There are good reasons for structuring a practice to take advantage of the proposed new rules allowing for the incorporation of legal practices and removing the prohibition against the sharing of income.

The reasons for structuring and re-structuring a practice have an impact on asset protection, superannuation and sharing of income. There are also other areas of winding up a service trust and the tax and stamp duty on restructuring.

Asset Protection
There is asset protection by incorporation to protect against personal liability to all creditors of the practice other than those taking action in respect of defalcation and potentially claims for negligence. Only one person needs to be appointed as director of a practice company and therefore that person would be the only person exposed to liability for negligence.

Through having a non-exposed investment trust holding a mortgage debenture over the assets of the practice company, in the event of a legal claim successfully being brought against the practice company the investment trust would be paid in priority to all other creditors. This would afford greater protection than the protection provided by holding the plant and equipment, practice lease and employees in a service trust.

Superannuation
You will have the ability to make deductible superannuation contributions in respect of a director and director's spouse. As from 1 July, 2005 the 15% surcharge will not apply to the contributions and therefore the effective rate of tax on the contributions would be 15%.

Service Trust wind up
It is believed that $50,000 is the minimum cost of running a service trust that will comply with the Commissioner's ruling and Phillip's case. With the wind-up of service trust arrangements there is a direct on-cost benefit of at least $50,000 per annum.

Sharing of income and further asset protection
Under the proposed rules for the sharing of income, if a practice is conducted by a company as trustee of a discretionary trust or a number of companies in partnership as trustee of separate discretionary trusts, income of the practice could be shared with members of the family of a practitioner and an investment entity.

This investment entity would be one that is not exposed to business risks with the intent that the investment entity would invest the amount distributed to it (net of any tax liability) to acquire passive investment assets, for example shares and property.

The shares and property acquired would be protected from the risks of the practice. Income of the practice distributed to individuals/entities would be included in their assessable income for taxation purposes.

Tax on restructuring
On the restructuring of the practice the capital gains tax 50% discount and small business capital gains tax concessions should result in a capital gain not being incurred on the restructure.

Stamp duty on restructuring
In Victoria and it is believed, also in New South Wales, stamp duty would not be payable on the restructuring of the goodwill of a practice. Unless a specific exemption is granted in Queensland, stamp duty would be payable on the value of the goodwill (if any) of the practice.

FMRC Legal is presenting a half-day seminar on Creating Wealth and Protecting Assets. Rob Jeremiah and Daniel Smedley, directors of Harwood Andrews Lawyers, and Sam Beasley from FMRC Legal will be addressing the issues.

Harwood Andrews Lawyers
Released by FMRC Legal.

For more information, please contact:

FMRC Legal Pty Ltd
Tel: 02 9262 3377