and 100K to her mother, because that’s going to impact their personal circumstances (personal tax situation, pensions, whatever)

    #1161082
    James Millar
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    Daniel Mitchell, post: 185941 wrote:
    Good morning and thanks in advance for any advice.

    I’m establishing a new business in the IT industry. Revenue streams will come from developing and selling our own software, plus contracts to clients to develop custom software, and potentially some other IT consulting services. A rough estimate has revenue upward of $200k per annum, but could be as low as $100k in the first year and potentially a lot more in the future – a bit of an unknown at this stage how far we can grow. At this stage I will be the only person working at the business but will have a small investment from my parents and if I established a company they would get 10% ownership. Over time there is the possibility of bringing in additional shareholders or of selling the company or rights to our software. Assuming the business grows as I predict we will bring in employees, but at this stage it will be myself and any outsourcing will be to external contractors.

    I have had a meeting with 3 different accountants and they all suggested a different company structure – a single Pty Ltd company, a 2-tiered company structure with one owning software IP and the other trading, and a discretionary trust – suggested that I act personally as trustee at this stage but can add a company as trustee at a later date. I have done a lot of reading and it seems there are pros and cons to each structure. I like the idea of keeping things simple at the early stages but I have been told that it is something that needs to be right from the start as there will be difficulties and tax implications if I decide to change it at a later date.

    I understand that a trust will give the best tax flexibility as I can stream income to family members, but in reality I just have myself and my parents and as I will be a shareholder and employee and they will be shareholders I don’t think the trust really offers much. I understand the concept of CGT but it seems to be a tricky area so I can’t quite work out whether the concessions offered to the trust are worth looking at that structure – our assets are really our IP. I believe the only benefit a 2-tiered structure offers is in protecting our assets, so really we are paying for security.

    I’ve read some other threads with a similar topic and it seems people are split as to whether a trust is right for operating a business. Any advice you have would be much appreciated. It seems I have been presented with 3 viable options but with my limited understanding I can’t get a clear pro/con balance to actually pick one. If I had to choose I would go a single company to keep it simple, but I am just concerned that by doing that I am being short-sighted.

    Thanks

    Daniel

    1. How many beneficiaries (other than you) do you currently have that are over 18 and earning very little? If none, do you expect there to be more in the foreseeable future? If the answer is no / none then income splitting opportunities are limited / nil. In other words a trust will not help you.

    2. How probable is it that you will have arms length (non family) business stakeholders in the future? A non fixed trust is really only suited for family business relationships. Only you can guess with this. If its more than 50% likely then a trust is no go.

    3. Examine whether there is a CGT rollover concession to allow you to transfer the business into a wholly owned company at a later stage. May allow you start as a sole prop inexpensively.

    4. Is research and development an element of your business (or will it be). Tax R&D concessions are only available to companies.

    Helping build better businesses and better lives with expert financial and taxation advice. [email protected] www.360partners.com.au 03 9005 4900
    #1161083
    Daniel Mitchell
    Member
    • Total posts: 56
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    Thanks everyone for the advice, appreciate your help

    #1161084
    Karthik Veni
    Member
    • Total posts: 1
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    Daniel Mitchell, post: 186217 wrote:
    Thanks everyone for the advice, appreciate your help

    Hey

    I am about to set up a book keeping firm myself and was looking at your post.

    I am in the process of researching of what my firm should be best set up as. In the meanwhile I saw your post and thought to have a word of the facts I heard of.

    If you are looking to sell the business off in like a few years time, its best to set the firm as a discretionary trust so you get 50% off your CGT.

    The draw back I heard so far in relation to the discretionary trust is – Money needs to be distributed off every year or if money held in the trust would be taxed at 45%, where u can escape it by creating a company and investing in that company’s assets.

    I’m still learning a lot myself and would be happy to take any feedback.

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