AUSTRALIA

TAXATION –
ADVANCED
MODULE 6: COMPLEX
BUSINESS STRUCTURES
TUTOR MATERIAL
AUSTRALIA TAXATION –
ADVANCED
MODULE 6: COMPLEX BUSINESS STRUCTURES

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LEARNING OBJECTIVES

After completing this module, you should be able to:

• assess the business and tax advantages of complex structures
suitable for Small Business Entities and their owners;
• analyse the complexities of multiple entity combinations involving
companies and the associated tax opportunities;
• analyse the complexities of multiple entities in a partnership and
the associated tax opportunities;
• analyse the complexities of multiple entity combinations involving
trusts and the associated tax opportunities; and
• assess the relationship between complex business structuring,
tax planning opportunities and tax avoidance risks.

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AUSTRALIA TAXATION – ADVANCED:
CONCEPT MAP

Source: CPA Australia 2018.

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AUSTRALIA TAXATION –
ADVANCED
MODULE 6: COMPLEX BUSINESS STRUCTURES
PART A: ASSESSMENT OF GROUP BUSINESS STRUCTURE
Why does this matter?

• Many ways to carrying on a business

• Important legal differences between alternative types of business structures

• Business owners need to know how the law regulates different types of
businesses – start-up, expansion

• Persons dealing with a business need to understand the legal nature of the
business they are dealing with

• Important to know the legal rights and duties, obligations that arise

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The name under which a person conducts a business
Legal name – name of entity that is on all official documents and legal papers
Trading name – an unregistered name that businesses could use before 28 May
2012
Trading name – must be registered as business name to continue using after 31
October 2018
Business name – name under which you trade that is different from your legal
name
Only registered business names will appear on ABN register from November
2023
Can have multiple business names attached to one ABN

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CATEGORIES OF BUSINESS ENTITY 1

Sole Private Co-

company operative
trader

Four most
common types
General law of small-to- Discretionary
partnership medium (SME) trust
business
entities
Association
Joint
venture
Unit trust

Source: CPA Australia 2020.

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CATEGORIES OF BUSINESS ENTITY 2

• Related group entities—a family or closely held group will also establish the
following related entities as part of the larger group structure:
• the shares in the company or units in the unit trust will typically be owned
directly by either an individual or more commonly indirectly via a family
discretionary trust—so that the business owners can access the capital
gains tax (CGT) discount on any sale of the equity interests in a company or
unit trust
• the business owners typically use part of business profits to contribute as
either concessional or non-concessional contributions to a self-managed
superannuation fund (SMSF) where they are also the members of the fund
• the business owners use surplus profits to acquire investments, which can
be held in a separate vehicle (e.g. discretionary trust)
to access the CGT discount, and to ensure that they are owned by
a different legal entity to the group’s trading entity.

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COMMERCIAL FACTORS IN SELECTING AN
ENTITY

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TAX FACTORS TO CONSIDER WHEN
SELECTING ENTITY

Source: CPA Australia 2020.

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 Economically, similar activities can be taxed in different ways and at different
rates, depending on the choice of business structure
• Applicable tax rate
• Companies are taxed at a flat rate (27.5% or 30%)
• Individuals taxed at their personal marginal tax rate
• Concessions that apply
• Companies not eligible for the 50% CGT discount
• Access to CGT concessions differ if the CGT assets are shares in a
company or units in a unit trust
• Partnerships may not be able to access R&D deductions
• Beneficiaries of trusts cannot access tax losses
• Distribution of income – discretionary vs fixed amount
• Companies must distribute dividends in proportion to the size of
shareholdings
• Partnership must split partnership income in accordance with
Partnership Agreement
• Trustee of discretionary trust can take the tax position of beneficiaries
into account when deciding on how to distribute trust income

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Business Structure
Choice depends on: Choice determines:
• Your personal circumstances • Your responsibilities as a
• The size and type of business business owner
• How much you plan to grow the • Your potential personal liability
business • Your asset protection
• How many people are involved in • Your finance requirements
starting up the business
• Establishment costs
• The need to acquire and raise
• Ongoing costs and volume of
capital
paperwork
• The extent privacy or
• How much tax you pay
confidentiality is a concern
• Personal risk appetite

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CAPITAL GAINS TAX ROLLOVER RELIEF

• Subdivision 328-G, Income Tax Assessment Act 1997 (Cwlth) (ITAA97)—optional rollover
• Available where all the following conditions are met:
• part of a genuine restructure of an ongoing business
• transfer of asset(s) does not have the effect of materially changing the ultimate economic
ownership of transferred assets
• asset(s) transferred is an active asset
• both the transferor and transferee are Australian resident small business entities (SBEs) who
choose to apply the rollover.
• Effects of the rollover:
• no loss or gain is derived by the transferor for income tax and CGT purposes
• transferee inherits the cost attributes of the transferred assets
• where membership interests are issued for the transfer of a rollover asset(s), the cost base
and reduced cost base of those new membership interests is worked out based on the sum of
the rollover costs and adjustable values of the rollover assets, less any liabilities that the
transferee undertakes to discharge in respect of those assets
• any capital loss on any membership interest in the transferor or transferee made subsequent
to the rollover is disregarded.

