.png)
.png)
If we're setting up a new business now, what should we use?
Fair question.
One option getting a bit more airtime is a company with different classes of shares.
A Class. B Class. C Class.
Sounds fancy.
Done properly, different share classes can give you something business owners have traditionally loved about family trusts:
Flexibility over who gets the money.
But, and you knew there was going to be a but, that flexibility comes with some pretty important trade-offs.
Including one that could really matter if you eventually sell the business.
So before we start handing out share classes like boarding groups, here's what you need to know.
Let's say Mum and Dad start a business together.
The standard setup might be:
Mum owns 50 ordinary shares.
Dad owns 50 ordinary shares.
The company declares a $100,000 dividend.
Mum gets $50,000. Dad gets $50,000.
Nice and simple.
But let's say instead:
Mum owns A Class shares.
Dad owns B Class shares.
The company's constitution is drafted so the directors can declare dividends separately on those different classes.
The company might then be able to pay a dividend to Mum's A Class shares without paying the same dividend to Dad's B Class shares.
Next year?
Potentially the other way around.
You can probably see the attraction.
One year Mum might have more income.
The next year Dad might.
Circumstances change. Life happens. Tax rates differ.
Having some flexibility can be pretty handy.
No.
Different share classes can give you some trust-like flexibility over dividends.
They do not give you all the flexibility of a discretionary trust.
A trust can potentially have a broad group of beneficiaries without those beneficiaries actually owning the business.
Shares are different.
If you give someone shares, you've given them an ownership interest.
That's a slightly bigger deal than adding Cousin Steve as a trust beneficiary and forgetting he exists for the next 14 years.
Shares can have value.
They can form part of someone's estate.
They can be caught up in bankruptcy, relationship breakdowns and succession issues.
So while dividend flexibility is useful, you need to think very carefully about who you're actually making an owner.
Let's talk about the small business CGT concessions.
These can be incredibly valuable when a business is eventually sold.
But some of the concessions depend on identifying people with a sufficient participation percentage in the company.
Very broadly, the tax rules look at a shareholder's percentage of:
And then use the smallest percentage.
This is where our clever A Class/B Class setup can run into trouble.
Because remember why we created it?
We wanted flexibility.
Mum doesn't have an automatic right to the dividends because the directors might choose Dad's B Class instead.
Dad doesn't necessarily have an automatic right either because they might choose Mum's A Class.
Great for flexibility.
Potentially not so great for establishing a fixed participation percentage.
So this creates a slightly annoying situation:
The flexibility you're trying to create today can potentially make it harder to access valuable tax concessions tomorrow.
Tax law does enjoy doing that. 🫤
Which means you need to think about a potential sale now.
We know.
You've just started the business.
You've got no clients, a laptop and a logo your mate made in Canva.
And we're asking what happens when someone offers you $5 million for it.
But this stuff matters.
Because the tax outcome when you eventually sell a successful business can be far more important than saving a bit of tax on dividends along the way.
So when we're setting up the company, we're not just asking:
👉 Who do we want to pay dividends to?
We're also asking:
👉 Who should actually own the value of this business?
👉 Could the business be sold one day?
👉 What CGT concessions are we hoping to access?
👉 Does the share structure we're creating now help or hurt that?
Sometimes the answer might mean sacrificing a little bit of flexibility today to protect something much more valuable later.
This one needs some thought. 💭
It can sound neat:
Mum gets A.
Dad gets B.
Kid one gets C.
Kid two gets D.
We've almost completed the alphabet and everyone's happy.
Except those shares aren't just labels.
They're assets.
If the business becomes valuable, those shares could become valuable too.
So what happens if one of the kids:
Gets divorced?
Goes bankrupt?
Dies?
Wants out?
Stops talking to everyone after Christmas 2034 because of something nobody quite remembers?
These aren't reasons not to do it.
They're reasons to understand what you're actually doing.
Dividend flexibility and ownership are two different questions.
Don't accidentally answer the second one while trying to solve the first.
Another area to be careful with is what's commonly called a dividend access share.
This becomes particularly relevant with existing companies.
Imagine Dad has owned a company for 15 years.
It's now sitting on $2 million of accumulated profits.
Someone has a bright idea:
"Why don't we issue Mum one B Class share for $1 and pay her a $500,000 dividend?"
Lovely.
Unfortunately, the ATO has also thought about that.
The ATO has specifically considered arrangements where new shares are issued for nominal amounts and used to direct accumulated profits to another shareholder.
Depending on the circumstances, anti-avoidance provisions including the dividend-stripping provisions and Part IVA can become relevant.
So there's a very big difference between:
Designing sensible share classes when establishing a new business
and
Bolting a special dividend share onto an existing valuable company because someone has discovered Dad's marginal tax rate.
Same alphabet.
Very different conversation.
You don't create dividend flexibility simply by calling something a "B Class Share".
The rights actually need to exist.
Your constitution needs to deal properly with things like:
This is where the accountant and lawyer need to talk to each other.
Because the accountant saying:
"Don't worry, they're different share classes."
while the lawyer's constitution says something completely different is not the sort of teamwork we're aiming for.
No.
There probably isn't an answer.
The Government's proposed trust changes have simply made us look harder at the options when we're establishing new businesses.
And companies with different share classes are definitely one of those options.
They can work particularly well where:
Which is why our answer to:
"Should we use different share classes?"
is unfortunately the accountant's favourite answer:
It depends.
Sorry.
We'd love to mix it up occasionally.
Different share classes can be a really useful tool when you're setting up a new business.
But they're not a family trust with ‘pty ltd’ slapped at the end.
And as with most things, there's important trade-off’s.
That's why we wouldn't design a structure around one question:
"How do we pay dividends tax-effectively?"
We'd start much broader.
Who should own the business?
Who should control it?
Where will the profits go?
How much will stay in the business?
What happens if someone's circumstances change?
What happens when someone dies?
And what happens if, hopefully, this thing becomes really valuable?
Build the structure for the business you want to end up with, not just the tax bill you want next year.
Because changing things when the business is worth $10 is generally pretty easy.
Changing them when it's worth $10 million?
That's when everyone suddenly starts using the phrase "tax consequences".
Disclaimer: This article is here to give you general info only, not professional advice specific to your unique situation. While efforts are made to ensure accuracy, the content may change over time. We can’t take responsibility for any decisions based on the contents of this article, so be sure to chat with your accountant or advisor first!
.jpg)
.jpg)
.png)
