Succession Planning

Have you recently given some thought to the question – how will your business succeed in your retirement or untimely exit?

Will your business partners, or even your offspring, be interested in carrying the business forward or should it be sold?

Questions such as how your business partners may fund a buy-out of your interest in a business should the inevitable happen, or whether a little pre-planning needs to happen to prepare your share of the enterprise for sale whether or not it is part of your retirement, also come to mind.

Concessions are, as we know, available to reduce, or in some cases even eliminate, a capital gains tax (“CGT”) liability upon the disposal of an interest in a small business. Apart from the general 50% discount rule that will halve a resident individual’s or trust’s capital gain on the disposal of an asset held for at least 12 months, there are other concessions that can apply, even for resident companies, if the conditions are met.

Meeting the relevant conditions is no easy feat – the requirements are onerous, the risk of not meeting them is high, and a review by the Taxation Office is likely. But, the rewards are significant – particularly as it’s possible to eliminate entirely a capital gain by the cumulative effect of one or more of the concessions.

If your circumstances so allow, the concessions you may be able to access include:

  • the 15-year exemption; this concession operates to eliminate the gain on sale of a long-held CGT asset where its disposal coincides with retirement or incapacitation and can coincide with significant uneducated contributions to a superannuation fund;
  • the 50% reduction; on top of the general 50% discount, this concession could reduce a taxable capital gain amount by a further 25% to a total of 75%, so only 25% of the gain is taxable;
  • an exemption of up to $500,000 (which is a lifetime limit) of a capital gain from tax; you do not need to retire to access this concession, but for under 55’s the exempted amount has to be rolled into a complying superannuation fund;
  • a rollover concession; this acts like a deferral, and gives you up to 2 years to put the proceeds into another CGT asset.

Each of these concessions has a multitude of tests that need to be satisfied to qualify – and therefore the primary question will be, do your circumstances or current structure allow you to qualify? If they presently do not, the second question is, can your circumstances be changed to potentially allow you to qualify?

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Forward planning is essential!

Unless you want a challenge from the Taxation Office if you attempt a restructure when a sale is imminent or even planned, often the better answer is to undertake some pre-planning so you’re ready if a buyer does come along.

And it is this kind of forward planning that should form part of the thinking behind preparing for a transfer of an interest in a business to your business successors should the inevitable happen. Your estate, with proper planning, may well be better off for it.

Could your business successors afford to buy-out your interest without personal cash-flow issues? Insurance may be a key consideration here.

Insurance for business succession involves not only proper structuring but also correct product selection. Ensuring the proceeds fall into the right place and that fringe benefits tax does not apply in relation to the premiums paid is a key structuring issue.

Succession is a complex topic, with many tricks and traps. But if carefully thought through and monitored over time, the benefits can be significant

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