Principals are Hanging On to Property Too Long, Find White Paper

Many real estate principals risk paying too much capital gains tax (CGT) when they sell their businesses because they are hanging on to their investment properties for too long, according to a recent industry white paper.

A white paper on succession planning commissioned by Brittains Accountants & Advisors has found that poor succession planning may cause principals to lose large amounts of their business sale profits in CGT when they sell their real estate practice.

Brittains director Matthew Nott said to reduce or eliminate the CGT, principals must follow three basic rules and plan effectively.

“Many principals fall down on the third condition, which requires businesses and related entities to have a turnover of less than $2 million or have total net CGT assets of less than $6 million,” Mr Nott said.

“Generally, the main net assets for real estate principals will be their business and other investments like investment properties, and these can often go over the threshold.”

Mr Nott said this is where long-term succession planning was required. “If your business is worth less than the threshold of $6 million but your total assets are over this threshold, principals should look at what they can do to change the status of the assets to make them exempt.”

The white paper was prepared in June 2012 to discuss some of the issues relating to succession planning for real estate principals in the current market.

Drawing on interviews with real estate principals, as well as lawyers, bankers, accountants and secondary research, the paper highlights some of the key risks to real estate principals.

“Many accountants and advisors recommend the succession planning process can take up to 10 years,” the paper says.

“Others believe you should be looking at how you are going to exit your business from the moment you establish or purchase it.

“It can also take several years for principals to change the status of their assets in order to stagger capital gains or use superannuation contribution caps.”

Although the planning time varies for each person and business situation, Mr Nott advised that if principals had not yet begun the process, now should be the time to seriously plan.

“The paper has definitely highlighted that real estate principals need to take the time to consider these issues and that properly planning to exit from their business is difficult,” he said.

“Planning properly will reap rewards. Planning poorly could slowly erode the business’s value.

“A succession plan will maximise your financial return on the time you have invested building your practice.”

Principals can get a copy of the white paper by emailing Brittains at advice@brittains.com.au. They can also get a copy through the link on their website http://www.brittains.com.au/services.html.

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