From about five years ago, the baby boomer generation started to turn 65. A surge in Australian business owners retiring began, and continues, but the topic of succession planning, although given some emphasis by this demographic wave, remains a perennially under-addressed issue.
Often a recurring subject of the ATO’s “Building Confidence” compliance website, effective succession planning can allay many of the tax risks that stem from the fact that every small and medium sized business owner will at some stage close-up shop, retire or otherwise leave their businesses.
While on some level every business owner realises they should have a succession plan in place, and not just family businesses, it seems less common to find an entrepreneur who has done something about it. Even the seemingly straightforward assumption that you will at some stage exit your business needs to at least recognise that there should be a process to tick off all the issues.
Of course there is more than just the tax issues to consider (although CGT will figure largely) – there is super, valuing your business, finding the right person to take over, and selling or otherwise divesting yourself of something you’ve probably put a lot of blood, sweat and tears into growing. Contemporary times may be witnessing a spike of baby boomers going through the process, but this should only cement the idea that succession planning will continue to be an important part of business life.
Not enough planning
The ATO has found that most small business owners have not done enough planning to make a smooth exit. “We have found that leaving a business is less risky if owners have worked with their tax adviser to address the taxation issues of an exit strategy or succession plan well before leaving the business,” it says.
The fact is that when a business is sold quickly and without proper planning, items can fall through the cracks and result in obligations not being met – or result in unnecessary and costly financial consequences
With so many issues to juggle (such as dealing with capital assets, staff, final dividends and so on) and possibly a lifetime’s achievement at stake, it can be extremely valuable to have professional advice and input to ensure careful planning – especially with the often large amounts of money involved.
Some of the problem areas can centre around the fact that selling or passing-on a business is a one-off transaction from a commercial perspective, but issues to remember include that, from a tax perspective, what can seem like one single sale (that of the business) is actually many sales of individual assets that need to be accounted for.
As such, it is extremely important to correctly deal with the eligibility to access the four small business CGT concessions, the correct treatment of pre-CGT assets (in particular, goodwill), the restructuring or sometimes de-merging of a company before a sale, and the GST treatment when selling a going concern.
Not cancelling registration for certain activities can cause problems, such as GST and PAYG withholding, but also your ABN. A business activity statement will continue to be issued, for example, should you neglect to deregister for GST – and you would be penalised if you don’t lodge these documents if the business is still registered, regardless of whether it is still actively trading.
ATO audits have revealed confusion over the treatment of the sale or other disposal of assets, especially over accessing the small business CGT concessions. The small business CGT concessions – 15-year exemption, retirement exemption, 50% active asset reduction and the rollover for replacement assets.
It is a pre-requisite for an asset to be “active” to gain access to these concessions, and this covers both tangible assets such as buildings, or intangible assets, which is where goodwill comes in. To be active they need to be used or held ready for use in the course of carrying on a business.
The gains from the sales of some CGT assets may not qualify for concessions due to this issue of “use”. For example, assets with a main use of just deriving rent (which is passive income for tax purposes) cannot be counted as active assets.
The general 50% discount on CGT usually applies when the asset sold had been held for 12 months or more by individuals and trusts. This concession will see only half of the capital gain included in taxable income. It is not however open to companies.
Decisions need to be taken on selling the business itself (that is, the shares in the company through which the business operates) or only the assets of the business, as there can be differing tax effects from each. Of course, if the business structure is a trust or partnership rather than a company, the tax consequences would differ yet again. We recommend getting advice about the tax consequences of your various options because of the dollars at stake.
If the business is sold as a “going concern” (see panel), the sale may be eligible for a GST exemption. But there are many eligibility conditions, including that the seller needs to stay in business right up to the sale date, the buyer needs to be registered for GST and agree in writing with the seller that the “supply” of the business is as a going concern.
And any discussion of succession planning opens questions on estate planning as well. Passing on a business in your will can bring to the table considerations about making sure a business continues to be viable if being run by beneficiaries of your estate or by an executor. And if there is a self-managed super fund that owns business assets, the treatment of benefits from the super fund will need to be dealt with specifically (these are not covered by a will, but by the SMSF’s trust deed).