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For small to medium companies the size and type of company capital usually doesn’t matter. But sometimes it does.
Company Capital
Company capital barely gets the limelight … but there are a few instances where company capital can really throw a spanner into the works, as Geoff Stein of Brown Wright Stein Lawyers in Sydney will tell you in this episode.
Here is what we learned but please listen in as Geoff explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
Size Doesn’t Matter…Usually
For small to medium companies, the size of capital itself usually doesn’t matter. Unless you are tendering for government jobs or large contracts –even then retained earnings is more important than the share capital itself – or seek registration in certain industries.
Minimum Capital for Building License
Applying for a building license is a common scenario where the size of your capital matters. If you want to get a residential building licence in NSW for residential work over $20k for example, you need insurance through the hbcf fund (home bilding compansation fund) administered by icare. And to obtain this insurance, icare will tell you how much share capital they want to see.
Up To Directors
Once the company is paid in, it is up to the directors what to do with it – within the confines of the law. Directors are to manage the company. The courts will generally not interfere with their business judgment – as long as they are not trading while insolvent etc.
So if the directors decide to pay all the capital back to the directors as a Div 7A loan, that is up to them.
Capital Increase
Increasing your capital sounds complicated, but complexity depends on the number of shareholders and type of shares issued.
Sole Shareholder
If you are the sole shareholder, increasing your capital is simple. You just create and sign a resolution or minute that describes the increase in share capital. And then you register this increase in capital with ASIC. That’s all.
As a sole shareholder, there is no point issuing different classes of shares. Why bother. It’s just you anyway.
Several Shareholders
When you have several shareholders, complexity multiplies exponentially with the number of shareholders and classes of shares. Now you need to watch out for value shifting. You need to look at the rights attached to each class of shares. Who got control? And how?
The more money is involved the more you need to govern the relationship between the different shareholders.
Partnerships
It has become common to convert partnerships into companies. For example most law firms – formerly partnerships – are now companies.
These partnerships-turned-companies often comprise an active partner and a funding partner. The tension between those two interests can create a difficult dynamic if not managed properly.
Capital Profit Reserve
A capital profits reserve includes tax-free capital gains from pre-CGT assets or the small business CGT concessions. It is important to track – ideally within separate accounts – what amount relates to what CGT event. It might be difficult to untangle the capital profits reserve many years later.
Some capital gains – sitting within your capital profits reserve – can leave the company CGT free – for example the 15-year exemption. Other capital gains can only leave the company tax-free, if you liquidate the company and then apply a new set of small business CGT concessions.
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Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 15 March 2021
Tax Talks spoke to Geoff Stein - Partner at Brown Wright Stein Lawyers - for more details.
