Most construction groups settle their structure early, when the business was smaller and did one thing. What the same business does a few years on is usually broader: several jobs running at once, a development site or two, plant and property acquired along the way, and often a business partner, a family member, or a key employee with an interest in where the business goes next. As a group grows and diversifies, the structure does not keep pace on its own, and the gap between the two is a risk that catches a lot of growing businesses out, because nothing in day-to-day trading forces the question. Whether the structure was set up a decade ago or reviewed more recently, the question worth putting to it is the same: does it still stack up for what the business does now?
A structuring conversation in construction has to account for more than the trading business. By the time a group is scaling, it is usually carrying several things at once: the personal and family wealth built up over the years, the core business of building for clients, land bought and held for future development, active development undertaken for the group’s own account, and the plant and people that sit behind all of it. Each of those has a different risk profile and a different tax treatment, so a structure that suits one of them will not automatically suit the rest.
Those activities carry risk, and containing that risk is part of what a structure is for. Some of the risk is financial: paying more tax than the group needs to, or a tax bill that arrives as a surprise because the profit behind it was never directed with a plan. Some is external: a dispute with a regulator, a dispute with a client over the work, or a Fair Work or safety matter involving staff. Some is internal: a falling-out between business partners or family members with no agreed way through it. And some is simply the nature of the industry, where a single loss-making project can cost a group a year of margin. Structure is one lever against these risks, and the one this article concerns, but it is not the only one. Contracts allocate risk before a job starts, and managing expectations with clients, partners and staff prevents a good many disputes from forming at all.
When accountants talk about getting the structure right, they are really addressing three separate questions, and the best answer to one is not always the best answer to another.
The first is how profit is taxed as it moves through the group. In one common arrangement, for example, profit earned in the trading entity flows to a holding company and then to a family discretionary trust, which directs income across beneficiaries, while a bucket company, a company that receives distributions and holds the profit at the company tax rate, allows some of that profit to be retained rather than taxed entirely in individual hands. That is one arrangement among several, and the right one depends on the group. In an industry where the next job is funded largely from the last one, the ability to retain profit for working capital, and the way profit is split when it is distributed, is where much of the available tax planning sits.
Discretionary trusts are worth a note of their own here, because the way the tax office treats their distributions has been changing significantly, and that bears on how much weight a structure should put on one. We look at this separately in our article on the changes to discretionary trusts.
The second is what is exposed if something goes badly wrong. The protection comes from keeping distinct activities in separate entities, so that if one of them fails, the loss stays with that entity rather than spreading. A development that turns bad is the clearest example: kept in its own entity, its failure does not reach the core trading business, and it does not reach further again into personal assets like the family home.
The third is how ownership changes hands as people enter and leave the business, which is a substantial question in its own right and one this article returns to below.
Getting all three right is a different exercise from setting up a company and getting on with the work.
These choices do not sit outside the licensing rules, which constrain what a builder can actually use. In Queensland, QBCC licensing and its minimum financial requirements, the annual test the licensed entity has to satisfy on its assets, liabilities and turnover, mean the licensed entity is rarely a trust. Other states set their own rules, and in Victoria in particular, more builders have historically traded through the trust itself. That position is set to change: Victoria is in the process of introducing its own minimum financial requirements regime, and once it is in place it will have a significant bearing on how builders in that state structure. Licensing, duty, warranty and insurance rules differ from state to state, so a structure that is sound in Queensland is not automatically sound elsewhere, and the state a group builds in changes the answer.
Where a review shows the structure no longer fits, changing it is rarely as simple as it appears, and the cost of the change has to be set against the cost of leaving it in place. Commonwealth rollover relief can defer the income tax and capital gains tax that would otherwise arise on moving assets between entities in a genuine restructure. Stamp duty, however, is a state tax that the Commonwealth cannot switch off, so the duty payable on the assets moved can exceed the tax the restructure was meant to save. That does not make a restructure wrong. It makes the timing and the numbers something to work through carefully, and often to stage, before anything moves.
Structure settles where risk and profit sit. It does not, on its own, settle who owns the business or the terms on which people come into ownership and leave it, and that is the other half of the conversation. Two situations account for most of it. The first is partners: setting up with one, and agreeing at the outset how ownership, control and profit are divided; bringing one on, by buying in or by earning in over time; and exiting one, whether the trigger is a voluntary departure, a falling-out, or death or disability. Each of those turns on an agreed way to value the business and to fund the buyout, and the time to settle both is while everyone is still aligned, not at the point someone is leaving.
Valuation itself is a method rather than an opinion. The accounts are normalised to underlying earnings, by adding back one-off costs and setting owner wages to a commercial rate, and the business is then valued as a multiple of those maintainable earnings, so the figure rests on a method both sides have agreed rather than on the argument of the day.
The second situation is key people who want a stake in what they have helped build. How that equity is granted, whether as real shares, through an employee share scheme, or as a share that carries upside without full control, decides what happens to control of the business, and vesting the equity over time with agreed leaver terms decides whether the arrangement still works cleanly the day that person leaves. In each of these cases, how the shares are held, whether by an individual, a trust or a company, changes the tax and the protection that apply, which brings the ownership question back to the structure it sits within.
Our Structuring for Construction Businesses masterclass works through the structuring decisions a building or trade group faces as it grows, and the ownership arrangements that sit alongside them. It is written for owners running more than one activity, sharing ownership with a partner or a family member, or considering bringing key staff into equity.
You will leave with a clear view of whether your current structure still fits what the business does now, which activities belong in their own entity, the tax planning a group of your size can use once the structure supports it, and the questions to put to your accountant and your lawyer.
If you would rather work through your own structure one on one, book a complimentary consultation.
This article is general information for construction business owners. It is not advice on your own circumstances.
