Purchasing A Business

Do I need to pay stamp duty on a family transfer?

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Often a Contract for Sale will not be entered when property is transferred between family members. Such transactions include when property or a portion of a property is gifted, sold (often for less than market value), or when one person is removed from the title of a property that was originally purchased together. Instead, a Memorandum of Transfer will be entered into.

It is a common misconception that no transfer duty (formerly known as stamp duty) is payable on family transfers, however this is not the case. Revenue NSW requires transfer duty to be paid by anyone buying or acquiring property. Therefore, family transfers are still subject to transfer duty even if no Contract for Sale is entered or there is no purchase price. If only a portion of the property is being transferred, then transfer duty will be payable on that portion only.

Revenue NSW calculates transfer duty on the dutiable value of the property. The dutiable value is the higher of the purchase price (consideration) and the market value of the property. Revenue NSW requires an independent valuation to be carried out for a property being transferred between people that are related to determine the property’s market value. This means that an independent valuation will be required for family transfers. In family transfers the market value will often be higher than the purchase price and accordingly transfer duty would be payable on this amount.

It is important to take transfer duty into consideration when planning a family transfer to ensure that the family member buying or acquiring the property has sufficient funds to pay the transfer duty before settlement when the Memorandum of Transfer is lodged with Land Registry Services. If a property is being gifted or sold for less than market value, the family member receiving the property may not have saved for the same and this may mean that finance may need to be sought for payment of the transfer duty.

There are some concessions and exemptions from transfer duty when property is being transferred between family members. These include:

-          Break-up of marriage or domestic relationships

Court Orders or a Financial Agreement made under the Family Law Act 1975 are required to receive an exemption from transfer duty for matrimonial property which is being transferred due to the dissolution, annulment or breakdown of a marriage. For a domestic relationship, a Court Order or a Termination Agreement made under the Property (Relationships) Act 1984 is required for relationship property.

-          Deceased Estates

Nominal transfer duty in the sum of $50.00 only is payable where property is transferred from a deceased family member to a beneficiary in accordance with the deceased’s Will or the rules of intestacy.

-          Transfers between married couples and de facto partners

An exemption from transfer duty is available when the principal place of residence is transferred to add a spouse or de facto partner so that the couple will own the property equally (either as joint tenants or tenants in common in equal shares).

Please note that other eligibility requirements may apply to the above concessions and exemptions.

Should you wish to discuss a family transfer further or determine whether you are eligible for a concession or exemption from transfer duty, please don’t hesitate to contact:

Natali Vujica
Licensed Conveyancer and JP
natali@couttslegal.com.au
02 4607 2108

This blog is merely general and non specific information on the subject matter and is not and should not be considered or relied on as legal advice. Coutts is not responsible for any cost, expense, loss or liability whatsoever in relation to this blog, including all or any reliance on this blog or use or application of this blog by you.

The Basics of Business Structure

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Whether you are taking on a new challenge and looking to open your own business or purchase an existing business, it’s important to think about what business structure is right for you. You may even be running a business already and considering changing the current structure. Either way you should know the options available to you.

There are four common types of business structures with lots of different pros and cons for each structure.

Sole Trader

A sole trader refers to an individual running a business in their personal capacity. There is no separation between the personal assets of the individual and the business assets of the business.

This is a simple structure and one of the easier structures to set up. Often the sole trader just needs to obtain an ABN and register to business (although some trades/professions will have regulations or licensing requirements governing the sole trader). A sole trader is most common in small businesses such as tradies or home businesses.

A sole trader can employ staff, enter into contracts and usually just lodges a personal tax return.

One of the biggest risks as a sole trader is that you are liable for the debts of the business. Essentially, you could be putting your personal assets at risk as your personal assets could be used to satisfy the liabilities of the business.

If you pass away, the business assets are inherited by your beneficiaries, but the business does not continue to run.

Partnership

If two or more people want to operate a business together, they can establish a partnership. The maximum amount number of partners is usually 20 with some exceptions such as law firms. Similar to a sole trader, a partnership is not a separate legal entity.

