• Structuring your business

    Business entities should be set up in compliance with relevant laws and regulations, such as corporation and trust laws.

    Choose a business structure appropriate for your business.

    Whichever structure you choose, make sure you understand the responsibilities that go with it. Talk to an accountant, tax adviser, solicitor or other business adviser if you need advice.

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    Companies

    If you've chosen a company structure for your business, it's important to ensure that the correct corporate documentation is complete and on hand.

    This typically includes its constitution or governing rules, certificate of registration, board meeting minutes, directors' resolutions, a business plan, share register, and share certificates.

    Directors should understand their role and responsibilities, including their obligations under corporations law and responsibilities for ensuring the company meets its tax and superannuation obligations. A public officer should be appointed as the company’s representative for dealing with us.

    Major changes to a company’s ownership or share structure often attract our attention. When establishing a new company or acquiring another company, having processes in place that ensure your new company’s share ownership and share structure are promptly reported to ASIC demonstrates effective governance.

    Trusts

    Many private business and investment structures include trusts.

    Trusts are highly flexible structures but can also be complex to manage. An effective tax governance framework ensures that you and your advisers have processes in place to correctly administer your trust, so that tax and any legal risks are managed.

    Trust deed

    Ensure your trust is established correctly. You'll need a valid trust deed that sets out the rules for establishing and operating the trust. The trust deed and any variations should be:

    • prepared by a qualified person
    • signed and dated by relevant parties including the settlor and all trustees
    • properly executed according to state or territory laws
    • regularly reviewed, and updated as necessary.

    Make sure you and your advisers have a complete copy of the original executed trust deed, including all amendments and variations.

    Ensure all trustees understand their obligations and are administering the trust according to the terms of the deed and trust law. This includes understanding:

    • how the income of the trust is calculated
    • who are the defined beneficiaries
    • how to make a valid resolution and distributions.

    Entitlements, resolutions and distributions

    It's good practice to review the terms of the trust deed before the end of each income year, or any earlier date required by the deed for making resolutions to distribute income or capital. Ensure that all trustee resolutions or declarations are made in accordance with the terms of the trust deed by the relevant times to avoid them being invalid.

    Ensure that the trustees understand how the income of your trust is calculated and that any resolutions reflect this definition.

    If you're ‘streaming’ capital gains or franked distributions (making particular beneficiaries entitled to them), firstly check that you're not prevented from doing so by the trust deed. Then check that you've complied with the relevant legislative requirements for the creation and recording of these entitlements.

    Trustees should notify beneficiaries of their entitlements within a reasonable time of them becoming entitled and advise beneficiaries of the trust amounts to be included in their tax returns.

    Example: Administering a trust

    You establish your family business using a trust structure, with annual tax governance procedures to ensure proper administration of the trust.

    Your procedures require you to conduct an annual review starting in April to ensure that your trust deed is well understood and up to date, and resolutions to distribute trust income to family members are completed by 30 June.

    During your annual review process, your tax adviser suggests updating your trust deed to permit streaming of capital gains and franked distributions. You agree to this and your resolutions are completed by 30 June.

    In April the following year, with the prospect of your business making a record profit, you consider whether to distribute trust income for the first time to your family investment company and a charity, but are unsure whether this is permitted. Your governance procedures require both you and your tax adviser to check the deed to ensure that the company and the charity are eligible beneficiaries and document your findings before making resolutions to distribute income. You document your findings, make your resolutions in June and promptly notify the charity of their entitlement.

    A year later, you decide to sell your business, and your trust makes a large capital gain. Your original governance process has ensured that your deed is up to date and allows you to correctly stream capital gains to your chosen beneficiaries.

    After selling your business, your trust is later selected by the ATO for review of the business disposal and trust distributions. Your trust’s records are readily located and provided to us with minimal effort. We accept your tax returns in full and close the review. Your effective tax governance arrangements will be considered in your tax profile in future.

    End of example

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    Self–managed super funds

    Some business owners decide to include a self-managed super fund (SMSF) in their business structure.

    If you decide to set up a SMSF, ensure you understand what is involved in setting it up correctly (see SMSF tax governance).

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    Partnerships

    Businesses that operate as partnerships are typically established and governed by partnership agreements. It's essential that business partners and their advisers maintain ready access to their partnership agreement and any variations.

    Partnership agreements may stipulate the process by which partners record transactions, prepare financial reports and satisfy the partnership’s tax obligations. Partners need to be aware of tax and other governance procedures set out in the partnership agreement and ensure they are adhered to.

    Partnership agreements often deal with the retirement of existing partners or the addition of new partners. Changes in partners may give rise to tax issues that attract our attention. Have procedures in place to ensure that all key tax requirements are addressed when partners are joining or leaving.

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    Last modified: 31 May 2016QC 49165