Last month we discussed retirement planning and the need to get in early to make sure you’ve done all you can to maximise your wealth and can enjoy the lifestyle you want when you retire.
For entrepreneurs, regular business valuations are crucial to ensure asset protection, tax efficiency, and overall business success. Often circumstances change, and factors like a business expansion to new locations, the addition of new product lines, the introduction of new business partners, and children reaching adulthood can all impact the appropriateness of a business structure and be a reason for the change. Planning for a potential business sale is also an essential factor to consider, and you should prioritise reviewing your structure as soon as any thought of a sale enters your mind.
One problem that must be addressed when you restructure a business is Capital Gains Tax (“CGT”). This is because the value of business assets, such as goodwill, have generally increased since the business commenced or was acquired, and moving it from one entity to another can result in an assessable capital gain. There are some options to minimise or eliminate this impact, but if you qualify for them, the Small Business CGT Concessions (“the Concessions”) are extremely attractive.
The Concessions are complicated, and much care is required to apply them to your circumstances. In general, though, they are intended to provide capital gains tax relief for owners of small businesses. If your business turnover is less than $2m per year or the value of your family group’s net assets (excluding your home and superannuation) is less than $6m, you are a good chance of qualifying for the Concessions.
As an illustration of how the Concessions might help you restructure your business in preparation for retirement, let’s assume you are operating a business that you started from scratch in a family trust. The business now turns over $1.8m and is growing, and your family has accumulated net assets worth $5m, some of which are owned by your family trust, including the business worth around $1.5m. You’re not ready to sell and retire yet but want to do so in 5 to 10 years.
Based on these facts, you currently qualify for the Concessions but may not in a few years. In other words, if you were to sell your business now for $1.5m, you could potentially pay no capital gains tax on the gain, but if you sell it in 5 years when you no longer qualify, you will pay up to $367,500 on the same $1.5m gain.
In reviewing your circumstances, transferring the business to a new separate trust may make sense. This would protect the assets you have accumulated in the trust by moving the business risk into the new trust. The transfer would be deemed at arm’s length value for capital gains tax purposes, resulting in a capital gain for the trust of $1.5m. Since you qualify for the Concessions, however, you may be able to eliminate tax on the gain completely. This will depend on which Concessions you choose to apply. You can refer to this information sheet for a bit more explanation of these, or call us to discuss them.
Notably, the new trust will be deemed to have acquired the business for $1.5m, so when it eventually sells it, any capital gain will be based on a cost base of $1.5m (i.e. you will only pay tax on any further increase in business value). Even though you may not qualify for the Concessions then, you have already locked in the benefits by applying them while you did qualify.
So, in short, by being forward-looking, this restructuring could save $367,500. That can make a big difference to your quality of life in retirement. It is worth taking the time to review your circumstances and discuss them with us regularly. If you have any questions in relation to the above, do not hesitate to reach out and contact us.
*Correct as of December 2014
Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.