The passing of the New South Wales Government budget has removed stamp duty on business transfers from 1 July 2016. It is therefore timely for every pharmacy owner (whether in NSW or another State) to understand the current structure the pharmacy is operating within and whether a change can yield a better result.
It is true that other States still have stamp duty on business transactions, but the cost can be minimized in the pursuit of more effective structures.
The last Federal Budgets have suggested a gradual decrease in the corporate tax rate from what is currently 30% to 27.5% from 2017 for businesses with aggregated turnover of less than $10million. The tax rate will then decrease to 25% by 2027. This is not the first time the Federal Budget has outlined reductions in the corporate tax rates.
Inevitably the question that should be asked by all owners is, should I own my business in a company? The answer will not always be clear, but here are some of the features you must consider when determining whether a company structure will benefit both you and your business. Paramount for most when considering this question will be assessing eligibility the small business capital gains tax relief rules.
Advantages
- The most significant advantage is through gaining access to the company tax rate compared to the maximum individual rate of 46.5%. This allows for accelerated debt reduction and increased business investment;
- Consolidating multiple structures which are often unwieldy and prohibit easy monthly reviews of financial performance. As such the need for service entities will be eliminated in many instances;
- Opportunity to “re-gear” the business and release cash for other purposes by selling into a company;
- Banks understand and like company structures;
- Capital gains tax concessions can apply to shares in companies under some circumstances.
- Employee share plans for pharmacists without the partnership liability risks and without full responsibility of ownership;
- Better structure than partnerships –shareholders do not have to be directors, therefore limiting liability;
- Greater ability for passive ownership by pharmacists – will replace limited partnerships as the preferred structure;
- Share transfers are simpler to deal with than partnership interest transfers – no changes in loan / guarantee documentation;
- Securities are simpler to deal with and can also be more easily confined to the company and the business to which they relate without affecting an individual’s other assets;
Disadvantages
- Capital Gains Tax – loss of some of the concessions that attach to owning a business individually on eventual sale;
- Companies with 2 of the following, over $25m turnover, 50 or more employees, or over $12.5m in market value of assets (gross not net!) have to apply company reporting standards which are reasonably onerous but I suspect there would be very few pharmacies this would apply to.
Restructuring & Stamp Duty
Whilst New South Wales and Victoria do not have stamp duty on business transfers, the cost of stamp duty in other States should not deter pharmacists from considering a restructure. The cost of stamp duty can be defrayed through the cashflow savings offered over time and will be dependent on the value being transferred.
Succession Planning
Given the cost of purchasing a pharmacy is now beyond many young pharmacists, company structures will help redress the position. Companies with their reduced tax rate should actually deliver improved cash flow and in turn help fund the high debt levels associated with entering into ownership.
The desirability of incorporation for existing owners will vary from case to case (whether buying a new pharmacy in a company or restructuring an existing pharmacy into a company). The different impacts should at least be understood by all.
As such, the removal of stamp duty in NSW and proposed reduction in corporate tax rates provides a timely reminder to review your structure to ensure it is tax and cost efficient while also providing the right platform to assist with business growth and asset protection.
Norman Thurecht from Pitcher Pharmacy