Case Study [100 Marks] (Maximum 10,000 words)
Bill, Terry and John are partners in a catering business in the North Shore. They have been operating their business together for the past 11 years. The business has experienced exceptional growth in recent years and they are gaining a good reputation where they now provide catering for large corporate events and gain large contracts to supply both corporate and private clients throughout the Sydney metropolitan area. Considering the recent business growth, the partners are now considering branching to other Australian cities, starting with Melbourne followed by Brisbane and Perth. If they were to pursue this expansion strategy, they may need to consider acquiring a larger factory premises as this is something they have been thinking about to accommodate for the continuing increase in demand. Also for the expansion strategy, they are open to bringing in additional equity partners to help support the business growth in other states. The three partners work well together as they have been friends from University. They have always had a passion for fine food and good dining experiences that has contributed to the success of the business. However, the key to their success has been the fact they possess important sets of skills to complement each other. Bill is a qualified chef, while Terry is great with people and looks after business development and keeps clients happy. John is a qualified accountant and a great business manager who looks after the staff management, finances and ensures the business is always in good financial shape. John is aged 42; married to Sally aged 38 and they have 2 children, one girl aged 8 and one boy aged 4. Sally works as a primary school teacher. Terry is aged 40; he has been single as he struggles to maintain a long term relationship, although he is currently dating Simone and he feels she may be the one. Although Bill and John are excited for Terry to have found someone to settle down, they are not quite sure she is his type as she seems to be rather immature and she has expensive taste expecting Terry to regularly buy her expensive gifts and pressure him to take time off to go on holidays. Although Bill and John feel this way towards Terry’s new partner Simone, they have kept this to themselves as they don’t want to upset Terry, particularly when Terry has struggled to find someone in the past to settle down with. Bill is aged 41; married to Tara 35 and have a 2 month old daughter. This is Bill’s second marriage after he went through a rough divorce 2 years ago. Bill has one 10 year old son from his last marriage and the son is currently living with his mother (Bill’s ex-wife). Bill provides his ex-wife with the child support required. About the business: The business is structured as a partnership. This has been the structure since inception Assets Plant and equipment $1.5 m Cash and short term securities $100,000 Factory premises $4m Liabilities $2m comprising of a bank loan and an overdraft facility secured against the factory premises Annual turnover $6M Bill, Terry and John would like you to explore if a partnership structure remains the best structure for them as they have been too busy to consider other options since they have first established the business 11 years ago. This is particularly timely with the recent expansion strategy the partners are now considering.
You need to prepare a report to the clients above addressing the following: A. You are required to consider the following five structures and the suitability to their needs: 1. Company 2. Partnership 3. Discretionary trust 4. Unit trust 5. Self Managed Superannuation Fund (SMSF) You need to explore the key issues including benefits and risks of each of the above structures from the following perspectives. You need to be specific and relate to their (Bill, Terry and John’s) personal circumstances: i. Taxation ii. Estate & Succession planning iii. Asset protection iv. Business needs v. Costs (25 Marks) Which of the above structures would you recommend for Bill, Terry and John to adopt in their business going forward and why? Provide a clear justification of your answer, advising the partners on the key risks or concerns (if any) resulting from changing the business structure from the existing partnership structure. . (2 Marks) B. Bill, Terry and John are excited about the growth in the business and future opportunities expanding to the other states, however, recently one of their close friends has passed away after suffering a heart attack. They have since been talking and are more concerned with what strategy they should have in place should one of them prematurely die or become disabled. Explain to the partners what can be done and the possibility of having a buy/sell arrangement in place between them. In your answer discuss what is a buy/sell arrangement and its purpose and benefits. Also comment specifically on the possible structure they could have for the buy/sell arrangement and how it can possibly be funded. Be specific in your advice (15 Marks)
C. Explain to Bill, Terry and John how the CGT small business concessions work. Discuss with them their eligibility to access any/all of these concessions in the future and how they can best take advantage of each of these concessions should they meet the relevant eligibility conditions. Clearly explain and justify your answer. In your answer briefly address the eligibility for the small business concession in the different business structures above (Part A). In your answer also explain how these CGT concessions can be used for retirement planning and make reference to the use of the CGT small business concession in retirement planning. Be specific in your advice. (15 Marks)
D. Following on from part C, briefly discuss other options the partners could consider if they were to restructure the business. (3 Marks)
E. John and Sally would also like to receive advice in relation to their wills and Powers of Attorney. Provide them with the key issues or structures they each need to consider for their wills addressing key asset protection and estate planning issues. You also need to
advise them as to who they can and should consider appointing as POA and what considerations they should have when appointing the POA and why? (5 Marks)
F. John and Sally are thinking of starting their own SMSF. They have also asked Bill and Terry if they would like to join their fund since they can have up to four members in an SMSF. The four of them currently have their superannuation in one of the public offer funds. Clearly explain three key benefits and three key risks of such a strategy. Be specific in relating to John, Sally, Bill and Terry’s circumstances. Make reference to precedents and case law where appropriate to demonstrate your points in highlighting the risks and benefits of such a strategy (10 Marks) G. Sally would like to receive specific advice from you in relation to an inheritance she is potentially receiving with her parents and her brother following the recent death of her widowed grandfather. The estate has the following assets:
1. The principal residence of the grandfather acquired in August 1999 2. A rental property purchased back in March 1982 3. A holiday house purchased in February 2002 4. A parcel of listed Australian shares purchased in April 1985 5. A parcel of listed Australian shares purchased in December 1999 6. A parcel of listed Australian shares purchased in October 1988 7. A parcel of listed Australian shares purchased in January 2001 (earmarked as a bequest to the Salvation Army) 8. An account- based pension (ABP) BDN to Sally’s mother Provide advice to Sally on the tax implications resulting from the distribution of the above assets to the beneficiaries under the will (no specific calculation required). In relation to the AB pension, explain if the latest superannuation changes may have any impact on the estate or any of the beneficiaries from the estate. You are also required to advise Sally as the executor under the will on her role, responsibilities and duties as the sole executor in administering the estate. Be specific with your advice. (14 Marks) H. Comment on the importance of asset protection and what the key risks are that could be faced by the three partners and their families and address possible asset protection strategies and solutions. Be specific in your discussion and suggested solutions by relating specifically to the clients. (6 Marks) I. As an adviser, what are your professional and ethical obligations when providing advice to clients like John, Sally, Bill and Terry? Be specific. (5 Marks)
Again; in your answer you must relate to Bill, Terry, John and Sally’s specific business, and personal and family circumstances.
END OF ASSIGNMENT