Category: Trusts

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Top 10 things to know about buy-sell agreements

Every small company or partnership should have a buy-sell agreement. This is a document that sets out what will happen to the business if there’s a specific event – like the death or illness of one of the shareholders or partners – or if one of the business owners wants to sell their share.

Think of a buy-sell agreement like a will for your business. There are many things that can go wrong if something unexpected happens, which is why it’s a good idea to put down on paper what your intentions are. A buy-sell agreement will allow for any of the owners to force a sale, which is why it’s called a buy-sell agreement. In this article, we outline 10 things that you should know from a legal perspective about buy-sell agreements.

1. Even sole proprietors need a buy-sell agreement

If you’re the only shareholder in your business, it may still make sense to put a buy-sell agreement in place to make sure your wishes are carried out. Perhaps there’s an employee that you’re grooming to take over the business for you, a buy-sell agreement will outline how they can purchase the business from your heirs for a fair price when you’re no longer around – saving both your employee and your family unnecessary headaches.

2. It doesn’t need to be a separate agreement

A buy-sell agreement doesn’t need to be a separate document. You can include your intentions in your company’s shareholder agreement or in your partnership agreement. But don’t assume that they’re already in the document. If you already have these documents in place, it may make sense to create a new buy-sell agreement that lays out your specific intentions or amend the existing agreement.

3. Make sure your buy-sell agreement covers a wide range of events

You never know what’s going to happen in the future, so it’s a good idea to cover as many events as possible in your buy-sell agreement. Death and total permanent disability (TPD) are two of the most common events to cover, but it’s also worth extending that to critical or long-term illness. If you become ill, your business partners may not appreciate your family getting involved in the business.

Other life events like retirement, divorce or even a major disagreement between the owners can also potentially impact your business and each owner’s decisions. Another important but often overlooked situation is bankruptcy. If one of the business owners becomes bankrupt it may have significant implications for them personally and for the business legally, particularly if they’re a director. So it’s a good idea to keep everyone’s options open.

4. The sale will need to be paid for

It’s important to make sure that the buy-sell agreement outlines how the purchase will be funded. This usually involves taking out an insurance policy that covers the specific events outlined in the agreement. For example, if the agreement covers one of the business owners dying, then the agreement can also require the business owners to take out an insurance policy to cover their respective part of the business. If one owner passes away, then the insurance payout will cover the other owner’s cost to purchase the deceased owner’s share of the business.

If you don’t have an insurance policy in place or the event wasn’t able to be insured for (like if one of the shareholders breaches the shareholder or employment agreement or it’s a voluntary exit), the sale can also be purchased with cash or by taking out a loan. The agreement can take this situation into account and perhaps even outline appropriate payment terms that allow enough time to pay for the shares.

5. There’s more than one way to value a business

The value of your business will change over time, so it’s important that this is reflected in the buy-sell agreement. It’s common for an agreement to value the company at the time the specific event happens. If this is the case, then it may also be worth outlining in the agreement how the value will be calculated at that time – book value, agreed value or independent valuation, for example. This will help avoid any disputes about what the value of the business is.

6. There may be a difference between the funding and the valuation

If you have an insurance policy in place, there may be a difference between the amount the policy pays out and the amount to be paid for the owner’s share in the business. The buy-sell agreement can outline what happens in this situation, particularly if the amount of the insurance payout is less than the value of the shares. This will help avoid any potential conflict or financial stress in the future.  

7. The business structure can affect the arrangement

For many reasons, the owners may hold their interest in the business through different legal entities like a family trust or another company. It’s important that the buy-sell agreement is able to operate as intended regardless of how the business ownership is structured.

To make sure this happens, it’s also important for the agreement to outline exactly how the business will be bought or sold and who specifically can purchase it. This is particularly important if the event that triggers the agreement is the death of one of the owners as the agreement should be clear enough to override any will that the deceased owner had.

8. Everybody will need tax advice

When putting together a buy-sell agreement it’s important that the company and each owner gets tax advice of their own as well. This is because the agreement could trigger both corporate and personal tax obligations depending on each individual’s personal circumstances.

If insurance policies are also put in place, each individual and the business will need to get advice about whether the premium will be deductible to them for tax purposes. This advice can then be used to help each individual and the company get the best outcome from the agreement.

9. There are different ways to transfer the interest

The buy-sell agreement should outline how the interest in the departing owner’s shares are to be transferred. There are generally two different ways to do this – a cross-sell purchase or a buyback. A cross-sell purchase means that the other owners of the business buy the departing owners share of the business – this increases their shareholding in the business. A corporate buyback means that the company buys back the departing owners share in the business or pays for the value of the shares and then cancels them.

10. Every business really is different

There are many template buy-sell agreements available that you could potentially use. While they’re useful, it’s worth remembering that every business is different and a template is unlikely to cover your unique situation exactly. That’s why we recommend you seek legal and/or accounting clarification to make the best decisions for your company and yourself personally.

If you’re considering buying or selling a business get in touch with CCASA to make sure you protect your assets and remain compliant.

