- 1. Unlocking the value of your business tax effectively Sam
Rubin Technical Services Manager IOOF Investment Management
Ltd
2. General advice warning This presentation has been prepared by
IOOF Investment Management Ltd (IIML) ABN 53 006 695 021, AFS
Licence No. 230524. IIMLs contact details can be found on the IOOF
web site atwww.ioof.com.au . This presentation is intended for
adviser use only and is not to be distributed to retail clients
without the consent of IIML. The information contained within this
presentation is general in nature only and does not take into
account your personal situation. You should consider whether the
information is appropriate to your situation and where appropriate,
seek professional advice from a financial adviser. All assumptions
and examples are based on current laws (current as at September
2006) and the continuance of these laws and IIMLs interpretation.
IIML does not undertake to notify its recipients of changes in the
law or its interpretation. All examples are for illustration
purposes only and may not apply to your circumstances. Adviser use
only 3. Agenda
- Outlining various business structures, for example
partnerships, trusts and companies
- Understanding the CGT small business concessions
- Alternative strategies to reduce CGT
- Unlocking remaining capital in your company
Adviser use only 4. Taxation of company
- A private company can have family members as shareholders to
own the family business or to hold investment assets
- Personal services income rule exempt for FP
-
- flat tax rate of 30%; and
-
- capital gains are fully assessed, no 50% discount
available.
Adviser use only 5. Assets available for concessions
- Not available to depreciate assets, only ordinary CGT
discount/indexation
-
- individual sells factory and machinery, factory subject to
small business CGT concessions but as machinery would have been
depreciated, this is unavailable
Adviser use only 6. Small business concessions
- Determine whether you satisfy the basic conditions:
- To qualify for any of the small business CGT concessions, you
must first
- satisfy several basic conditions. These conditions are in the
form of three
-
- themaximum net asset less than $6 million(proposed July
2007);
-
- theactive asset test ; and
-
- where the CGT asset is a share in a company or interest in a
trust, the 20%significant individual test(proposed July 06).
Changing from control test.
Adviser use only 7. Maximum net asset value
- Less than $6 million includes:
- market value of assets or taxpayer (for example, company);
- taxpayers small business CGT affiliate (for example, farm kids
take over with dad still involved); and
- entities connected with them (for example, controlled
subsidiary with at least 40% of voting power and distribution of
income and capital. Business assets included.)
- Note proposed changes (July 07) allow STS taxpayers will NOT
have to satisfy this.STS taxpayers thresholds to increase threshold
of average annual turnover from $1 million to $2 million and remove
the $3 million depreciating assets test from STS eligibility
requirements
Adviser use only 8. Active asset test
- A CGT asset is an active asset if it is owned by you and
is:
-
- used or held ready for use by you, a small business CGT
affiliate or an entity connected with you, in the course of
carrying on a business; or
-
- an intangible asset inherently connected with a business you
carry on, for example, goodwill.
Adviser use only 9. Active asset test What is an active asset?
Broadly, if you have not ceased your business in the last 12 months
and you have owned the asset for less than 15 years, the CGT asset
must be an active asset just before the CGT event and for at least
half of the period of ownership. Proposed amendmentJuly 06 Asset
can be active even if sold after business ceased but sold within 12
months of cessation and active for lesser of half period of
ownership or 7.5 yrs.The asset cannot be one where the main use is
to derive rent. For example, a factory/commercial property that is
rented/leased to a third party. Adviser use only 10. Active asset
test
- The following are active assets:
-
- land owned as part of caravan park business
-
- building/land used as boarding house in business
-
- land owned as part of farm used for business
-
- building from which retail operations used for business (for
example, financial planner runs business from 100% residential
property)
- Assets that are not included as an active asset:
Adviser use only 11. Individual test
- If the CGT asset is a share in a company or an interest in a
trust, there are two basic conditions (s152-10(2)):
-
- 1. company or trust satisfies the significant individual
test
-
- 2. you are a CGT concession stakeholder in a company or
trust
- Note that this test is proposed to be the 20% significant
individual test.