The partners can enter into contracts, own assets and borrow loans.

Most commonly the partners will enter into a partnership arrangement to govern the terms of their partnership. The agreement should set out the rights and responsibilities of each partner, the division of profits, how to deal with a dispute and termination of the partnership. Depending on the terms of the partnership agreement, generally, if a partner dies or exits the partnership, the partnership is terminated, and the remaining partners are in a new partnership.

The issue with partnerships is that all the partners are responsible for the partnership. This means that one partner could be liable for debts of the partnership incurred by another partner so it’s important to think about who you want to partner up with. Partnerships put the personal assets of the partners at risk as their personal assets could be used to pay debts of the partnership.

Company

A company is a separate legal entity which is established to run a business. The company is governed by the Corporations Act 2001(Cth) (Corporations Act) and a company constitution is created to dictate the procedures for meetings of directors and shareholders. Alternatively, a company could use the replaceable rules under the Corporations Act instead of preparing a constitution or use a mixture of both.

A company will consist of a director/s and shareholder/s. A director is responsible for managing the company, whilst a shareholder holds an interest in the assets of the company, usually with a limited liability as to the debts.

A director has a number of director duties under the Corporations Act and can be subject to civil and criminal penalties for breaches of their duties.

As the company is a separate legal entity, the company can enter into contracts, hire employees, and has perpetual succession, which means the operation of the company does not end if a director or shareholder passes away.

A company is meant to be responsible for its own assets and liabilities. However, in some cases directors may be personally liable for example if they signed a personal guarantee when the company entered into a loan agreement.

A company may be more expensive to establish and may have ongoing auditing and reporting requirements.

Trusts

Trusts are another way to run a business, the most common trusts are unit trusts or discretionary trusts. The trust will have a trustee who holds the property on trust for the beneficiaries.

A trustee of a trust could be a company or an individual. The trust will be established with a trust deed which governs the trust.

Trusts can be flexible with how they distribute income to beneficiaries which may have some tax advantages. For example, the trustee could distribute income to all or some of the beneficiaries (who can be family members).

There is no public disclosure requirements of the finances of the trust so this structure can offer more privacy.

Due the complex nature of a trust it may be more expensive and difficult to set up.

Choosing the right structure

Each structure has its different advantages and disadvantages so it’s important to consider what option works best for you and your business. Coutts can assist in guiding you to find the right fit which factors in protecting your assets, the costs and complexities of setting up the business and maintaining the structure. Coutts can collaborate with financial advisers so that you can ensure you also chose a structure which has the most advantageous tax implications for your business.

 

For further information please don’t hesitate to contact:

Alexandra Johnstone
Partner
alexandra@couttslegal.com.au
02 4607 2110  

Keely Irving
Lawyer
keely@couttslegal.com.au
02 4607 2124

This blog is merely general and non specific information on the subject matter and is not and should not be considered or relied on as legal advice. Coutts is not responsible for any cost, expense, loss or liability whatsoever in relation to this blog, including all or any reliance on this blog or use or application of this blog by you.

Copyright 101

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‘Copyright’ is a phrase most people have heard or used, but do we actually know that much about it?

 

What is Copyright?

Copyright is an exclusive legal right given to a creator for a certain amount of time over material they have produced. Copyright is usually given to people who produce creative work like authors, artists or musicians.

Copyright will protect work such as:

  • Music;

  • literature;

  • artistic work like paintings;

  • sound recordings and broadcasts;

  • films;

  • computer programs.

 

Copyright will not cover:

  • ideas, techniques and information;

  • names, titles or slogans;

  • images of people.

 

Copyright generally means that other people need permission to use the work which is protected. It is possible to provide licenses for other people to use copyrighted material.

 

When does someone get copyright?

Lucky for the creator of the work, copyright automatically applies once the work is written down or recorded in some way.

There is no way to register copy right in Australia, it is not necessary to apply to receive the protection of copyright.

 

How do I let people know I have copyright?

As there is no way to register copy right there is no database to check in the same way as other intellectual property such as trademarks.

Some people will choose to use the copyright symbol © and a copyright notice which consists of the owner’s name and year of publication.

