Sixty-five Western Australian legal practices have become incorporated following legislation allowing for law firms to convert from a partnership to a company structure, which came into effect last year.
Sixty-five Western Australian legal practices have become incorporated following legislation allowing for law firms to convert from a partnership to a company structure, which came into effect last year.
And a further 10 are to be processed by the Legal Practice Board.
Firms to incorporate have mainly been sole practitioners and smaller partnerships, with stamp duty concerns claimed to pose problems for larger practices.
Halsey and Associates director Fiona Halsey said there were a number of advantages to incorporating and that it made sense to operate law firms within a modern business structure.
“The issue of incorporation will become a lot more prominent because of the Tax Office crackdown on service trusts, which will mean they will be looking closely at and auditing those trusts,” Ms Halsey told WA Business News.
At the end of June, Tax Commissioner Michael Carmody released a statement warning that the ATO would be tightening regulation of professional firms and guidelines to determine whether fees paid under its service arrangements were likely to be accepted as deductions.
“We expect our examination of high-risk cases will add around 40 new audits to the 40 currently under way,” Mr Carmody said.
Ms Halsey said that, apart from avoiding the new scrutiny on service trusts, incorporation offered decreased liability, the ability for staff and other non-lawyers to become shareholders, and the ability to hold shares in discretionary trusts.
“I am aware that some law firms are looking at the option of listing on the Australian Stock Exchange but that none have yet taken the step,” she said.
Despite the advantages to becoming incorporated, there are several hurdles preventing more practices from making the change, according to Ms Halsey.
“Stamp duty is a serious problem, and goodwill is being judged at market value, and some large assessments have been made, something which is stopping a lot of the larger firms from incorporating because of the massive cost,” she said.
“Capital gains tax, cash-flow issues and payroll tax are other issues that are of concern to firms.”
Ms Halsey said that, despite the problems, she would generally advise legal practices to incorporate.
A lawyer who recently began an incorporated legal practice told WA Business News a corporate structure was a much better platform on which to build a business.
“It is a much neater structure with a division between management and the equity holding,” the lawyer said.
“Partnerships are difficult – partners are all essentially directors and shareholders and there are just too many bosses, particularly in the larger firms.
“National firms are going to have a major and expensive exercise on their hands if they want to incorporate, but it is a much more manageable structure.”
Despite the problems with stamp duty and capital gains tax, the advantages of being incorporated made it a preferable and more attractive structure, the lawyer said.
Currently, laws allowing for incorporated legal practices are not uniform across the country, making it difficult for national firms to incorporate.
However, several major firms have said that if legislation became national they would seriously consider becoming incorporated, the only major inhibitor being the potential stamp duty bill.