- Also applies to a CGT asset held/owned by company or
trust.
Adviser use only 12. Example Adviser use only Mr Jones 20%
ownership Jones Family Trust 10% ownership Clark Family Trust 40%
ownership Mrs Clark 5% ownership Mr Clark 5% ownership Mrs Jones
20% ownership Company 13. Significant Individual Test Adviser use
only
- Mr & Mrs. Jones each ok due to 20% holding.
- Mr & Mrs Clark can also qualify provided the Clark Trust
distributes all or at least 33.33% of the income and capital for
the year to either Mr or Mrs Clark.
- The CGT concession stakeholder of a company means:
-
- significant individual; or
-
- spouse is a significant individual of company, for example 20%
legal and equitable interest by spouse; or
-
- if trust, same as rule for test 1 for trust.
-
- If Mr Clark receives distribution and is a significant
individual then Mrs Clark will still be a significant individual as
her husband is also a CGT concession stakeholder.
14. Federal Budget 2006 update
- Superannuation contributions above the UDC cap will be allowed
in the following circumstances:
-
- the proceeds from the disposal of assets that qualify for the
small business CGT exemptions (that is, the15-year exemption and
the retirement exemptionup to a lifetime limit of $1 million
(indexed)). This will also apply to assets that would have
qualified if they were not pre-CGT assets or if disposed after the
permanent disablement of the owner including where the asset was
owned for less than 15 years; and
-
- the proceeds from a settlement for an injury resulting in
permanent disablement.
Adviser use only 15. Federal Budget 2006 update
- Does that mean an opportunity exists for small business owners
to consider selling their business in the 2006/07 year to
contribute a maximum of $2 million to superannuation. How?
- utilise the $1 million limit under the CGT exempt or 15-year
rule; and
- the $1 million undeducted contribution limit.
- The CGT $1 million threshold is not meant to utilise the UDC
limits, for example from July 07 $150,000 and $450,000, but is it
the Governments intention for individuals to receive double benefit
this financial year?
Adviser use only 16. Small business concessions
- Three CGT concessions are available for small businesses:
-
- Thesmall business 15-year exemptionprovides a total exemption
for a capital gain on a CGT asset if you have continuously owned
the asset for at least 15 years(Proposed changes is to limit to 15
year period)and if the taxpayer is an individual aged 55 years or
over and is retired, or is permanently incapacitated. If company or
trustrequires there be a significant individual and only for any
period or periods totalling 15 years.
-
- Payment to a stakeholder is limited to % interest for company
and discretionary trust is 100% for only one concession stakeholder
and 50% for two.
Adviser use only 17. Small business concessions
-
- 2. Thesmall business 50% active asset reductionprovides a 50%
reduction of a capital gain.
-
- 3. Thesmall business retirement exemptionprovides an exemption
for capital gains up to a lifetime limit of $1 million (indexed).
If the recipient is under 55 years of age, the amount must be paid
into a superannuation (or similar) fund.
Adviser use only 18. Active asset reduction Adviser use only
- Reduction is 50% of assessable gain.
-
- reduce assessable gain to access retirement exemptions of $1
million
-
- assist to minimise taxation if unable to (for example, over
lifetime limit) or do not want to apply retirement
-
- reduce deferred assessed CGT under rollover relief
-
- CGT exempt component is NOW treated as contribution but has
separate limit UDC.
19. Small business retirement exemption Adviser use only
- Exempt amount paid to stakeholder as ETP
-
- 7 days post election to disregard CG or 7 days post receiving
proceeds from a CGT event;
-
- need written election to utilise exemption and if two
stakeholders, each individual % can range from 0% to 100% but two
must add up to 100%;
-
- if aged under 55, then ETP must be rolled over; or
-
- if aged 55 or over, individual has option to cash or roll
ETP.
-
- is aged under 55, ETP must be rolled over before receiving
capital proceeds from CGT event;
-
- is aged 55 or over, individual has option to cash or roll
ETP;
-
- needs written election to utilise exemption before lodgement of
tax return; or
-
- lifetime limit of $1 million (indexed).
