Chris Morris explains Small Business Tax Concessions and how Advivo’s specialist tax advice could help you save money during your business’ key taxing points.
There are several key taxing points throughout the business lifecycle where the amount of tax you can end up paying is highly dependent on the specialist tax advice you receive and how it applies to your specific circumstances.
But did you know that a correct application of the small business capital gains tax (CGT) concessions could potentially save you hundreds of thousands on the sales of shares in a business?
We’ve demonstrated below two very different outcomes for the exit of a business partner. In these scenarios, the exit is completely amicable and both parties are intent on ensuring minimal tax payable for all parties.
Assume:
- Linda and Mark are business partners and operate their business through a trading company which is owned 50/50 by their respective family trusts.
- They started the business themselves 7 years ago and have grown it over time into a $4M business.
- Mark now wants to sell his portion of the business to Linda, and they have agreed Mark’s 50% is worth $2M.
- Mark is currently 51 years of age and is wanting to move on to what’s next for him.
- Linda doesn’t want to borrow from the bank to fund her buyout and Mark is willing to allow Linda up to two years to pay him for his half of the business.
Event / Details
Scenario 1
$440k tax payable. Mark is selling his 50% shares to Linda and “doesn’t need specialist tax and CGT advice”
Scenario 2
$0 tax payable. Mark is selling his 50% shares to Linda and invests in specialist tax and CGT advice.
Contract for Sale and Specialist Tax and CGT Advice
(Mark is 51)
Linda and Mark don’t seek advice and instead prepare and execute a simple sale agreement.
Linda and Mark seek advice and decide to enter into an option agreement whereby Linda has the option to purchase Mark’s shares in the trading company at an agreed price of $2M.
The option is valid for up to two years.
Terms for Linda’s payment of $2M to Mark
Mark has effectively moved on to his next venture and is happy to allow Linda up to two years to buy him out.
Mark has effectively moved on to his next venture and is happy to allow Linda up to two years to buy him out.
Timing for tax payable.
(Mark is 51)
On signing their sale agreement, Mark has triggered a capital gain taxing event and will be assessed on any capital gain in the year in which the contract is signed.
This may cause a cash flow problem for Mark given that he won’t receive full payment from the sale until two years later.
No CGT event is triggered so no tax payable at this time.
Option for Linda to buy Mark’s shares is executed.
(Mark is now 53)
N/A
It’s not until closer to the end of the two years when Linda decides to execute her option to buy Mark’s shares.
It’s at this point that a CGT event is triggered.
50% Capital Gains Tax Discount
Mark is aware that if the asset has been held for more than 12 months’ he is eligible for a 50% discount on his capital gain, so he only declares $1M worth of net capital gain and ultimately pays tax on this at marginal rates.
Mark is aware of the 50% CGT discount and claims this on the transaction which reduces his net capital gain down to $1M.
Specialist Tax and CGT Advice
(Mark is 53)
“Mark doesn’t need it.”
Instead, he borrows money to fund the tax payable on his $1M capital gain, until he receives payment from Linda.
Mark chooses to rollover his CGT event for up to two years meaning he doesn’t have any tax payable at this stage.
Specialist Tax and CGT Advice
(Mark is now 55)
“Mark doesn’t need it.”
Instead, he’s waiting to be paid in full so he can deal with his interim loan to fund his tax bill.
Mark is now 55 and his circumstances are such that he is eligible for another 50% ‘active asset’ discount, effectively reducing the net capital gain down to only $500,000.
Specialist Tax and CGT Advice
(Mark is now 55)
“Mark doesn’t need it.”
Instead, he ultimately receives his cash from Linda and sets to paying off his loan.
Mark chooses to utilise the CGT retirement exemption, and as he’s now over 55 years of age, there is no requirement for him to pay his retirement exemption amount of up to $500k into super, meaning he is free to keep that cash outside of super if he chooses, and can still claim the full $500,000 exemption.
Outcome
Mark has an estimated tax payable of $440k after utilising the 50% discount.
Mark has effectively reduced his tax to $0 due the way the sale was structured and Mark seeking Specialist Tax and CGT Advice.
This is a very simple example designed to show that great outcomes are possible in certain situations, but please be aware that individual circumstances can vary. If you’re considering or have entered a key taxing point for your business, we recommend you seek specialist tax and CGT advice, specific to your circumstances.
Key taxing points in a business can include:
- Restructuring into a more appropriate business structure for your current and future goals.
- Buying out a business partner
- Selling part of your business to a new partner (including bringing in a family member).
- Selling your business in its entirety
- Changes as a consequence of a marital split
Tax law is complicated, but we love it, and we love helping our clients achieve the best possible outcome for their circumstances. If you would like to discuss your situation and how we could potentially help save you money, please contact us today!
Written by Chris Morris