TFN Reporting for Closely Held Trusts: What You Need to Know

Many people use trusts as a good way to protect their assets or investments – they’re quite common for families’ investments as well as business structures. A ‘trustee’ holds assets on behalf of at least one beneficiary (who cannot be the trustee) and the trustee is responsible for looking after the legal and tax obligations of the trust. This includes setting up the trust’s tax file number (TFN), lodging tax returns and TFN reporting for closely held trusts.

TFN reports are due at the end of July, so now is the time to complete reporting for closely held trusts – particularly if you’ve set up new trusts within the FY 2018 financial year.

What’s a closely held trust?

Under the tax law, a closely held trust is one that is resident in Australia and is either:

  • A family trust (i.e. a trust that has made a ‘family trust election’ under the trust loss rules).
  • Has up to 20 people who are entitled to at least 75% of the income or capital of the trust, either directly or indirectly. There are complicated rules to determine who counts as one individual. For example, if two or more individuals are related then they will count as one person or if the trustee is also a beneficiary then they will also count as an individual. As an individual may have some entitlements over the trust assets or income indirectly, it’s also important to look through any beneficiaries that are corporations or trusts to see if the trust is a closely held trust.
  • Is a discretionary trust. This means that the trustee has discretion over how they distribute the income and capital to the beneficiaries. It’s quite common for family trusts to be discretionary trusts.

Under the tax laws, a trust will not be a closely held trust if it’s an excluded trust. An excluded trust includes:

  • A complying super fund, approved deposit fund or a pooled super trust
  • A deceased estate’s trust (at least for the first 5 years)
  • A unit trust with beneficiaries who are all exempt from income tax
  • A unit trust with units listed on the Australian Stock Exchange
  • A discretionary mutual fund
  • An employee share trust for an employee share scheme
  • The trust of a law practice.

What TFN reporting for closely held trusts is required?

Trustees of closely held trusts are required to report the TFNs and other personal details of the beneficiaries of the trust to the Australian Taxation Office (ATO). This must be lodged with the ATO as a TFN report in the month following the end of the quarter. The lodgment dates for the TFN report are:

  • April to June quarter – 31 July
  • July to September quarter – 31 October
  • October to December quarter – 31 January
  • January to March – 30 April

It’s not necessary to lodge the TFN report every quarter though. It only needs to be lodged for any quarter where a beneficiary quotes or changes their TFN with the trustee. This often happens when a new trust is established. So, if you’ve been involved in setting up a new trust this year, it’s best to check if the trustee has to complete any TFN reporting for the closely held trust.

The trustee will need the following information from each beneficiary to complete the TFN reporting:

  • The beneficiary’s TFN.
  • The beneficiary’s full name. This should be identical to the name they use on all ATO correspondence, so beware of spaces and even punctuation.
  • If they are an individual, the beneficiary’s date of birth.
  • For an individual, the beneficiary’s residential address or their business address if they’re not an individual. A PO Box or private mailbag is not acceptable.

It doesn’t matter how the beneficiary gives the trustee this information. Some may email it, while others may choose to call the trustee and give them the information over the phone.

The TFN report for closely held trusts can be completed online and then saved, or printed out and handwritten. The form only has space for six beneficiaries, so if the trust has more than six beneficiaries it will be necessary to complete more than one form.

Why is TFN reporting required for closely held trusts?

The reason that a beneficiary’s TFN must be reported to the ATO is that most beneficiaries will be subject to the TFN withholding rules regardless of whether they’re an individual, company, partnership or even a self-managed super fund. The TFN withholding rules require the trustee to withhold tax at the top rate from any payments or distributions beneficiaries receive if the beneficiaries have not quoted their TFN.

The only beneficiaries who are not subject to the TFN withholding rules are:

  • Unit trusts
  • Non-residents for tax purposes
  • Exempt organisations like tax concession charities or deductible gift recipients
  • Beneficiaries who have a legal disability (like children)

If the trustee has had to withhold tax from payments made to beneficiaries during the financial year, they will also need to lodge an Annual TFN withholding report. This form must be lodged with the ATO by 30 September.

The trustee is also required to lodge an annual activity statement for the closely held trust which includes any amount that has been withheld from beneficiary payments. This must be lodged and paid by 28 October.

What happens once the ATO receives the TFN report?

Once the ATO gets the TFN report it matches the information against its records. If it finds an anomaly, for example, the TFN doesn’t match their records, then the ATO will send the trustee a letter asking them to check their records. The trustee may then need to get in touch with the beneficiary to make sure they have the correct details.

Once the beneficiary updates their details, the trustee will need to complete another TFN report in the next quarter and send it to the ATO. If there is a mistake in the report, the trustee can also correct this in the next quarter by lodging another TFN report. Until the TFN report is updated, the ATO may treat the beneficiary as if they haven’t provided their TFN details, which means the trustee may have to withhold tax at the highest rate from any payments or distributions they make.

Of course, every trust and company is different. We recommend that you seek legal and/or accounting clarification to make sure you make the best decisions for your circumstances. The TFN report is a legal document and there are significant penalties if the information contained in it is false or misleading so it’s important to take the time to get it right.

If you need help with your TFN reporting or with any of your trust or company compliance needs, get in touch with CCASA. We have company compliance offices in Melbourne and Perth but help businesses with their company compliance Australia-wide.