When formulating your succession plan you should review your fi nancial and legal structures and evaluate

how appropriate they are in the light of the changing circumstances.

When considering what are the most suitable structures, it is worthwhile to review the various types of business structures which can be utilised and the legal and taxation consequences of each one.

SOLE TRADER As a sole proprietor you are personally responsible for all business decisions and fi nancial matters.Advantages • Low cost. • Simple business structure. • Control over business decisions.• Full control and ownership of the business,

including profi ts and capital.• Taxation advantages when profi ts are low.Disadvantages • You are legally responsible for all aspects

of the business.• Debts and losses cannot be shared.• Raising fi nance is dependent on personal

wealth.• You can lose private assets such as your

home, land, contents and vehicles if the business goes into debt.

• Taxation disadvantages are high when profi ts are higher.

• Selling ownership of the business may be diffi cult.

PARTNERSHIPIf you operate your business as a partnership, you’re carrying on your business with one or more other people as partners and receiving your income jointly.Advantages • Low set up cost.• All partners can contribute to the capacity

to raise fi nance.• Losses and legal responsibilities are

shared among all partners.• Tax advantages may exist if your business

partners are from the same family.Disadvantages • All partners are responsible for the debts

of the partnership, even if they are incurred by another partner.

• You can lose private assets such as your home, land, contents and vehicles to settle debts of the partnership.

• Problems can occur in the event of death, disablement or divorce of one of the partners.

• If a partner decides to dissolve the business, it may effectively end the business.

• As the business develops, personalities may clash and there may be disputes over operations and profi t sharing.

COMPANYIf you operate your business as an incorporated company, the business is a distinct legal entity that is regulated by the Australian Securities and Investment Commission.Advantages • Greater access to capital. Lenders look

favourably on the limited liability.• Liability for the debts of the business

is limited to the money invested in the business (unless you personally guarantee debts).

• Shareholders are not liable for the debts of the business.

• Increased asset protection.• A company can own propertyDisadvantages• More costly to establish.• A company pays a fl at rate of 30%

company tax.• Reporting requirements are greater.• Limitations on distributing income. • Shareholders may have diffi culties in

recovering their investment because of limitations on who can buy shares.

TRUSTS Rather than shareholders, a trust has benefi ciaries who are entitled to distributions of capital and/or income.

These distributions are controlled by the trustee and form part of a benefi ciary’s

RURAL BUSINESS SUCCESSION PLANNING

Transition and succession – creating the right structuresThis is part of an ongoing series where Next Rural’s James Benson discusses the multi-generational issues confronting an effective succession plan on the family farm.

8 Farming Ahead May 2013 No. 256 www.farmingahead.com.au© Aspermont Limited - courtesy of Farming Ahead magazine

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personal income, subject to income tax. If the business is operated through a trust,

you will have a trustee who is responsible for holding property or income for the benefi t of others (the benefi ciaries).

The most common variety of trust used by farming businesses is the discretionary trust.

If you’re the trustee of a discretionary trust, you have the power to decide how the profi t will be distributed among the benefi ciaries.Advantages • A trust may have limited liability if the

trustee is a company.• The trust has perpetual existence and does

not cease with the death of a benefi ciary.• Possible increased asset protection.• Some tax minimisation and fl exibility.• Ease of succession.• The trustee has fl exibility regarding the

distribution of income and capital.• Less regulation than a company.• The trust deed can be tailored to the needs

of principals and benefi ciaries.• Easier to wind up than a company.Disadvantages • Profi ts distributed to children under 18

may be taxed at higher rates.• Can be very diffi cult to dismantle.• Trusts may include benefi ciaries that are

no longer appropriate for the existing business circumstances.

• The appointer(s) of the trust may not match the persons who require control over the assets or distribution of profi ts of the business. The appointer of a trust has the real power and control of the assets of a trust. The appointers have the power to appoint and remove trustees. In most cases, the original appointers are parties whose family will benefi t from the trust. Generally, having a number of joint appointers, possibly including an independent appointer, provides greater asset protection and succession planning benefi ts, so it is preferable to avoid having a sole appointer. Alternatively, a company could be made the appointer.

REVIEWING STRUCTURES FOR SUCCESSION PLANNINGYour legal and accounting structures should be reviewed as part of your succession plan. Some of the key issues to be addressed in relation to the structuring include:• Do the fi nancial and legal structures

reasonably refl ect the intent of the business transition plan and expectations of the key stakeholders?

• Are the structures effective in protecting assets?

• Do they protect against changing circumstances such as a death or divorce?

• Are they effective from a stamp duty and capital gains tax perspective?

• Should the land holdings be held separately from the day-to-day operations?

• Are the existing trusts suitable? Are there “skeletons in the closet” to be dealt with, such as existing loan accounts to benefi ciaries? Should a new trust be established? Would this have capital gains tax or stamp duty implications?

• Who should be the directors, shareholders and appointers of any proposed new trust?

• Should the children consider a “buy/sell agreement” among themselves?

• Should the children have a business/partnership agreement in the future?

• What impact will any restructure have on personal tax positions?

Contact:Next Rural has put together a guide to business transition and succession planning. To obtain a free copy, email Next Rural at info@nextrural.com.au or call 1800 708 495. Mark Scanlon and Ric Moffi tt

9www.farmingahead.com.au No. 256 May 2013 Farming Ahead© Aspermont Limited - courtesy of Farming Ahead magazine