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COMBINATION OF MULTIPLE GROUP
ENTITIES 1
• Holding company and subsidiary
Figure 6.1: Holding company and subsidiary

Source: CPA Australia 2020.

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COMBINATION OF MULTIPLE GROUP
ENTITIES 2
• Holding company and multiple subsidiaries
Figure 6.2: Holding company and multiple subsidiaries

Source: CPA Australia 2020.

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COMBINATION OF MULTIPLE GROUP
ENTITIES 3
• Business entity and separate property-holding entity
Figure 6.3: Business entity and separate property-holding entity

Source: CPA Australia 2020.

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COMBINATION OF MULTIPLE GROUP
ENTITIES 4
Figure 6.4: Multiple trusts – same controller

Source: CPA Australia 2020.

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COMBINATION OF MULTIPLE GROUP
ENTITIES 5
Figure 6.5: Multiple trusts – different controller

Source: CPA Australia 2020.

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COMBINATION OF MULTIPLE GROUP
ENTITIES 6
Figure 6.6: Separate construction entity and landholder

Source: CPA Australia 2020.

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AUSTRALIA TAXATION –
ADVANCED
MODULE 6: COMPLEX BUSINESS STRUCTURES
PART B: MULTI-ENTITY COMBINATION
INVOLVING COMPANIES
LIMITATIONS OF A COMPANY AS SOLE
ENTITY
• Limitations of using a company as the sole entity of a business:
• a tax deferral only arises where shareholders are on an effective marginal tax
rate which is higher than the company tax rate
• income splitting is not available to a company
• a company cannot apply the CGT discount
• capital gain sheltered under the CGT small business 50 per cent reduction is effectively clawed
back when that gain is distributed as an unfranked dividend to shareholders
• CGT small business 15-year exemption and the retirement exemptions require a company to
have a significant individual
• tax and capital losses are cancelled if both the continuity of ownership test (COT) and the
business continuity test (BCT) are failed
• change in generational control of a company will trigger adverse CGT liabilities at some point.

• Where a company chooses to expand its business operations it may consider setting up a related
entity that addresses some of the limitations that apply where the business is conducted solely in
a company.

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LICENSING INTELLECTUAL PROPERTY
TO A RELATED ENTITY
Steps in setting up a multi-entity structure for
• A multi-entity structure may be licensing intellectual property (IP) to a related
appropriate where a company entity
Incorporate a company to hold the IP
has developed intellectual property
that the business owners wish to
quarantine from potential creditors by
Discretionary trust
licensing it to a related entity.
• Business considerations
• Tax considerations Company licenses the intellectual property to
operating entity

Admit future equity partners in operating entity

Terms of the licence to operating entity are

cancellable

Source: CPA Australia 2020.

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PROVISION OF ADMINISTRATIVE SERVICES
BY A SERVICE TRUST
Steps in setting up a service trust
• Involves a service trust owning
or leasing office premises and A company is set up to employ professional services staff

employing administrative staff Shareholders will be the principals in the professional services
that are made available to the company

professional practice in return Separate service trust is set up to provide administrative services
for a service fee that includes a
profit mark-up Corporate trustee of service trust

• Business considerations
Service trust will typically own or lease the operating premises, etc.
• Tax considerations
Service trust charges the company a fee to recover costs as well as a
profit mark-up

Profit mark-up is distributed by the service trust to its unit holders

Amount of the service fee must be arm’s length

Source: CPA Australia 2020.

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AUSTRALIA TAXATION –
ADVANCED
MODULE 6: COMPLEX BUSINESS STRUCTURES
PART C: MULTI-ENTITY COMBINATION
INVOLVING PARTNERSHIPS
PARTNERSHIPS

• Rules concerning the formation of a general law partnership

• Distribution of a partnership’s net income or partnership loss to
partners in accordance with their partnership interests

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Peter and Paul operate a partnership on a 50/50 basis. Peter receives $1,000
salary a month and Paul doesn’t take a salary. The partnership accounts
show net profit of $112,000.
How much does Peter get and how much does Paul get?