A copyright notice and the symbol are optional and not mandatory in Australia. 

 

How long does copyright last?

Generally, copyright will last for the life of the creator plus 70 years. In some situations, the length is based on the year of publication, so copyright will last 70 years after it was first published.

 

Infringement and Disputes

If there is a dispute about who owns copyright it will usually be heard by a court to make a determination.

Copyright means people need permission to use the work. If somebody commits a copyright infringement it may be necessary to issue a letter to demand to request the infringing act stops or to commence legal proceedings.  

 

How does Copyright work internationally?

There are a number of international treaties which mean that material created in Australia is recognised and protected in most countries overseas.

Due to the international treaties and the Copyright Act 1968 (Cth), Australia protects majority of copyright material produced overseas.

 

Coutts has experience in dealing with Intellectual Property and invites you to contact us if you have any enquiries.

 

For further information please don’t hesitate to contact:

Rebecca Watts
Lawyer
rebecca@couttslegal.com.au
02 4607 2148

 

This blog is merely general and non specific information on the subject matter and is not and should not be considered or relied on as legal advice. Coutts is not responsible for any cost, expense, loss or liability whatsoever in relation to this blog, including all or any reliance on this blog or use or application of this blog by you.

I'm only loaning money to family or friends. Surely I don't need a loan agreement?

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There are many different situations where people might loan family or family friends money for lots of different reasons.

 

Even though loaning money may be a very supportive thing to do, it’s important to consider how you can minimise risk to yourself, what could go wrong and what could help prevent issues arising.

 

A Loan Agreement is definitely helpful for your worst-case scenario if the relationship with the person you have loaned money to goes sour or if things go off course.  Like all other contracts, the Loan Agreement is designed to set out risk allocation and responsibilities and be helpful when things go wrong.

 

So, what might go wrong?

Some people may be gifting the money but if you are expecting to be repaid either in full or in part you should put the agreement in writing. There are countless ways for issues to arise if it is unclear without a Loan Agreement in place, including that the loan was a loan to begin with and on what terms the money was to be repaid, whether interest is repayable and so on.  

 

Below are some examples where loans to family and friends can result in a legal predicament:

1.     Disagreement that there is even a loan

If you don’t have an agreement clearly outlining the terms of the loan you may find yourself having to argue that the loan even existed in the first place. This hypothetical situation became a reality for an elderly couple in the case of Berghan & Anor v Berghan [2017] QCA 236 when their son denied there was a loan between the parties and instead said that the money was a gift to him.

 

Whilst the couple ended up being successful with the Court of Appeal declaring that there was a loan and it was not a gift, the couple had to endure several court hearings (and plenty of costs) to achieve this outcome.

 

This demonstrates the issues caused by informal loan transactions between family members and proves that it is better to be safe than sorry. 

 

2.     Demands to be repaid in full

Whilst many people may focus on how much money is being loaned, it’s important to consider exactly when the money should be repaid. It is possible that the parties will end up with different expectations of when the money should be repaid if the payment terms are not clearly outlined in a Loan Agreement. Without the existence of a loan agreement the lender may be expecting and relying on a repayment and the unclear deadline is missed.

 

On the other hand, if there’s no agreed repayment dates in writing, the lender may make a demand that the entire amount is repaid immediately, and the borrower may not be able to do this. 

It is very easy for a disagreement to occur and result in a party needing to threaten legal action. A written Loan Agreement can prevent this situation and the unnecessary stress that may come along with it.

 

3.     Family Law Property Settlements

It is not uncommon for loans from family members or friends to become an issue of dispute in Family Law proceedings. For example in the matter of Liakos & Zervos & Anoy [2011] FamCA 547 the husband argued that he owed his father a principal amount of $587,000.00 plus interest which was loaned to him in separated transactions over a number of years. However, the wife disputed these loans. 

 

The Court found that the loans were not previously enforced by the father (the lender) and were not expected to be. The steps taken by the father to enforce the debts appeared to coincide with the wife’s application to the Court to divide the assets between the wife and husband.

