Planning to sell your business? Have you structured the sale correctly so you pay less tax?

By Damien Moffrey

A confluence of events has brought us to a time and place where owners of small to medium business enterprises need to be well organised to ensure a successful business exit strategy. The GFC and property market decline combined with the imminent retirement of baby boomers (45 to 65 years old - 24% of the Australian population) means that the next five years will see a huge peak in businesses listed for sale. When compared to the number of potential buyers (35 to 45 years old - 15% of the population) this will make for an extremely competitive market place.

Whether your reason for exit is to retire or to commence a new business venture; the first step is to speak to the experts. It’s time to listen to your accountant, lawyer, financier and business broker.

Every business owner should have an exit plan, and if your timing is five years or less, you need to focus on making your business attractive to the buyers’ market. The focus should be on improving net profit and cash flow, tax planning, effective organisational structure, marketing plans and efficient processes that ultimately deliver growth and value.

Buyers in the current market are extremely savvy when it comes to figures and opportunity for growth. You will need a full set of financial reports prepared by a qualified accountant, a business plan and the ability to demonstrate the plan in action. At Baker Affleck Moffrey we undertake many business due diligences each year and are often astounded by the lack of structure and planning by many business owners. Poor key performance indicators revealed by a due diligence make it difficult to sell a business.

If you are planning to retire, consider a transition to retirement strategy which accesses the generous tax concessions available on exit and the benefits from the use of superannuation funds. Such a strategy can significantly reduce the tax payable on a business exit.

Another key factor is an appropriate business structure which provides flexibility in distribution of net profit, asset protection and access to tax concessions on sale. Good accounting and legal advice is required when purchasing a business to ensure the best possible tax outcome during both the operating phase and on sale.

Many businesses will qualify for the Capital Gains Tax (CGT) small business concessions and this can mean that zero tax is payable on sale. You do have to meet a number of basic conditions to qualify for the concessions but they are tax advantageous if you qualify. The concessions which may be available are:

general 50% CGT discount;
15 year retirement exemption;
small business 50% reduction;
retirement exemption; and
replacement asset rollover relief.

The following case study illustrates the benefits of accessing the CGT concessions:

Manufacturing business started 1 July 2000 (no cost base)
Acquired a competitor for $1,000,000 cost (all goodwill)
Business is owned in a Family Trust with a Trustee Company
Trustee Company directors and shareholders are 54 and 61 years old
Business is sold on 2 July 2011 for $6,000,000 with PP&E $500,000 WDV at date of sale

The client has the following assets and liabilities:

Asset	Liability
Business PP&E WDV - $5000,000	NIL
Goodwill - $5,500,000	Business Loan - $1,000,000
Investment Property - $500,000	Bankl Loan - $200,000

54 year old has other income in the year of sale of $180,000
61 year old has other income in the year of sale of $75,000
Assume that the clients have never used their lifetime caps or any other CGT caps previously

The table below calculates the Net Asset Value for CGT purposes (must be less than $6,000,000):

Asset	Liability	Net Asset
Business PP&E WDV - $500,000	NIL	$500,000
Goodwill - $5,500,000	Business Loan - $1,00,000	$4,500,000
Investment Property - $500,000	Bank Loan - $200,000	$300,000
		$5,300,000

Alternatively, the client could qualify for the CGT small business concessions if its annual turnover was less than $2,000,000.

Option A – Small Business 50% Reduction

	TP 1 (54 years)	TP 2 (61 years)
Other income	$180,000	$75,000
Capital Gain ($4,500,000)	$2,040,000	$2,460,000
Less 50% CGT Discount	$(1,020,000)	$(1,230,000)
Less 50% Active Asset Reduction	$(510,000)	$(615,000)
Taxable Income	$690,000	$690,000
Tax Payable	$294,400	$294,400

Option B – Use the Replacement Asset Rollover

	TP 1 (54 years)	TP 2 (61 years)
Other Income	$180,000	$75,000
Capital Gain ($4,500,000)	$2,250,000	$2,250,000
Less 50% CGT Discount	$(1,125,000)	$1,125,000)
Less 50% Active Asset Reduction	$(562,500)	$(562,500)
Balance of Capital Gain Deferred	$(562,500)	$(562,500)
Taxable Income	$180,000	$75,000
Tax Payable	$57,250	$17,175

The Small Business Rollover allows the client to defer the balance of the capital gain for two years. To be eligible for the Small Business Rollover the tax payer must have acquired a replacement active asset and must meet the basic conditions, ie small business test, net asset value test. This two year replacement period can be extended if you acquire another replacement asset or make capital improvements to an existing active asset.

Option C – Use the Retirement Rollover

	TP 1 (54 years)	TP 2 (61 years)
Other Income	$180,000	$75,000
Capital Gain ($4,500,000)	$2,250,000	$2,250,000
Less 50% CGT Discount	$(1,125,000)	$(1,125,000)
Less 50% Active Asset Reduction	$(562,500)	$(562,500)
Less Retirement Concession ($500,000 Cap)	$(500,000)	$(500,000)
Balance of Capital Gain Deferred	$(62,500)	$(62,500)
Taxable Income	$180,000	$75,000
Tax Payable	$57,250	$17,175

As TP1 is under 55 years of age, the trust must contribute $500,000 into TP1’s superfund within seven days after you:

choose to disregard the capital gain (must be in writing); or
receive the capital proceeds from the CGT event.

Option D – Use the 15-year Exemption

In this case we have assumed that:

The business is sold on 2 July 2015
Both taxpayers are over 55 years of age and the CGT event happened in connection with their retirement
As we do not know the tax rates for 2015/16 we have not accounted for other income of the taxpayers in this example

	TP 1 (58 years)	TP 2 (65 years)
Capital Gain ($4,500,000)	$2,250,000	$2,250,000
Less 15-year Exemption	$(2,250,000)	$(2,250,000)
Taxable Income	Nil	Nil
Tax Payable	Nil	Nil

If the CGT 15-year small business exemption applies, any capital gain is disregarded
The trust must make all payments to the individual CGT concession stakeholder within two years of the CGT event for it to be tax free to the individual

The above options are a simplified example of the application of the small business CGT concessions. This article should not be taken as personal advice as so many criteria must be met. You should always consult a tax professional who is familiar with the CGT concessions.

Failing to plan for a future exit may reduce the marketability of your business and result in a higher tax bill.

For more information or to make an appointment to discuss your plans please contact Baker Affleck Moffrey Chartered Accountants on (07) 5538 3088 or click here and we will contact you.