Part I

A. Consider the various types of business structure Kevin and Julia

could adopt to be the purchaser of the business. 1000

Types of Business Structure

There are three main types of structure most suited to Kevin and Julia. A
Sole Trader is unsuited as there are two people who wish to enter into
business together.
Partnership
A partnership is one of the easier structures to set up and one of the more
flexible of the structures available to Julia and Kevin, however, it is also
offers significantly less asset protection than other structures. Setting up
a partnership is cheaper than a company and has a lot fewer
administrative issues. A partnership would also allow Julia and Kevin very
direct control over the company and its assets. They would not have to
use business assets for a company purpose and would essentially
significantly more flexibility in the day to day running of the company.
-

Limited Partnership

Both partners within a partnership are generally jointly and severably

liable. However a partnership can be setup such that one partner is
limited in their liability. This limited partner does not have the same rights
as a general partner and according to s65 of the Partnership Act 1981
must not take part in the management of the partnership and cannot bind
the partnership. Essentially a limited partner would act as a passive
investor. Given the familial relationship described by Julia and Kevin this
seems inappropriate, however, if one of them is significantly more
interested in running the business and the other has a lot more in the way
of assets this may be desirable.
Joint Venture?
Company
A company structure has many benefits over other types of structures.
The main advantage of becoming incorporated (apart from any tax
advantages) is that the liabilities of the company are limited by shares
and thus the directors of the company are not held personally liable.
However, depending on the type of business Julia and Kevin wish to
engage in, their current wealth (which may be an issue as they are
unemployed currently) and their level of experience, a bank may require

personal guarantees for loans entered into, which could limit some of the
benefits of a corporate structure.
Setting up a corporation also requires a lot of administrative costs in order
to comply with the Corporations Act 2001, which is complex and may
require professional assistance. A corporation is also expensive to set up
at the outset compared to other types of structures.
A company is also a lot less linked to the business owners. This is an
advantage, for the limitation of liability as mentioned above, but can also
cause several problems. A company structure has a lot less means
control over a companys business than sole traders or partners do and
must use its assets for a company purpose and not a personal one. The
effect of these types of limitations will differ depending on the type of
company that Julia and Kevin wish to engage in and the way that they
want to run it.
Trust
A trust is a more complex type of structure but certainly has many
benefits. Most of the benefits of a trust structure are tax benefits.
However, there are also other benefits similar to those of a company
structure. Firstly, the business assets in a trust are sheltered from the
personal bankruptcy of one of its beneficiaries. If a corporate trustee is
used then there is a limitation of liability.
-

Discretionary Trust

A discretionary trust is a type of trust in which the distribution of assets to

beneficiaries is at the discretion of the trustee of the trust. This allows for
flexibility and very easy addition of extra beneficiaries. A family trust is
an example of a discretionary trust
-

Family Trust

As mentioned below, this is a kind of discretionary trust. For Julia and

Kevin this may not be particularly beneficial as they have no children,
however a family trust is a useful means of distributing assets
(particularly for tax purposes).
-

Unit Trust

A unit trust is distinct from a discretionary trust in that the profits of the
trust, rather than being divided between
-

Corporate Trustee

A discretionary trust with a corporate trustee may be the best type of

structure for Julia and Kevin. This type of structure is complex and

(relatively) difficult to setup, and also the most expensive to set up,
however it offers many advantages. Obviously there are the potential tax
advantages, but this type of structure also offers a large degree of asset
protection, with both the corporation and the trust structure helping in this
regard.
Part II
B. Advise Kevin and Julia on the issues to consider in purchasing the
business assets as opposed to the shares in John Pty Ltd. 500
There are advantages and disadvantages when buying assets of a business
instead of buying shares of a company. One of the biggest advantages in
buying business assets is that they may be able to avoid some of the trouble
associated with the liabilities currently owed by John Pty Ltd.
There are several things that must be considered when purchasing business
assets as opposed to shares in a company. Firstly, it must be determined
whether there is any third party consent required in transferring the contracts
that make up the business. For example property leases may require
landlord consent in order to be assigned.
Employment contracts are also complicated in a business asset sale as they
cannot be assigned and therefore the seller of the business would need to
terminate the contracts of its employees and Julia and Kevins company
would have to enter into new contracts with the employees, should they wish
to retain them.
There is also a significant degree of flexibility with a business asset purchase
as Julia and Kevin will have the ability to choose which assets they wish to
purchase and which they wish to leave with the seller. However, if they fail to
purchase certain assets the business may not be considered a going
concern for the purposes of GST.
Stamp duty will be one of the bigger concerns for Julia and Kevin.
C. As well as general issues please address the issues discovered in their
investigations. 500
D. What protections could you draft in to the sale agreement if Kevin and
Julia wish to proceed to buy the shares in John Pty Ltd? 500
You could draft a precondition to the contract that would specify that the
proceedings against John Pty Ltd must be completed prior to the execution of
the contract. However, given that the proceedings are still in their early
stages, this may not necessarily be wise.

Part III

E. Your supervising partner has asked you to draft a memo with your
thoughts on that proposition and also what issues are likely to arise in
this transaction. 500
Part IV Tax 1000

a) Income tax for the owner

Partnership
According to the Income Tax Assessment Act 1997 s106.5 any capital gain
or capital loss from a CGT event that happens in relation to a partnership
or one of its CGT assets is borne by the partners individually.
Obviously in order to determine whether this has occurred in a specific
instance all of these terms would need to be applied to that instance, that
is: whether a capital gain or capital loss has occurred; whether a CGT
event has occurred and whether that involved a CGT asset.
The important point here is that the cost is borne proportionate to a
partner's interest in a particular asset each partner's capital gain or
capital loss is determined on the basis of their individual interest. (ITAA
1997 s106.5(1))
Each partner also has a separate cost base or reduced cost base that is
determined based on their individual interest in each CGT asset. (ITAA
1997 s106.5(2)).
This means that the subtraction (ITAA 1997 s106.5(3)) or addition (ITAA
1997 s106.5(4)) of a partner constitutes a CGT event that occurs as the
result of a change in the interests in a partnership asset. The capital gain
or loss that results from such a CGT event is borne by the remaining
partners individually, proportionate to their interest in the partnership
asset.
Company

Joint Venture
Trust
b) Income tax for Kevin & Julia (if they arent the owner)
c) Capital gains tax for the owner (of either the business assets or the
shares in the owning company) upon subsequent sale.