Understanding changing super and tax laws can help small-business owners avoid the capital gains tax threshold when they sell. Here are seven strategies that can help. By MICHAEL LAURENCE.
By Michael Laurence
Sydney tax lawyer Robert Richards knows of intending vendors of small businesses who calculated that they had overshot the small-business capital gains tax (CGT) threshold by millions of dollars – but who eventually fell within the limit by simply understanding the tax rules, making large gifts to their adult children and contributing much more to super.
Richards urges vendors of small businesses to understand the changing super laws, particularly the changing maximum caps on annual contributions. “This is a crucial time for anyone intending to sell a small business,” he says. Super savings do not count towards the small-business CGT threshold.
Access to the small-business (CGT) concessions can provide a legitimate means to eliminate, depending upon the circumstances, multi-million-dollar capital gains from the sale of a small business.
Smart business vendors should seek expert tax advice about exactly what counts towards the small-business CGT threshold of $5 million, soon expected to rise to $6 million – and, perhaps more importantly, what assets are excluded from the count.
In short, proceeds from the sale of active business assets of eligible small businesses are either exempt from CGT, qualify for CGT discounts or CGT rollover relief. (The rollover relief is available if other active business assets of at least the same value are bought within two years.)
The net market value of the vendor’s business assets, personal shares, personal investment properties – as well as those of their business partners, spouses, children under 18 or any entities or people under their control – count towards the $5-million threshold test to be treated as a small business for the purposes of the CGT exemptions and discount.
Here are seven strategies to consider if you are selling your business and are concerned about overshooting the small-business threshold. As discussed in strategy seven, you must always keep the anti-avoidance provisions in mind:
1: Make gifts to your adult children. Richards points out that assets owned by your adult children, unlike those of your children under 18, do not count towards the small-business CGT threshold, provided these adult children are not linked with your business.
2: Make large super contributions. The tax law expressly does not include super towards the small-business CGT threshold. “Superannuation is most important thing that is not counted towards the small-business threshold,” Richards says.
Sydney tax consultant Gordon Cooper, principal of Cooper & Co, emphasises that some younger small-business vendors, who may be many years away from retirement, may not want to be make large contributions at this stage in their lives.
As fully reported by SmartCompany, super fund members can make after-tax super contributions of up to $1 million between May 10 last year and June 30 this year, before being restricted from July 1 to after-tax contributions of up to an indexed $150,000 a year or $450,000 every three years. And, in addition, members over 50 can make tax-deductible contributions (mostly salary-sacrificed contributions or contributions by the self-employed) of a little more than $105,000 in 2006-07, changing to $100,000 a year from July 1.
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3: Buy a more valuable family home. The value of the family home is not counted towards the small-business CGT threshold. This may be an ideal time to upgrade your family home – before your small business is sold. (Again consider the anti-avoidance provisions; see strategy seven.)
4: Buy a holiday house. The tax law expressly excludes personal-use assets such as holiday houses from being counted towards the threshold.
5: Buy a luxury car or boat. Again, the value of these does not count towards the small-business threshold because of their status as personal-use assets. “You might decide to buy a top-of-the-line Mercedes,” Cooper says. “But for the value of the car to be excluded from what counts towards the small-business threshold, you should not use it for income-producing purposes.”
Richards adds: “It may even make sense to simply blow some money on luxuries. Keep in mind that the small-business CGT exemptions and discount are highly valuable. Perhaps you should be thinking more about a Ferrari than a Mercedes,” he jests.
6: Don’t borrow to finance super contributions, upgraded family homes, holiday houses, gifts or luxury cars. “This is because those debts will not be deducted against the value of assets that are counted towards the small-business threshold,” Richards says.
7: Watch the anti-avoidance provisions. Your main or dominant purpose for any of the transactions described above should not be to come within the small-business CGT threshold, Richards warns. That would be tax avoidance that the tax commissioner could attack using his Part IVA anti-avoidance powers.
Cooper adds: “The overriding thing to be concerned about is the potential application of the IVA anti-avoidance provisions. But you might, for example, have been thinking about buying a holiday home for three or four years, and perhaps the right property came along before your business was sold.” That would be acceptable.
“Your dominant purpose should be to buy a holiday home, contribute money to superannuation or make a gift to your children,” Cooper emphasises. “And you may have been considering doing so before making a decision to sell your business.”
Kirk Wilson, CGT specialist with tax and legal publisher Thomson Legal & Regulatory, points out that legislation to increase the threshold from $5 million to $6 million has not yet been introduced into Federal Parliament. However, the proposal is contained in draft legislation.
Wilson is confident that the threshold will rise to $6 million from July 1, a pledge that has been repeated by the Treasurer since the budget announcement last year.