09/02/2017 CGT and GST Legislation and Business Sales – Tax Session Australian Institute of Business Brokers Presented By: Emma Barns, Senior Manager, EY Peter Dolzadelli, Senior Manager, EY DISCLAIMER The content of this training presentation and associated materials (collectively, “Materials”) is generic in nature. The Materials are not intended to, and do not constitute, legal, taxation or accounting advice. Accordingly, the Materials must not be used, or relied upon, as a substitute for specific advice. Separate advice should be obtained for specific transactions. The Materials have been prepared solely for the use of the Australian Institute of Business Brokers (“AIBB”) and its members. No responsibility to any third party is accepted as the Materials have not been prepared, nor intended for any other purpose. Access to the Materials is restricted to AIBB and its members. EY has prepared the Materials based on its understanding of relevant tax legislation current as at the beginning of February 2017. Page 2 Topics to be covered Income Tax Options for selling a business ► CGT/tax consequences of selling a business ► CGT outcomes of sale – tax concessions available ► Planning strategies ► New withholding tax rules for acquiring property ► Page 3 1
09/02/2017 Topics to be covered GST Potential GST treatments for sale of a business ► GST-free supply of a going concern ► Advantages / Disadvantages ► ► Requirements Examples ► GST contract clauses ► Case Studies ► Page 4 Case Study - Introduction Refer to page 1 of handout ► Page 5 Options for Sale Where a company or unit trust is the entity selling the business, there are ► alternatives for effecting a business sale: 1. Sale of business assets by the business entity directly 2. Sale of the entity (i.e. sale of shares in a company or units in a unit trust) Q: What are the advantages / disadvantages of each? Page 6 2
09/02/2017 Sale of Business Assets Page 7 Key Issues for Selling Assets Identification of business goodwill Goodwill is an intangible asset representing the value of the business over ► and above its other tangible (and intangible) assets ► Goodwill can be internally generated or acquired Sale of goodwill is a sale of a capital asset and dealt with under the CGT ► regime If business commenced prior to 20 September 1985, the ‘goodwill’ of the ► business may be able to be sold tax free ► Consideration may need be given to whether the same business is being carried on If goodwill of the business is pre CGT, consider whether there has been any past ► shareholding changes that may alter this status (Div 149) Page 8 Key Issues for Selling Assets Apportionment of sale proceeds Commissioner will generally accept allocation of proceeds as set out in sale ► contract, provided parties are dealing at arms length If parties not dealing at arm's length, the market value substitution rule will ► apply (assets deemed to have been disposed of for their market value) Page 9 3
09/02/2017 Apportioning Sale Proceeds ► Seller should aim to maximise consideration allocated to CGT assets and buyer to depreciating assets and trading stock. Apportionment is often as follows (as representative of MV): ► Trading stock: at cost (deemed MV disposal) ► WIP: at calculated cost ► Depreciable assets: at TWDV (adjustable value) ► ► Intellectual property: at TWDV (adjustable value) Goodwill: the remainder ► Page 10 Apportioning Sale Proceeds Some sale contracts will not allocate sale proceeds across assets ► Where this occurs, seller and buyer can separately make a reasonable ► apportionment based on market value Should have objective and supportable data to support value allocation ► Ideally sale proceeds should always be allocated in the contract ► Page 11 Returning to Case Study (page 2) Returning to case study: ► Total capital proceeds of $3,200,000 could be allocated as follows: ► Trading stock $200,000 (assessable income to seller) ► ► P&E $1,000,000 (no gain or loss on disposal) Goodwill $2,000,000 ► In this case the capital gain on sale of goodwill would be $2 million ► (goodwill has no cost base) Goodwill is a ‘post CGT’ asset ► Page 12 4
09/02/2017 CGT Consequences of Sale Page 13 Calculation of net capital gain Gross capital gain on disposal of goodwill is $2 million ► This amount can be reduced further by: ► General CGT discount ► ► Broadly applies to disposals by non-corporate entities who have held the asset being disposed for greater than 12 months Small Business Relief concessions ► Q: Would the general CGT discount apply to the sale of goodwill? Page 14 CGT Small Business Relief: Overview SBR provides for a capital gain arising on certain assets to be reduced ► A number of basic conditions must be satisfied ► The following concessions are available: ► 1. 15-year exemption full exemption from CGT when asset held >15 years, you are over 55 ► and disposal in connection with your retirement 2. Small Business 50% reduction ► Further 50% reduction in CGT where basic conditions are met Page 15 5
09/02/2017 CGT Small Business Relief: Overview 3. Retirement exemption $500K lifetime limit ► Must roll remaining amount into superannuation if under 55 ► No requirement to actually retire ► 4. Small business rollover (replacement asset) defer capital gain for 2 years or longer where reinvest in new assets or ► capital improvements If no (or a lesser value) replacement active asset acquired, capital gain ► triggered after 2 years Page 16 CGT Small Business Relief: Basic conditions for application Basic conditions must be satisfied: ► ► A CGT must happen to a CGT asset resulting in a gain; ► At least one of the following applies: you are a ‘ small business entity ’ (SBE) for the income year; or i. you satisfy the maximum net asset value test ( NAVT) ; or ii. you are a partner in a partnership that is a SBE for the income year iii. and the CGT asset is a partnership asset (and that other business is a SBE) you hold the asset passively and it is used by a connected entity, iv. affiliate or partnership of which you are a partner The CGT asset satisfies the ‘active asset’ test ► If the CGT asset is a share in a company, or interest in a trust, additional ► conditions must be met (discussed later) Page 17 CGT Small Business Relief: Aggregated turnover A small business entity is one that meets certain ‘aggregated turnover’ tests ► Aggregated turnover for an income year is the sum of the following: ► your annual turnover ► annual turnover for an entity connected with you at any time during the ► income year; and annual turnover for an entity that is an affiliate of yours at any time ► during the income year Aggregated turnover – ordinary income from carrying on a business ► Page 18 6
09/02/2017 CGT Small Business Relief: Small business entity summary Aggregated turnover Current Year Previous Year Previous Year - 2 - 1 Likely Actual Test 1: Under $2 Can be over $2 N/A N/A million million Previous Year Test 2: Under $2 One can be >$2 million N/A million Likely Test Test 3: Under $2 N/A N/A N/A million Actual for Current Year Page 19 CGT Small Business Relief: SBE example (cont’d) Likely test – Based on client’s ‘state of affairs’ at beginning of current year; ► Factors to consider in assessing ‘likely’ include: ► the entity's aggregated turnover in previous income years; ► exceptional sales or particular product lines last year that will not occur ► this year; whether the entity is likely to have reduced staff this year; ► ► whether the operating hours of the business will decrease; whether aspects of the location of the business, or its industry, indicates a ► declining turnover (e.g., if a drought is declared in an area, or if prices in the industry decline); or whether the business will face increased competition. ► Page 20 CGT Small Business Relief: SBE summary Exclusion ► Where entity otherwise qualifies as a SBE, it will still not be a SBE if ► a) It carries on business in the 2 previous income years before the current year; and b) its aggregated t/o in both those years exceeded $2 million. Page 21 7
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