Believe it or not, there are times when taking an overseas holiday, upgrading your family home, buying a holiday home or perhaps swapping your Holden for a top-of-the-range BMW may actually save you money.
Perhaps you could consider saving even more by helping your children pay the deposit on their first homes. Or what about becoming more financially secure by making an extra-large super contribution?
The spending of money to save money may seem ridiculous. But some SME owners who are planning to sell their businesses may find themselves in the fortunate position of being able indulge themselves and their families in order to become eligible for the highly valuable small business CGT concessions.
Access to the concessions potentially can drastically cut or even wipeout multi-million dollar CGT bills that would otherwise be payable on the sale.
Sydney tax lawyer Robert Richards, principal of Robert Richards & Associates, says there are “probably no greater concessions offered under tax law than those offered to small business taxpayers who make capital gains”.
As SME owners should understand, various small business CGT concessions are available to businesses with either an annual net turnover of less than $2 million or a maximum net asset value of $6 million.
Eligible business owners are entitled to CGT exemptions, discounts or rollover relief on the sale of “active” business assets. These tax breaks are in addition to the 50% general CGT discount for individuals, trusts and super funds.
Many business owners probably cannot do too much about lowering their business turnover. However, depending upon the circumstances, a business owner may be in the position to take decisive action to try to pass the $6 million asset test.
It’s a matter of knowing what assets are counted for the threshold and then – if possible and practical – adjusting your spending accordingly.
The net market value of the business assets, personal bank accounts, personal investment portfolios and personal investment properties – together with those of your business partners, spouses, children under 18 or any entitles or people under your control – are included in the $6 million threshold.
Disputes between the Tax Office and business owners can rage for years over whether or not a business falls within the threshold. It is not always as straight forward as it may at first seem.
Many businesses are sold with complex contracts that may stipulate a specific cash payment at the time of sale and then instalments if certain profit targets are reached. This can trigger debates over the value for the purposes of the asset threshold. (Under tax law, the asset test is based on the value “shortly” before sale.)
As Terry Hayes, senior tax writer with Thomson Reuters, discussed in his regular SmartCompany column last week, the Administrative Appeals Tribunal has upheld a decision by the tax commissioner that the vendor of a Queensland marina is not entitled to the small business CGT concessions. The tribunal agreed with the commissioner that its value exceeded the asset threshold.
The tribunal rejected the vendor’s argument that despite the $8.9 million sale price, the marina really had a market value of $4 million-$4.5 million.
Exchanges between the ATO and the vendor about the value of the business began more than five years ago. (Read the tribunal’s decision here.)
This case truly highlights the value of small business tax concession for those eligible.
Here are 10 strategies that may help business owners fall within the asset test for the small business CGT concessions:
As discussed, the net market value of the business assets, personal bank accounts, personal investments – together with those of affiliates – are included in the test.
These are your main residence, superannuation and assets “solely for personal use and enjoyment” (such as holiday homes, luxury boats and exotic cars). A key consideration is how the assets are used.
This is crucial even if you have no intention of selling at this stage, emphasises Paul Banister, director of taxation for accountants and business advisers Grant Thornton in Brisbane.
Banister says owners of growing businesses that may eventually exceed the maximum asset threshold for the small business CGT concessions could examine the merits of restructuring. This might, for instance, involve changing from a trust to a company.
Such a restructure could trigger CGT liabilities which, depending on the circumstances, could be significantly reduced or eliminated through the general CGT discount and the small business CGT concessions.
Banister emphasises that a small business should have a good commercial reason for restructuring. It should not be solely motivated by a determination to cut tax. He says such commercial reasons may be that the current trust structure is not appropriate for sharing equity with employees.
Banister says that if the cash is available, ways to possibly fall within the $6 million asset threshold include buying a more costly home. As mentioned, homes are not included in the asset test. And future capital gains from your main residence are exempt from CGT.
By making the contributions, the value of assets counted for the small business CGT concessions is reduced, business owners are maintaining their personal wealth, and future earnings within the super fund are concessionally taxed.
This spending is not caught within the small business CGT asset test and – like upgrading your family home or making big super contributions – is likely to be beneficial for family wealth.
Again, this personal-enjoyment asset does not count towards the asset test, and its value may increase over the long-term.
Although these assets are not caught within the test if used only for your personal enjoyment, their value will almost inevitably decrease. Whether their purchase is a smart move may well depend largely on the amount of tax is saved, if any, by reducing the value of assets included in the small business CGT asset test.
Richards gives the example of an entrepreneur who has a business worth $6 million and shares worth $4 million. The assets for the purposes of the CGT asset test total $10 million – if the business were sold today.
Even after taking account of the general CGT discount, a taxpayer who makes, say, a $6 million capital gain on the sale of a business might face a tax bill of well over $1 million.
“But if you sell the shares and buy a boat and go sailing for a year, you might be able to escape tax altogether or at least substantially,” Richards says.
“The Tax Office would be hard-pressed to apply the Part IVA anti-avoidance provisions to that arrangement,” he adds.
Certainly, spending a large amount on an overseas holiday will reduce the worth of your assets. However, Banister says that “whether it is a good idea for a business owner to take an extended holiday is a different issue”. It could damage the business, again depending upon the circumstances.
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