Robust research design should, at its core, seek to ensure the validity and integrity of its findings. However, this can be extremely challenging to achieve when engaging with subjects such as tax planning, and other subjects that rely on self-reported measures.
In a recent research project about business structure selection, we overcame this challenge by implementing a mixed method study that involved both interviews with multi-fact scenarios (qualitative) and surveys (quantitative). Through a comparison between the interview analysis and the survey findings we were able to provide some assurance of the accuracy of our interviewees’ justification of what they were trying to achieve with their recommendations of business structures.
The focus of this research project is to ascertain the underlying reasons for the choice of business structures recommended by Australian advisors to clients operating small and medium enterprises (SMEs). We have published a number of articles, both blog and journal, to discuss the rationale behind the advisors’ business recommendations, their evaluation of the strengths and weaknesses of the structures and the tendency for a combination of business structures.
In short, we found that advisors recommended a combination of structures to their clients with companies and discretionary trusts featuring prominently. Our analysis demonstrates that tax may be influencing the business structure choice.
In this blog, we summarise the technical aspects of the study. A longer version providing further details can be found on New Zealand Journal of Taxation Law and Policy.
Why we need a mixed methods approach
In our research, we set out to investigate the factors including tax that might be driving the choice of business recommendations by SME advisors. However, we recognised that there might be a tendency for self-reported actions to obscure the real reasons for this business structure choice, as there may be perception to ‘hide’ aggressive tax planning strategies. Prior research in this area has had several methodological limitations which this study sought to address, such as only providing advisors a pre-existing list of factors or not considering a combination of business structures.
In our research we implemented a convergent parallel mixed method approach of interviews involving multi-fact scenarios (qualitative) and surveys (quantitative). Forty-eight professional advisors from across Australia were selected to participate in this study. We first conducted an interview with them and followed by a short survey to validate the interview.
During the interview phase, the advisors were provided with one of 12 SME business scenarios, with each business scenario having different circumstances such as industry, turnover, number of active owners, number of employees and family circumstances. Each advisor was given a scenario one week before the interview.
During interviews, advisors would provide their business structure recommendations for the scenarios described, followed by the reasons behind their recommendations. The advisors then completed a survey at the end of each interview; they were asked to rate the recommended structure in relation to the factors provided in the survey questions using a Likert scale of 1 to 10 (1 low/bad, 10 high/good). The factors included tax and non-tax attributes, as well as client understanding and satisfactions about the recommended structure.
We then use thematic analysis to analyse the interview data to determine if there were common reasons behind the recommended structures and unique reasons given the different factual circumstances behind the scenarios. The findings also compare the new and established scenarios, and they include a comparison between scenarios.
The interview results are then compared to the short survey results to support the validity of the interview data analysis, as well as to provide rigour and robustness through the triangulation of the results.
Key findings
In the study, all but one advisor recommended a combination of business structures for each business scenario, namely companies and discretionary trusts. The main combinations were a trading company owned by a discretionary trust and a trading trust with a corporate trustee.
The findings demonstrate that there is a lot of consistency between the interview and survey findings. Overall, it is argued that the comparison between the interview analysis and the survey findings (or ‘method triangulation’) is an appropriate method of validating the interview findings, providing some assurance of the accuracy of the advisors’ justification of what they were trying to achieve with their recommended business structures.
The findings demonstrate the importance of the clients’ circumstances in recommending a business structure that could meet the needs and concerns of clients. These observations are important as they demonstrate that advisors appear to be truthful and are tailoring their advice according to the clients’ needs. The findings also reveal the optimal business structure given the clients’ circumstances.
For instance, trading trusts with corporate trustees are more appropriate:
- for a family business with little need for external funding,
- when there are other elements, such as flexibility in distribution to accommodate for the needs and the tax profile of family members,
- for accessing the small business capital gain tax (CGT) concessions (the CGT 50% discount) on the sale of the business or business assets, and
- for protecting assets.
However, such a structure is seen as complex and not ideal for when the business needs to expand, for international dealings, engaging with government bodies, in a multi-generational business, retaining the profits, accessing research and development (R&D) tax incentive, or accessing finance from banks.
Trading companies owned by discretionary trusts are more appropriate when there is a need for: working capital, retention of profit, raising equity, external funding, engaging with government bodies, accessing the low corporate tax rate, flow-through of dividends through discretionary trust, protecting assets, limiting liability, access to R&D tax incentive, and ease in exiting the business.
Tax consolidated groups are more appropriate when the business:
- is in a high-risk industry,
- employs many workers,
- has significant assets,
- is facing potential sale of part/whole of the business,
- has access to the R&D tax incentive,
- needs to raise capital and equity,
- needs to retain the profit at a low corporate tax rate, and
- has potential for national and international expansion.
Implications
Through the analysis, it was apparent that the driving motivations for business structure choice by SME advisors centre around tax minimisation, considerations of complexity, asset protection, flexibility of distributions and working capital requirements. This confirms that tax may be adversely affecting the business structure choice and adds weight to the argument that advocate for greater tax neutrality for business structures in Australia.
The results of this research could inform policy changes that are evidence based rather than assumptions. With this understanding and knowledge, improved policy development directed at increased economic efficiency outcomes can eventuate. This could encompass reducing tax complexity broadly and, in particular, complexity associated with the use of a combination of multiple business structures for one business operation, therefore reducing tax compliance costs, achieving greater tax neutrality between business structures, and allowing trusts to retain profits and cap it at a low tax rate.
Ultimately, this study may assist government and policy makers in developing tax reform options that improve business economic performance and achieve a more equitable tax system.
Journal article
Barbara Trad, Craig Cameron, Brett Freudenberg and John Minas, ‘Business Structure Selection: A mixed methods approach’ (2024) 30 New Zealand Journal of Taxation Law and Policy 69.
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