I want to minimise tax. How about an offshore company?

This article first appeared August 27, 2009.

Dear Aunty B,

My business is growing so I’m considering changing its structure. I’m looking for a structure that will provide asset protection and tax minimisation. After talking with my accountant they’ve recommended establishing a company with a family trust. My business mentor however has advised against trusts because they are expensive and time-consuming, and suggested setting up an offshore company instead.

A quick trip to the local library revealed that there is little information on the subject of offshore companies but yet I hear that Macquarie Bank has one. Can you help to shed some light on the advantages and disadvantages of offshore companies?

FT,
Sydney

Dear FT,

Are you nuts? A business mentor? What are you relying on a business mentor for tax advice? Or the public library? Do you really think your public library is going to have a step-by-step guide on how to channel your funds through Malta? Why don’t you just wander along the street, pick someone at random and ask them for some accounting advice?

Okay, listen to me carefully because I am going to give you some very valuable information for nothing, which seems to be what you prefer.

First: don’t listen to big talking mates or mentors. I can’t tell you how many people I know who are in strife with the Tax Office because they did not structure their growing businesses correctly, simply because the chose the wrong advisors and did not look at the risks.

Second: there is a fine line between tax minimisation and tax avoidance. Tax minimisation means you only pay the tax you have to. And any professional accountant will help you structure your finances so you keep your nose clean, pay what you have to but not a cent more.

Avoiding tax means you don’t pay the tax you are meant to – and there is a big chance you will get caught. Make sure that you know the difference because I get the feeling that unwittingly you are talking about the latter.

Third: You are not Macquarie Bank. Yes, you might be as big one day. But for now, you are a minnow, so act like one. Know your limitations.

Yes, large companies use offshore structures. That is because they trade offshore. And it can be legitimate if you are operating in a jurisdiction with a lower tax rate than Australia to pay less tax by using offshore structures.

There is a lot of tax legislation designed to limit tax planning around offshore structures. This includes transfer pricing, CFC rules and thin capitalisation legislation to name a few. This is because, my friend, you are not the first person in the world to wonder about sending money offshore so you can pay less tax.

Further: Many large companies also have massive accounting and legal teams who expertly negotiate the maze of complex rules of offshore tax structures and make sure they stay out of trouble.

If a large company does step over the line (accidently of course!) when seeking to minimalise their tax, they fork out many millions of dollars to the ATO to settle the tax bill.

If you step over that line my friend, you won’t be able to afford 20 silks and you will probably be directed straight to the slammer.

Lastly: Cost. Accountant Greg Hayes from Hayes Knight points out the establishment and maintenance of an offshore company is likely to be more expensive than the use of a trust. He says they will bring additional complexity as well.

He says that normally you would only establish an offshore entity if you are looking to trade internationally and take a part of your business offshore.

Greg’s advice to you is to first look at what you are planning to do with your business and what you are seeking to do commercially.

Avoid taking advice on this, on the basis that a particular structure has worked for someone else. “There is no single right answer on this. It depends on your individual situation,” says Greg.

But he also agrees with your accountant: that a trust structures can provide a significant amount of flexibility and should at least be considered by you.

Lastly and sadly, let me point out that there are very few shortcuts in business and the time you waste looking for them could be far better spent growing your profits.

So be a good boy. Focus on growing your business not reducing your tax and listen to your accountant. You will end up with a valuable asset and eight good hours of sleep every night, at home, in your own bed and hopefully between satin sheets.

Good luck!
Your Aunty B

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