Caring about sharing
Wednesday, September 28, 2011/
If you established your business under a company structure as part of the set-up process there would have been shares issued, so you probably own shares in your company.
Not a big deal you may think, with all the focus on the business and building it.
The shares are just something necessary as part of the set up process and you may not even be holding the share certificates.
If this is you it might be an idea to have another think about it because the beneficial ownership of the company and the business rests with the shareholders.
That’s OK while the status quo remains but the moment there is any change in the business the issue of who holds the shares becomes important.
Change can occur because you want to sell or issue some shares to someone else, or it may be unplanned as a result of events like illness, death or divorce.
In any of those scenarios you will quickly want to know who owns what shares, who holds the majority interest, if there are different share classes on issue and what rights are attached to those share classes.
It will also be important to understand what the constitution of the company says about various shareholder rights if new shares are being issued.
Any change in your equity structure could have tax effects. The key is to know what those are in advance of any transaction and to make any changes in the most tax-effective way.
If you transfer any existing shares it will trigger a CGT event, assuming they were acquired after September 20, 1985.
The amount of the capital gain will be the difference between the transfer price and your cost of acquisition of the shares transferred.
Where you transfer the shares to a related party you will need to establish that the transfer price represents market value and where they are transferred for less than market value you will need to account for the capital gain as if they were transferred at market value.
The Tax Act provides a market substitution rule which allows the commissioner to ignore transfer values between related parties and substitute the market value for purposes of calculating any capital gain.
That means that you will need to have a valuation on the shares to establish their market value.
Keep in mind that you need to report the capital gain in the income year when the transfer occurs and you are subject to the substantiation provisions.
So you need to be able to establish that any value placed on the transfer is a fair market value.
The fact that you will make a capital gain on the transfer is not necessarily bad news.
There are a number of concessions available on capital gains and if you are able to access CGT small business concessions you may well be able to reduce taxable gains to nil.
Where you issue new shares in your company it should not trigger any CGT event for the shareholders.
However if the shares are issued for less than their market value you could trigger the value shifting provisions.
Thye are designed to prevent the transfer of value in an entity between parties through indirect means.
Value shifts of less than $150,000 are normally ignored but you still need to prove your numbers.
The valuation method used needs to be appropriate for your business and industry sector, and it needs to comply with professional standards.
There are no shortcuts and you should seek advice on any transactions in advance.
Crucially, you need to know exactly how your company is structured and what the rights of the various shareholders are.
Greg Hayes is a director of Hayes Knight and specialises in taxation and business planning advice.