Holding Company

The legal structure often shields holding companies from being directly accountable for the debts or liabilities of their subsidiaries. This separation plays a critical role in mitigating the risk of losing assets if a subsidiary company faces financial challenges or fails. 

Through careful structuring, holding companies can potentially lower the collective tax burden for themselves and their subsidiaries. Although recent tax law adjustments have placed some limits on these benefits, strategic placement in low tax jurisdictions remains a consideration. 

Holding companies typically hold the reins when it comes to managing subsidiary companies. This arrangement allows for a unified approach to governance and management, potentially leading to better financial terms and streamlined operational practises. 

As the central holder of all group assets, a holding company can manage these assets more efficiently, reducing the administrative burden on subsidiary companies and fostering a more unified strategy for asset utilisation and investment. 

By centralising the ownership and management of assets, holding companies enable their subsidiaries to explore new ventures or exit existing ones without risking the core assets of the group. This approach offers flexibility and agility in navigating market opportunities. 

The structure of a holding company, complete with a board of directors, can greatly facilitate succession planning. This is crucial for maintaining business continuity through transitions, such as the retirement or departure of key figures within the company. 

These benefits make holding companies an attractive option for business owners looking to optimise asset protection, minimise risks, and achieve tax efficiencies, while also centralising control and asset management for better growth and development flexibility.   

Holding companies may not necessarily own all shares of their subsidiaries, leading to management challenges, especially when dealing with minority owners. Conflicts may arise when the interests of minority owners conflict with those of the holding company. Additionally, the management of a holding company may lack expertise in the operations of its subsidiaries, posing challenges in making informed decisions. 

The use of holding companies introduces complexity, particularly when managing multiple subsidiaries. This complexity can be amplified in publicly traded corporations with numerous subsidiaries, requiring robust entity management systems to track vital information and deadlines effectively.  

Even smaller enterprises must maintain separate records and assets for each subsidiary to mitigate the risk of legal complications, such as piercing the corporate veil, which exposes assets beyond the subsidiary to creditors. 

The Australian Taxation Office (ATO) reviews arrangements where an individual taxpayer accesses the profits of a private company in tax free form through the use of an interposed holding company. This is relevant to all arrangements when, viewed objectively, there is an indication that the dominant purpose of the arrangements is for the individual to avoid tax.

These company profits tax free schemes generally have the following features but may also include variations where the shares in the first company are pre CGT shares or a holding company is interposed between a trustee shareholder and a company:

• A private company (company A) has retained profits on which it may have paid tax at the corporate rate. Shares in company A are held by an individual who may also be a director of company A.
• The individual disposes of their shares in company A to another private company (interposed company), receiving shares in the interposed company in return.
• The shares in the interposed company are issued at a paid-up amount being the same as, or similar to, the net assets of company A which includes the retained profits of the first company.
• The individual applies a CGT roll-over, to disregard for tax purposes any capital gain on the disposal of those shares in company A.
• Company A declares a franked dividend to the interposed company and discharges its liability to pay the dividend by way of cash, cheque or promissory note.
• The interposed company then provides a loan to the individual, sourced from the dividend received. The loan may be interest-free and repayable at call.
• Neither the interposed company nor company A has a sufficient distributable surplus for Income Tax Assessment Act 1936 (Cth) (ITAA 1936) Div 7A to treat the loan made to the individual as a deemed dividend (whether directly from the interposed company or indirectly from company A).
• In some cases, company A could be wound up after the dividend payment to the interposed entity with the loan remaining uncalled and outstanding.
• The individual will have then obtained an amount tax-free in the form of a loan as opposed to without the interposed entity.

As outlined in the above scenario, Company A could have provided its accumulated profits to the individual by simpler means, such as paying a dividend or providing an interest-free, unsecured loan (assessable as a deemed dividend under ITAA 1936 Div 7A), both of which attract tax consequences for the individual. Hence, when viewed objectively, the purpose of the interposed entity appears to have a dominant purpose of avoiding tax.

Besides the general anti-avoidance provisions in ITAA 1936 Pt IVA, the ATO reviews these and similar arrangements to look for intention to repay the loan to decide whether the amount may be assessable under Div 7A. In addition, if the arrangements are found to be a “dividend stripping” scheme or operation, various legislation could apply to include the amount of the loan in the individual’s assessable income, and cancel the franking credit on the dividend paid to the interposed company.

Selecting how the entities will be taxed for federal income tax purposes is another significant decision. This involves considering whether the entities will be treated as separate taxable entities or pass through entities. The decision depends on various factors relevant to the business structure and objectives. 

Choosing the states in which to form each entity is essential. While any state can serve as the formation state, it‘s crucial to remember that each entity conducting business in states other than its formation state must qualify to operate in those states. Decisions regarding formation states should consider legal and logistical factors. 

Carefully selecting names for the parent company and subsidiary companies is important. Names must comply with statutory requirements, including indicating the entity type, avoiding restricted words or phrases, and ensuring distinctiveness from other business entities‘ names. Checking name availability and reserving desired names before filing formation documents is advisable. 

Following the name selection, the company needs to be officially registered with ASIC. This process involves completing an application form and paying the requisite registration fee. Essential details such as the company‘s name, address, and directors must be provided in the application. 

Upon successful registration, the next step is to obtain an ABN. This 11 digit identifier uniquely identifies the company to the government and other entities, facilitating various transactions and interactions. 

Subsequently, a bank account needs to be opened in the name of the holding company. This account serves as the primary vehicle for managing the company‘s finances and receiving dividends from subsidiary companies. 

The final step involves acquiring shares in subsidiary companies. This can be accomplished by purchasing shares through the stock exchange or through negotiated agreements with the owners of the subsidiary companies. 

The choice of a registered agent is often overlooked but holds significance. Registered agents receive service of process and official communications on behalf of the business entity. Deciding between an individual (such as an employee, owner, or lawyer) and a professional registered agent service entails considering factors like expertise and reliability. 

These decisions lay the foundation for starting a holding company and require thoughtful consideration to ensure compliance and effectiveness in achieving business goals.