Accounting profit $112,000

Salaries paid $12,000
Net income of partnership $124,000

Peter Paul
Salary $12,000
Share of partnership $50,000 $62,000
income

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PARTNERSHIPS

• Capacity of a partner to offset their share of a partnership loss

against other assessable income
• Tax issues arising on the dissolution or reconstitution of a
partnership upon a change in partners

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LIMITATIONS OF A PARTNERSHIP
AS SOLE ENTITY
• Limitations of using a partnership as the sole entity carrying on
a business:
• all partners are jointly and severally liable
• a partner disposes of a fractional interest in each CGT asset
on a reconstitution of the partnership
• a reconstitution of the partnership will also require elections to
be made to prevent a notional disposal of trading stock and
depreciating assets
• partnerships are not an effective structure for succession planning
—any generational change in control will trigger CGT events
• individual partners can only offset their share of partnership loss
against other assessable income if they meet the non-commercial
loss rules under Division 35 of ITAA97
• a partnership cannot set up an employee share scheme (ESS).

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PARTNERSHIP SETS UP A PROPERTY-
HOLDING UNIT TRUST
A partnership setting up a property-holding unit trust

• Partners in a general law General law partnership formed to carry on a business

partnership carrying on a
profitable business may wish Written partnership agreement

to expand their business by

acquiring a property on which Partners should be either a company or a company acting as a trustee

to carry on their business.

Set up a unit trust with a corporate trustee
• This may be held in a standalone
unit trust for asset protection
Trust deed expressly limits liabilities
purposes to quarantine it from
creditors of the partnership’s Units in unit trust are held by a family discretionary trust
business.
• Business considerations Unit trust leases the property to the partnership

• Tax considerations
Unit trust lends back the rental income to the partnership

Source: CPA Australia 2020.

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PARTNERSHIP OF DISCRETIONARY
TRUSTS WITH CORPORATE TRUSTEE
AND COMPANY MANAGER
• Each party establishes its own Setting up a partnership of discretionary trusts
discretionary trust and the
Establish separate discretionary trusts
trustees of the trusts then enter with a corporate trustee
into a written partnership
agreement. A company is
appointed as agent to manage Written partnership agreement

the business.
• Business considerations
Establish a company
• Tax considerations

Source: CPA Australia 2020.

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CORPORATE LIMITED PARTNERSHIPS

• Limited partnership that is registered under state and territory legislation

• Taxed as companies under Division 5A of the Income Tax Assessment Act
1936 (Cwlth) (ITAA36)—important income tax consequences:
• treated as a continuing entity because a change in the composition of a
limited partnership does not affect its continuity under s. 94C ITAA36—
the adverse income tax issues that arise on a reconstitution of a general
law partnership do not apply when partners enter or leave a limited
partnership
• references in the income tax law to a company or a body corporate
generally include a reference to a corporate limited partnership
• income distributions are treated as if they were dividends payable on
a share to a shareholder
• tax losses are quarantined in the partnership and are not available to be
deducted by the partners according to their interests in the partnership.
• Considered a private company under Division 7A of ITAA36 if it is regarded
as a ‘closely held’ corporate limited partnership

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AUSTRALIA TAXATION –
ADVANCED
MODULE 6: COMPLEX BUSINESS STRUCTURES
PART D: MULTI-ENTITY COMBINATION INVOLVING TRUSTS
LIMITATIONS OF A TRUST AS A SOLE ENTITY

• Limitations of using a trust as the only entity carrying on a business:

• lack of asset protection unless a corporate trustee is used, and the trustee’s right of
indemnity is limited to the trust’s net assets under
the trust deed
• beneficiaries of a discretionary trust do not own any equity interests
• CGT will arise on a change in generational control of a unit trust
• no income splitting where the trust is a unit trust
• trustee of a family trust will be liable for family trust distribution tax at a rate of 47 per
cent
on any distribution made to a person who is outside the family group
• unit trust will trigger CGT event E4 on distributing a capital gain sheltered under the
small business 50 per cent reduction
• cancellation of tax losses will occur in a fixed trust where the 50 per cent stake test is
breached since there is no alternate SBT
• cancellation of tax losses will occur in a non-fixed trust under the trust
loss recoupment tests especially where the pattern of distributions test is not met.

