Five tax strategies for small business owners selling up

Small business specialist accountant Sue Prestney believes that many small business owners who had delayed their sales through the GFC and its aftermath will now put their businesses on the market. And she expects the bubble of baby boomers entering retirement to significantly increase the volume of businesses changing hands.

Prestney, a principal with accountants MGI in Melbourne, emphasises the tax and superannuation advantages that eligible small business owners have regarding the potential tax and superannuation for certain proceeds from the sale of their businesses.

First, the sellers can significantly reduce or eliminate tax on the sale of active business assets if eligible for small business CGT concessions. (See Strategy 1.)

Second, super contributions from the proceeds of small business assets that qualify for the CGT small business 15-year exemption or retirement exemption are excluded from the non-concessional contributions cap up to a lifetime limit of $1.255 million (for 2012-13). (See Strategy 2.)

Some vendors of small businesses go a step further and sell or contribute their business premises to their self-managed super fund to provide concessionally-taxed or tax-free retirement savings, depending upon their circumstances. (See Strategy 3.)

Prestney says the ability to make extra-large super contributions “really gives small business owners an advantage” over other super fund members. And she believes the latest halving of the cap on annual concessional contributions for members over 50 further accentuates this advantage. (From July this year, the annual concessional cap for all members is $25,000 – no matter their age.)

Superannuation auditor Chris Malkin points out that a small business vendor who is eligible for the special $1.255 million lifetime limit using proceeds from the sale could contribute a total of $1.43 million into super in 2012-13. (His calculations take into account the standard concessional and non-concessional contribution caps). This is compared to annual contribution limits totalling $175,000 for other members.

Malkin, consulting auditor of specialist superannuation auditor Baumgartner Superannuation in Melbourne, emphasises that eligible small business owners potentially benefit from the “double-whammy” of the CGT concessions and the extra-large limit on their contributions.

Here are five strategies or tips for sellers of small businesses to consider regarding their tax and superannuation advantages:

These CGT concessions – together with the 50% general CGT discount (applying to individuals and trusts) – often remove CGT on the sale of small business assets.

Only proceeds from the sale of so-called “active” business assets are eligible for small business CGT relief. (As Sydney tax lawyer Robert Richards, principal of Robert Richards & Associates, explains in his column Fiscal Thoughts, “active” assets are basically those used or ready to use in the carrying out of the business. They include tangible and intangible assets such as goodwill.)

And a small business is only eligible for the small business CGT concessions if its turnover in the preceding financial year was under $2 million or the total value of the owner’s assets and those of “affiliates” do not exceed $6 million.

The net market value of the owners’ business assets, personal bank accounts, personal investment portfolios and personal investment properties – together with those of their business partners, spouses, children under 18 or any entitles or people under their control – are included in the $6 million asset threshold.

The four small business CGT concessions are:

• The 15-year ownership exemption. If your business has owned the asset for 15 years and you are over 55 and retiring, no CGT is payable on any assessable capital gain. Prestney says small business owners do not have to apply for any of the other small business concessions if qualifying for this one because it wipes out the entire capital gain.
• The 50% “active asset reduction”. This is a crucial and fundamental tax break – including for those continuing in another business. It halves the capital gain.
• The small business retirement CGT exemption. A capital gain from the sale of a business asset is exempt from CGT up to a lifetime limit of $500,000 for each individual owner. For a couple, this would mean a $1 million exemption. If you are under 55, the exempt amount must be paid into super.
• The small business CGT rollover relief. As Paul Banister, director of taxation services for accountants, Grant Thornton in Brisbane, writes in the Australian Financial Planning Handbook, published by Thomson Reuters, that this is a “last resort” following the sale of “active” small business assets that are being replaced by other active assets. CGT is postponed until the replacement assets are eventually sold.

As discussed, super contributions from the proceeds of small business assets that qualify for the CGT small business 15-year exemption or the retirement exemption – see Strategy 1 – do not count towards the standard non-concessional contributions cap up to a lifetime limit of $1.255 million (for 2012-13). This cap is indexed.

3. Consider holding your business premises in your self-managed fund

Some small business owners sell the trading side of their business to an external buyer and then contribute or sell their business premises at market value to their self-managed super fund.

Under superannuation law, business real estate – such as an office, shop or factory – is one of the few types of assets that super funds are allowed to acquire from members.

Once the assets of the fund begin to back the payment of a superannuation pension (including a transition-to-retirement pension), fund income and capital gains are tax-free. And after members turn 60, superannuation pension payments are no longer taxable.

If you are contributing the property to your self-managed fund as a non-cash contribution – perhaps it is jointly owned with your spouse who is also a member of your super fund – you should not overlook the annual superannuation contribution caps.

Significantly, Sue Prestney of MGI says business owners who sell or contribute their business premises to their self-managed super funds as a separate transaction should:

• Check their eligibility for any of the small business CGT concessions on the transaction. She says the contribution of business premises to a self-managed super fund would qualify as a disposal for the purposes of the CGT concessions.
• Check their eligibility for the small business super contribution lifetime limit of $1.255 million (for 2012-13), as discussed in Strategy 2.

Prestney urges business owners who are considering contributing or selling their business premises following the sale of the trading businesses to first get professional advice regarding the timing of the transaction. And she emphasises that stamp duty would be payable on the transfer.

As Prestney explains, some small business owners choose to sell their business premises to their self-managed super fund and then contribute the proceeds to the fund. And, where eligible, they make use of the small business CGT concessions and the special lifetime limit on contributions from the sale of certain small business assets.

Financial planners and superannuation specialists typically urge fund trustees to recognise the possible negative consequences if their retirement savings are heavily reliant on the profitability of a single, high-value asset. A broadly diversified investment portfolio spreads the risks and opportunities.

Prestney says a consideration for sellers of small businesses who are thinking about contributing the proceeds and/or business premises to a super is increasing concern that the government may reduce some of superannuation’s tax concessions. This has been widely discussed in the press during recent weeks.

“I have a theory that taxpayers should work with the best concession they can get at the time,” Prestney comments. But she urges business owners not to overlook the reality that governments sometimes cannot resist changing tax concessions – particularly in regard to super.

Prestney warns taxpayers not to assume they are entitled to the small business CGT concessions because they have a small business. She says that business owners should take professional advice at least a couple of years before a sale to see if any changes should be made to become eligible.

For instance, company shares in a small business may be regarded as “active” assets for the CGT concessions if the market value of all of the company’s active assets is at least 80% of its total value. Prestney says some restructuring of a company’s balance sheet may be necessary to become eligible for the concessions in such circumstances.

This article originally appeared on SmartCompany.