As advisers to both domestic and international businesses, we are often asked “What is the right business structure for my business?” The stock reply of the industry “it depends” does not always cut the mustard in today’s information hungry society.
In our experience and with a subtle antipodean flavour, our retort is usually prefaced with “take a seat, and let me explain.”
Why you might ask? Australia along with our Kiwi next door neighbours have evolved the use of the “trust” structure over the years and it is far mere prevalent here than in other economies. It’s useful to explain trusts before coming on to the more commonly understood company structure.
Where did trusts come from you may ask? Here I have to shoulder some of the blame on behalf of my country of birth, England. Back in the days of yonder, when knights went off to battle they:
- often did not return alive or
- occasionally were tried for treason which usually then ended in the same fate.
Unsurprisingly they wanted to ensure some protection for their estate.
As such trusts arose around this time as a measure to protect assets and then in later years to avoid death taxes and to keep the castle in the family. In the UK, trusts are still widely used for estate planning purposes, whilst in Australia with the advent of time the trust has evolved into what we see in current times whereby trusts are utilised for trading and asset protection purposes on a widespread basis.
Subject to the Australian Tax Office’s ever evolving stance in respect of trusts, they are an ever present feature of the economy of Australia.
This can work well for domestic businesses and assets, and certainly for businesses that fall under family ownership.
Trusts, particularly a discretionary trust allow great tax planning opportunities that can be harder or impossible to access via a company, particularly around property assets.
Trust are less favourable so for international or mixed ownership businesses. Internationally, trusts are increasingly prone to either be misunderstood or mistrusted which makes a company structure more attractive.
This is really where as a structure the “proprietary limited” company comes into its own. Like its big brother the Ltd Co. it’s a relatively “known” quantity around the globe.
Born from the days of the East India Company in the 1400’s to become what it is today in its various forms, it ranks as the preeminent business structure globally.
The company will be the default structure in most jurisdictions for exactly the reasons stated above in so far as it is a known quantity, affords limited liability protection and is relatively straight forward to quantify the tax impost.
Commercial dog, tax tail
Whilst we should never let the proverbial tax tail wag the dog, the tax impost in a country will impact business location decisions to a degree.
Current corporate tax rates for Australia are 30% (28.5%, for small businesses), comparatively high by global standards.
This means if you make a dollar or make a million, you still pay company tax at 30%.
Will the Australian government use lower rates in the future to attract business as we’ve seen in some Asian and European countries? Time will tell.
In closing, you may think ‘’Why this reflection on business structures?’’
Put simply, where our economy differs from other economies, I feel it is inherent upon us to convey some of these distinctions so as to provide some context to the way that business structures are utilised and used in Australia.