Holding Company


  • What is a Holding Company? 
  • The Structure of a Holding Company 
  • How are Holding Companies Financed? 
  • The Versatile Role of Holding Companies 
  • What are the Benefits of Holding a Company in Australia? 
  • What are the Disadvantages of a Holding Company Structure? 
  • Key Decisions and Steps to Set up a Holding Company 

What is a Holding Company? 

A holding company is a type of company established with the primary purpose of acquiring and owning shares in other subsidiary companies. Unlike operating companies that directly produce goods or provide services to customers, holding companies don’t engage in such activities themselves. Instead, they hold controlling interests in other companies, which are referred to as subsidiaries. 

The main function of a holding company is to own the assets of its subsidiaries and oversee their operations. Holding companies can take various forms, such as private companies, public companies, or trusts, depending on the objectives of the owners and the desired structure of the organisation. 

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The Structure of a Holding Company 

In a typical holding company structure, subsidiary companies, known as operating companies, are primarily involved in manufacturing, selling, or conducting business operations. Meanwhile, other subsidiaries are tasked with holding assets such as real estate, intellectual properties, vehicles, equipment, or any valuable assets utilised by the operating companies. 

The holding company may own all of the subsidiary’s shares or just enough to exert control over it. Control is typically achieved by owning a majority of shares or membership interests, ensuring that decisions align with the holding company’s objectives. This controlling interest can vary, with ownership as low as 51% in cases with multiple owners. 

Each subsidiary operates under its own management team responsible for day to day operations. The holding company’s management oversees the subsidiary’s operations, including the appointment and removal of corporate directors or LLC managers. Major policy decisions, such as mergers or dissolution, are made by the holding company’s management. However, they do not directly participate in the day to day decision making processes of the operating companies. 

How are Holding Companies Financed? 

A holding company’s financing typically involves various methods. Management of the holding company decides on investment avenues while considering available funds.  

A pure holding company secures funds for investments through equity sales in itself or its subsidiaries, borrowing, or earning revenue from subsidiary payments like dividends, distributions, interest, rents, and fees for back office services. In contrast, a mixed holding company generates revenue from its own business operations. 

The Versatile Role of Holding Companies 

The role of a holding company spans across businesses of all sizes and industries. Many prominent publicly traded corporations are actually holding companies, a fact that some investors may overlook.  

Holding company structures are particularly favoured by large enterprises with diverse business units. For instance, a sizable corporation producing various consumer goods might adopt a holding company model, owning several subsidiaries.  

Each subsidiary operates independently, with the holding company maintaining a controlling interest. Intellectual properties, equipment, and real estate may also be organised into separate subsidiaries, leasing these assets to the operating companies. 

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What are the Benefits of Holding a Company in Australia? 

Creating a holding company in Australia provides several significant benefits, particularly for growing or scaling businesses. Here are the key advantages:

Asset Protection

A holding company serves as a guardian for valuable assets, from real estate to intellectual property. By owning these assets, the holding company insulates them from any financial liabilities or claims that might be directed at its subsidiary operations, offering a protective barrier. 

Risk Reduction

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. 

Tax Benefits

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. 

Unified Management

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. 

Consolidated Asset Management

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. 

Growth and Development Opportunities

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. 

Ensuring Continuity

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.   

What are the Disadvantages of a Holding Company Structure? 

Financial Burden

Establishing and maintaining a holding company and its subsidiaries entail significant costs, including formation fees and ongoing compliance expenses. Each entity must adhere to specific legal requirements, such as filing annual reports and paying franchise taxes, adding to the overall financial burden. Compared to a single operating company, the additional compliance obligations can lead to higher costs. 

Management Complexities

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. 

Increased Complexity

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. 

Interposed Holding Company Tax Avoidance - Beware

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.

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Key Decisions and Steps to Set up a Holding Company 

Establishing a holding company involves several key decisions to be made when forming the necessary business entities. Here are the essential steps: 

Choose Business Entity Types

Deciding on the type of business entities to form for the parent company and subsidiaries is crucial. Factors such as management structure, financial interests distribution, and taxation implications need consideration. Options include corporations, LLCs, or other entity types, each offering varying features like limited liability and tax treatment. 

Determine Taxation Approach

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. 

Select Formation States

Choosing the states in which to form each entity is essential. While any state can serve as the formation state, its 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. 

Name Entities

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. 

Register the Company

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 companys name, address, and directors must be provided in the application. 

Obtain an Australian Business Number (ABN)

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. 

Open a Bank Account

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 companys finances and receiving dividends from subsidiary companies. 

Acquire Shares in 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. 

Appoint Registered Agents

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. 

This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.