It is not often as an accountant that I can tell a client they have no tax to pay on the sale of their business. For many real estate agencies, however, that is exactly the case thanks to the Small Business CGT (SBCGT) Concessions.
It doesn’t matter whether you are selling all of your business, part of your business, units in a unit trust, or even just shares in the company that operates the business. However, there are some hard-fast criteria you must meet to be eligible for these concessions.
These rules are complex, but let me share with you a simple case study of a fairly typical real estate agency so you can see the benefits of planning ahead when you are contemplating an exit.
Joe and Flo started Sunrise Real Estate in 1995. They have worked in the business since then – Joe looks after the back office and the rent roll while Flo is the leading sales agent for the office. They operate in a company structure but now want to exit the business and have agreed to sell the shares in the company to their leading property manager for four million dollars. They have no other assets, other than their house and superannuation, and are both now 60 years of age.
Joe and Flo meet the basic eligibility requirements for the Small Business CGT (SBCGT) Concessions, in this case being:
- Selling shares in a company that has always carried on business.
- Annual turnover is less than $2 million, but their net assets (that is, net of debt) are less than $6 million excluding their home, superannuation and other personal use assets.
- They have never bought non-business assets in the company and never borrowed significant amounts from the company.
- Shares in the company are currently owned by a family trust, but they have always distributed dividends on a 50:50 basis from the trust.
- Joe and Flo both plan to retire on the sale of the business; this sale is specifically in connection with their retirement.
Because Joe and Flo have operated the business for more than 15 years and they have met the basic eligibility criteria, they will pay no tax on the sale of the business, using the 15 Year Exemption under the SBCGT Concessions. That’s $4 million tax-free.
Let me share with you a simple case study of a fairly typical real estate agency.
Joe and Flo walked away from the business with a smile on their face, but let’s imagine an alternative scenario.
Let’s assume now that Joe and Flo only started the business in 2005, 13 years ago. Both 60, they are worn out and need a break but may still contract as sales agents to the business after they have sold it.
In this case, tax concessions would be applied as follows:
Although Joe and Flo do not plan to fully retire, they can still exit the business, crystallise a tax-free gain on sale and are well set up for the future.
I do not want to underestimate the complexity behind meeting the requirements for the SBCGT Concessions, but these rules are made for businesses like real estate agencies.
You can also use the SBCGT Concessions to bulk up the balance of your superannuation as they fall outside the normal super-contribution rules. If you are under the age of 55 at the time of the sale, to be eligible for the Retirement Exemption you may need to contribute the amount to superannuation if you don’t want to pay tax on the sale.
There are many tricks and traps with these rules. If you can meet the requirements, great! If not, maybe put a plan in place to work towards meeting the requirements by the time you exit, because the benefits are significant.
It’s important to consider your own personal and business finance circumstances and seek professional advice. For more information on SBCGT visit the ATO Small Business CGT concessions site or speak to your financial planner