Changing shareholders of a sole director company.
One of our companies is a private company Pty Ltd.
It was originally setup as a private company with the only shareholder being the sole director holding 100% of the shares.
For this example let’s say Sole Director A (SDA)
The company has been trading well:
Holds assets
Has e.g. $1m retained dividends.
$500k stock
$200k assets such as vehicles.
SDA is paid a wage each year.
Dividends have been kept in the company as there has been no need to pay it out.
Now as the company grows we are becoming wary of keeping a large amount of retained earnings inside the company.
(We are assuming when this company was setup the accountant figured like most companies we would go broke or not make much money, therefore shareholder structure wasn’t given much thought)
We want to change 100% of the shares of the company from SDA to another ‘bucket’ company (Company B) that can be paid the dividends of company A to keep it safe to reduce any risks of losing all that in case company A in the extremely unlikely event has something happen.
Also the below is an extract from LCR 2016/3 Genuine restructure of an ongoing business - in this case it would also be a tax consideration as by having a bucket company as a shareholder the company only pays the company tax rate or base company tax rate and not the highest marginal rate.
[It results in a structure likely to have been adopted had the small business owners obtained appropriate professional advice when setting up the business.
8. The Commissioner acknowledges that tax considerations are factors that can be taken into account under a genuine small business restructure. For example, a sole trader subject to the highest marginal rate moving to a company structure to access the lower corporate tax rate.]
3 Questions:
Question 1: Would this occur CGT when the shares are transferred from SDA to Company B?
(Our accountant says no, as what would we consider the value of the company? But I’m thinking but the company has assets and retained earnings there would at least be some gain here)
Question 2: Would the small business business restructure rollover apply here?
https://www.ato.gov.au/Business/Small-business-entity-concessions/Concessions/CGT-concessions/Small-business-restructure-rollover/
Question 3: If we were to change 100% of the shareholding of company B, would it matter if company B’s shareholders were 2 related people instead of just SDA (the original sole director?) Asking as one of the conditions of the small business restructure rollover is that there is “No change to ultimate economic ownership
To be eligible for this rollover, the transaction must not result in a change to the ultimate economic ownership of transferred assets.”
Or for company B, should we just change the shareholder of company B now to SDA and then change it in the future.
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