 

Normally, in Family Law a court will distribute the net value of assets between the parties after the debts have been deducted. In this situation the loans from the father were not included as a debt to be deducted. Therefore, there was a significantly larger amount of money to be divided between the husband and wife without repayment to the husband’s father. Basically, the wife received a share of the money the husband believed was owed to his father.

 

Loans can have implications on Family Law proceedings, so it is important to have the right documents in operation to avoid this as much as possible.

 

4.     A Loan in exchange for living in a property

Sometimes people will come up with an arrangement where the lender will give a loan and the borrower will then let the lender live in their property. For example, a mother may sell her property and give some of the proceeds to her daughter with the intention that the daughter will buy a large property in her sole name with a granny flat for the mother to live in.

 

In this situation, technically the new property is solely in the daughter’s name. If a disagreement arises the daughter may try and evict the mother and deny the arrangement ever existed.

Coutts is here to help and can provide advice on the best way forward to protect an interest in property.

 

How can I protect my legal interests?

At Coutts we can assist you in negotiating and preparing a Loan Agreement or other suitable document that mitigates the legal risks and issues as much as possible. For example:

 

  1. We can prepare a written Loan Agreement which is signed by all relevant parties and outlines the terms of the loan.

  2. We can advise on the differences between secured and unsecured loan agreements.

  3. We can take you through options for security such as potentially lodging a caveat or mortgage over the property under the Loan Agreement.

  4. We can advise you on the enforcement options if the there is a dispute or default under the Loan Agreement.

 

It is important to obtain legal advice prior to entering into a Loan Agreement or entering into any form of loan arrangement. Clearly defined terms in the format of a proper Loan Agreement can help reduce the room for disagreements.

 

It is also important to know whether any time limitation periods for enforcing the loan apply.

 

At Coutts we can help with all elements of your Loan Agreement so please contact our commercial law team if you have any questions or enquiries.

 

For further information please don’t hesitate to contact:

Rebecca Watts
Lawyer
rebecca@couttslegal.com.au
02 4607 2148

 

This blog is merely general and non specific information on the subject matter and is not and should not be considered or relied on as legal advice. Coutts is not responsible for any cost, expense, loss or liability whatsoever in relation to this blog, including all or any reliance on this blog or use or application of this blog by you.

Critical Issues for Selling or Purchasing a Business

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Deciding to sell or purchase a business can be one of the biggest decisions you will face as a business owner. Even once you decide to sell or purchase a business there are several things that must be considered to try and ensure the sale runs as smoothly as possible. We have listed a sample of the critical issues that usually arise and considerations and risks for both vendors and purchasers.

1.       Critical: Ensuring you use right structure to sell or purchase the business: asset sale or share sale

There are two common ways to buy or sell a business. It is important to make an informed decision as to the structure that is the most appropriate for you.

The first option is an asset sale. This is where the vendor (business seller) uses a Sale of Business Contract to sell the assets of the business to the purchaser. For example, the purchaser buys the business name, the equipment, the stock and the clients under that contract.

The second option is a share sale. This structure is typically used where the business is run by a company. Here, the vendor (business seller) is usually the director/shareholder of the company and will sell the business by selling their shares in the company through a Share Sale Agreement. This means that the purchaser will buy the shares in the company and become the director and shareholder in place of the vendor. By doing this the purchaser controls the company and as such controls the business and its assets and liabilities.

Coutts assists vendors and purchasers in identifying risks with each available structure and determining which structure is the most appropriate for the transaction.

2.       Critical: Ensuring new business activities by the vendor are properly dealt with

If you are a vendor and you are thinking about opening a new business, you will need to consider whether you want to engage in certain activities which will compete with the business you are selling.

For example, you might be a real estate agent, and you might want to open another real estate agency in the future. Often a purchaser of a business will include a restraint period for a certain period of time and kilometres. So, you need to consider how this might affect or restrict you opening a new business.

On the other hand, if you are purchaser it is important to think about setting restraint periods and distances as you’d probably be unhappy if the vendor opened the exact same type of business down the road a few weeks after you bought, and business and customers started going there instead.  That is, if the vendor became your direct competitor.