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UNRELATED DISCRETIONARY TRUSTS
SET UP A SUBSIDIARY UNIT TRUST
• Each party forms a discretionary
trust to acquire units in a unit trust to
carry on business.
• Allow unrelated parties to engage in
business activities together without
either forming a company, general
law partnership or entering into
a joint venture arrangement.
• Business considerations
• Tax considerations
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Unrelated discretionary trusts setting
up a subsidiary unit trust
Each party establishes a discretionary trust to carry on
business
Each discretionary trust subscribes for unit capital in a unit
trust
Corporate trustee administers the unit trust
Unit trust carries on the business—the trustee
distributes the income
Unit trust can be wound up
Source: CPA Australia 2020.
DISTRIBUTIONS TO DISCRETIONARY
CORPORATE BENEFICIARIES
• A trustee of a discretionary trust
carrying on a business may
exercise a discretion to distribute
trust income to a related private
company beneficiary where the
trustee and company are controlled
by the same family group.
• Business considerations
• Tax considerations
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Discretionary trust distributes income
to a private company beneficiary
Business owner sets up a discretionary trust
Trustee is a company and beneficiaries also include
a separate company
Trustee makes the private company beneficiary
presently entitled
Beneficiary is not paid the unpaid present
entitlement (UPE)
Company effectively authorises the trustee’s
continued use of funds
Source: CPA Australia 2020.
INTERACTION WITH SELF-MANAGED
SUPERANNUATION FUNDS
• Family or closely held group will usually include an SMSF as part of the
larger group structure
• Important to recognise the following limitations concerning investments
that can be made by an SMSF under the Superannuation Industry
(Supervision) Act 1993 (Cwlth) (SISA). The trustee(s) must:
• continuously ensure that the fund is maintained solely for one or more
core purposes of providing benefits on a member’s retirement or upon
the member’s death
• formulate and give effect to an investment strategy having regard to
the whole circumstances of the fund
• deal on an arm’s length basis in respect of any investment with
another party including a related party
• not intentionally acquire an asset from a related party of the fund
• constantly monitor whether the SMSF complies with the in-house
asset test.

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AUSTRALIA TAXATION –
ADVANCED
MODULE 6: COMPLEX BUSINESS STRUCTURES
PART E: ASSESSMENT OF TAX RISKS
PERSONAL SERVICES INCOME
• The personal services income (PSI) regime was principally
enacted to prevent an individual structuring their activities so
that the PSI derived by an individual was diverted to a personal
services entity (PSE) being an associated trust, company
or partnership.
• ‘PSI’ is defined as the ordinary or statutory income derived by an
individual or any other entity that is ‘mainly’ a reward for the
personal efforts and skills of an individual taxpayer.
• Where the PSI rules apply, a PSE will not be able to claim
deductions that would not otherwise have been available to the
individual had that person been an employee.
• However, PSI will not be included in the assessable income of that
individual if the PSE is conducting a personal service business
(PSB)

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PERSONAL SERVICES INCOME

• A PSE will be carrying on a PSB if:

• the PSE satisfies the results test where at least 75% of the
entity’s PSI for the tax year is earned under a contract for
producing a result, and the PSE is required to supply the plant
and equipment and to rectify any defect in the work performed,
or
• less than 80% of the PSI during the tax year is income from a
single source (being an entity and its associates) and either the
unrelated clients test, employment test or business premises
test is met, or
• the PSE obtains a PSB determination from the Commissioner,
where unusual circumstances prevented any of the results,
unrelated clients, employment or business premises tests being
met.

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Factors indicative of employee
• the person receiving the services exercises control over the manner in which
the work is to be performed
• other workers doing the same job are treated as employees
• work hours are defined;
• the worker providing the services is engaged on a continuing basis;
• the worker is paid regularly or periodically, rather than on a per job or on a
results basis;
• the person receiving the services supplies the materials, equipment and tools
to the worker performing the work
• the worker’s PAYG income tax or sick leave, holiday pay, superannuation,
workers’ compensation or other benefits are paid by the person receiving the
services
• the worker is required to perform the work personally and is unable to provide
the services by employing or subcontracting another person to do the work
• the services are integral to the business conducted by the person receiving
those services

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Factors indicative of a contractor

• the worker is engaged to produce a specific result

• the worker is not subject to control or direction by the person
receiving the service
• the worker conducts an independent business and suffers all
losses that may result from the provision of services
• the worker provides all equipment and materials and personally
suffers the loss if they are stolen or damaged
• the worker carries their own risk such as of injury and sickness
• the person receiving the services contracts with a company or
trust which engages the worker

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PART IVA

• Determining when Part IVA of the Income Tax Assessment Act 1936 (Cwlth)
(ITAA36) may apply is challenging—it requires judgment.
• General observations about the application of Part IVA to the structuring of
transactions:
• consider whether any person participated in a scheme for the dominant
‘purpose‘ of obtaining a tax benefit for the taxpayer
• tax benefit may likely be inferred if the transaction would not be a
commercially viable standalone transaction in the absence of that tax benefit
• a tax benefit may arise if the tax effect (such as reduced income or higher
deductions) might reasonably not have been expected to have occurred if the
scheme had not been entered into or carried out based on reasonable,
alternative arrangements to the scheme: ss. 177CB(3) and 177CB(4) of
ITAA36.
• Australian Taxation Office (ATO) guidance on splitting of individual professional
practitioner income

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REVIEW

• Part A introduced the features of, and issues to be considered,

for different group business structures.
• Part B provided a detailed discussion of multi-entity combinations
involving companies.
• Part C provided a detailed discussion of multi-entity combinations
involving partnerships.
• Part D provided a detailed discussion of multi-entity combinations
involving trusts.
• Part E covered the potential application of the PSI regime and Part
IVA.

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