20. Termination of employment Adviser use only
- Each time a company/trust receives an amount of capital from
CGT event, it must make an ETP in relation to each of its CGT
concession stakeholders
- This means that employment actually has to be terminated due to
ETP payments in consequence of termination of employment.
- The Government is looking at changing this requirement as
recommended by the Taxation Board of Review.
21. Company selling business Adviser use only
- Most business owners upon selling their business, purchaser
will acquire business from company, thus company applies fro CGT
relief. Greater opportunities for CGT free sale of business with $1
million limit.
-
- Financial planner is selling practice through a company
structure for $2.3 million gain. Company is selling business so
applying CGT small business concessions, husband and wife
controlled.
-
- CGT exempt component for each equal:
-
- $2.3 million / 2 = $1.15 million x 50% (active asset reduction)
= $575,000 each can receive $575,000 CGT exempt component.
-
- What are your options with the remaining $1.15 million in the
company?
22. Accessing funds in company Adviser use only
-
- 1. Pay out benefit over years as dividend (note no franking
credits unless surplus credits retained in company).
-
- 2. Pay out as directors fees, then may have option to salary
sacrifice/personal deductible contribution into super utilising
transition-to-retirement strategy.
-
- 1. Wind up company within 12 months, then remaining funds will
be of a capital nature and re-apply the CGT small business
concessions. Has to be within 12 months to meet the active asset
test.
23. Financial planning strategy Adviser use only
- Therefore, from example, remaining $1.15 million is paid out
utilising (each $575,000):
-
- 50% individual discount ($287,500)
-
- 50% active asset reduction (no need to apply)
-
- Total retirement exemption of $862,500
- Benefit allows for super account to be:
-
- husband: $862,500 CGT exempt and $287,500 UDC
-
- wife: $862,500 CGT exempt and $287,500 UDC
- Total value of business $2.3 million can be invested in super
providing pensions to husband and wife, if aged 60 or over from 1
July 2007, tax free for life.
- Note: important that clients are under the age of 65 to utilise
$450,000 UDC limit
24. Example Adviser use only
- Another financial planner is selling their practice which is
owned through a company for total $2 million with a $1.6 million
gain. Company is selling business to applying CGT small business
concessions, husband and wife control. Wound up company to regain
access to remaining $400,000.
- Tax effective transfer of sale value:
-
- $800,000 each CGT exempt component
-
- $200,000 each contribute as UDC
- Note: $400,000 capital retained in company is not subject to
CGT as cost base is $400,000.
25. Summary
- CGT can be a complex area
- Opportunity for small business owners to utilise accumulated
capital from business for a tax-efficient retirement
- Importance of structure of business, for example sell company
or business.
- Consider short term business sales inline with 1 July 2007
changes to maximum asset value, STS eligibility and control
tests
- Need for elections so important to work closely with an
accountant
Adviser use only 26. Questions Adviser use only 27. Disclaimer
IOOFInvestment Management Limited (IIML) its officers, employees,
directorsand agents believe the information in thispresentationis
correct at the time of compilation but no warranty of accuracy or
reliability is given and no responsibility arising in any other way
for errors or omissions (including responsibility to any person by
reason of negligence) is accepted by IOOF, its officers, employees,
directorsor agents.IIML is a member of the IOOF Group. IIML is the
issuer of many financial products, a responsible entity of certain
managed investments, a trustee of various superannuation funds and
an operator/custodian of a range of investor directed portfolio
services.IOOF Limited (ABN 21 087 649 625), another company in the
IOOF Group, is the issuer of other IOOF Group products. Where you
proceed with an investment in an IOOF product, IOOFmayreceive
remuneration via fees for that product. If you seek personal
financial advice from a financial adviser, they may receive
remuneration via commission payments from IIML.Details of
remuneration will be detailed within a Statement of Advice where
personal advice is provided or can be provided upon request.
Adviser use only