3.       Critical: Ensuring confidentiality

Selling a business will often involve providing information that is confidential and private. Coutts can help you consider whether a confidentiality agreement is necessary for the parties as we understand the importance of ensuring the confidential details of a business remain confidential.

4.       Critical: Understanding possible tax consequences

Once the purchase price is agreed on, both the vendor and purchaser need to think about how they are going to divide the purchase price between the good will and equipment of the business. This is known as apportionment of the purchase price and could have potential tax consequences.

Another factor to consider is whether the business will be sold on a walk in/walk out basis. For example, will the business continue to trade up until the settlement date? Will the vendor provide the purchaser with everything they need to continue to operate the business? This is known as the supply of a going concern and will affect whether GST is payable on the sale or not.  

5.       Critical: Ensuring the business premises are properly dealt with

If there is a lease over the property where the business trades, a vendor will need to get permission from the landlord to assign the lease to the purchaser or to permission from the landlord to grant a new lease to the purchaser.  It is important for a vendor to arrange this otherwise after the sale of business, the vendor risks remaining committed under a lease for a business that it no longer owns.

For a purchaser, it is often crucial to obtain the consent of the vendor’s landlord because and obtain permission to use the premises when they become the business owner. That is, a purchaser can’t run the business at that location without the lease or other appropriate permissions.

Coutts regularly negotiate with landlords’ solicitors to arrange assigning or granting leases or any other necessary permissions to obtain or deal with the right to use the premises for the new purchaser or the removal of risk in premises for the vendor.

6.       Critical: Ensuring employee entitlements are properly dealt with

If you’re a vendor and you have employees, you will need to think about their entitlements such as annual leave, sick leave and long service leave, and whether the employees are being transferred to the new purchaser. If the employees are transferred there is usually an adjustment for the purchaser to cover employee accrued entitlements.

If you’re a purchaser, you need to think about whether you will keep any of the current employees. You need to inform the vendor of your decision, so they can either give notice to employees to terminate their employment or make an adjustment in your favour for any entitlements owed to the employees that you are retaining.

7.       Critical: Ensuring stock is properly dealt with

A vendor should consider whether they have stock that needs to be sold with the business. For example, if you own a hairdressing salon you might sell shampoos and hair straighteners from suppliers. If so, a vendor should consider whether the value of the stock is included in the purchase price or if the purchaser will be paying extra for the stock, together with how the stock is valued.

If the purchaser is paying extra for the stock, you should also consider how the stock will be valued. Perhaps the vendor and purchaser will complete a stock-take together, or a sum will be agreed, or maybe an independent valuer will be appointed to complete the stock-take.

For a purchaser, it is important to know whether the purchase price includes stock or if you need to pay extra for stock, so you can ensure that you have the funds available. If you are paying extra for the stock, you should consider negotiating a trading stock maximum with the vendor. This means you can set a maximum amount for stock, for example $20,000.00. Then, for example, if the stock is valued at more than $20,000.00 you can choose which stock to purchase up to that amount.

 

Recommendations

A properly prepared Sale of Business Contract is integral in addressing risks and issues, protecting your interests and ensuring that what can be a complicated process is as stress free as possible. Even if you and the purchaser have agreed on what seems like the major elements of a sale of business, such as the purchase price and the date for settlement, Coutts are here to assist in ensuring the smaller (but often equally as risky) details that are the foundation to a smooth sale of business are considered and dealt with and ensuring risks are addressed long term and properly.

If you are after the best advice on how to sell or purchase a business, call Coutts Solicitors & Conveyancers on 1300 268 887 and book an appointment

For further information please don’t hesitate to contact:

Rebecca Watts
Lawyer
rebecca@couttslegal.com.au
02 4607 2148

 

Keely Irving
Lawyer
keely@couttslegal.com.au
02 4607 2124

This blog is merely general and non specific information on the subject matter and is not and should not be considered or relied on as legal advice. Coutts is not responsible for any cost, expense, loss or liability whatsoever in relation to this blog, including all or any reliance on this blog or use or application of this blog by you.