Licensing Your Business to a Related Company

This article considers the situation where a business is conducted through a discretionary trust and the trust enters into a business license arrangement with a related company to achieve asset protection and gain access to the company tax rate.

Asset protection could also be achieved where a business operated by company is licensed to a related company.

Essentially, a business licence arrangement involves packaging up the components of the business and making them available to the private company (whether it is newly established or an existing company in your structure) under licence, to carry on the business in return for a fee.  

With a private company running the business and the family trust taking on the role of passive asset owner, the taxation of an appropriate amount of profit can similarly move to a corporate environment where profit can be retained rather than distributed, with ready access to the company tax rate.  

By structuring the term of the licence to accurately reflect the owner’s business objectives, the arrangement is highly responsive to any future legislative changes and provides some flexibility in reaping the benefit of either the trust or company structure. When properly implemented, the arrangement also provides a high level of asset protection for the business by separating the valuable assets (which remain in the trust) from the operational risks, which are borne by the company.

If desirable, by changing trustees of the trust before the licence is implemented, the former trustee in its own right can set up as the business operator under the new arrangement, which can avoid transition costs and complications usually associated with moving a business to a new entity.

From a NSW duty perspective, the grant of a business licence, without more, was not dutiable in NSW before the abolition of duty on business assets (effective 1 July 2016) and that continues to be the case.  In Queensland, the granting of a licence is the grant of what is referred to as a “new right” under the Duties Act 2001 (Qld), and is a dutiable transaction.  However, careful drafting of that licence agreement may ensure that any value attributable to the licence itself is nominal (reducing any duty payable to a similarly nominal amount).

In respect of capital gains tax (CGT), provided there is no premium paid to the licensor (i.e. the discretionary trust) for granting the licence, there should be no CGT consequences of entry into the license agreement.

However, care needs to be taken so that the licence fee set and paid by the company to the trust does not exceed a commercial rate, otherwise, adverse tax consequences (under Division 7A of the Tax Act) may follow in respect of those payments.  


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