Taxation Aspects on Existing a Business

Transcription

1 Taxation Aspects on Existing a Business 1

2 Overview of key considerations 1. SALE OF SHARES / UNITS OR BUSINESS ASSETS 2. COSTS ASSOCIATED WITH SALE 3. COMPONENTS OF THE PRICE 4. LAND, STOCK AND EQUIPMENT 5. WORK IN PROGRESS, CONTRACTS 6. INTELLECTUAL PROPERTY, LICENCES 7. EMPLOYEES 8. GOODWILL 9. CGT SMALL BUSINESS CONCESSIONS 10. GST CONSIDERATIONS 11. PAYMENT AND CONTRACTUAL ISSUES Peter Adams Sale of shares or business assets Key influencing factors for purchasers and vendors Commercial risks Tax losses requirements for entitlement COT & SBT Antiavoidance Non-commercial business activities deferred losses seller & buyer Commissioner s discretion salary sacrifice planning Bad debts capacity to deduct requirements for companies Franking account surplus - Peter Adams 2

3 Sale of shares or business assets Key influencing factors for purchasers and vendors (continued) Pre-CGT assets Tainting assets as post CGT if > 50% change of company ownership Small business CGT concessions active asset test shares / units Shares have higher cost base Shares pre-cgt and sale of business assets give rise to assessable income Note CGT event K6 if > 75% post-cgt property Liquidation sale of shares may be more appropriate if company has tax-free reserves Peter Adams Costs associated with sale Tax treatment of legal, accounting and associated fees generally capital costs No deduction under s8-1 as general immediate deduction but can claim 5-year write-off deduction under s year write-off deduction available even if business sale ultimate falls through 5-year write-off deduction also available to defend take-overs or to implement take-overs Tax treatment of tax related expenses s25-5 deduction only applicable relevant to income tax registered tax agent company deduction can be imputed to public officer Other incidental expenses cost base for CGT purposes Peter Adams 3

4 Components of the price Expenses associated with the acquisition of a business are generally capital expenditure and not deductible Vendor will have an interest in maximising capital component of the transaction to: obtain the benefits of the concessional treatment of capital gains, eg the 50% discount obtain the benefit of the CGT exemption for pre-cgt assets (particularly goodwill) obtain the benefit of the CGT small business concessions. Purchaser may wish to maximise any possible revenue component of the transaction to obtain immediate deductions. Vendor will have interest in minimising the component of the consideration relating to trading stock and depreciating assets. Peter Adams Land, Stock and Equipment Treatment of trading stock: market value at date of disposal vendor wants value low value ascribed and buyer wants high, but not always If pre-cgt asset for vendor and trading stock for purchaser both may want high value ascribed to asset If stock prices are expected to rise vendor can defer tax liability by having purchaser hold stock as bailee for sale on assignment Commissioner s approach contracted value acceptable if armslength parties Peter Adams 4

5 Land, Stock and Equipment Treatment of land and improvements pre-cgt/post-cgt - separate land and buildings note profit-making by sale exception Treatment of unused capital works buyer inherits capital works deduction vendor has to provide information within 6 months Peter Adams Land, Stock and Equipment Treatment of leased premises assignment of post-cgt lease subject to CGT Lease premium paid capital cost - part of cost base for vendor Lease premium received capital gain under CGT event F1 but no 50% CGT discount Strategy - include lease premium as part of goodwill rent must be at market rates Lease incentives paid or lease surrender payments - capital costs Lease preparation expenses deductible Treatment of leased equipment similar principles Peter Adams 5

6 Land, Stock and Equipment Depreciating assets balancing adjustment for vendor (assessable income or allowable deduction) no CGT unless CGT event K7 Depreciating assets purchaser s entitlement to a (decline-invalue) deduction for cost proportion ownership in disposal year No cost allocation in contract reasonable cost / value attribution Treatment of motor vehicles depreciation car cost limit no CGT on sale of car but part of SBE CGT concessions assets base Treatment of spare parts capital costs / gain Repairs deduction entitlement initial repairs knowledge irrelevant cost base if not deductible Peter Adams Work in progress and Contracts WIP part of trading stock if tangible property WIP services business - amounts paid for WIP that are assessable to the recipient are deductible to the payer. Deduction available in year payment is made if a recoverable debt has arisen for the work or reasonably expected to arise within 12 months after payment. Otherwise deduction will be available in the income year following the year of payment. Contracts separate from goodwill - assigned business contracts generally have only nominal value at time of sale Debtors bad debts Vendor can retain debts and purchaser can act as collection agent company retain bad debt deduction capacity if shares sold and SBT met Peter Adams 6

7 Intellectual Property and Licences Patents, copyrights and designs depreciating assets - balancing adjustments Partial assignment on instalment payment basis may be treated as royalties not capital gain Licence arrangements (IP) part disposal of depreciating asset balancing adjustment Tax treatment of trademarks Not part of good will - CGT assets Tax treatment of know-how capital account - CGT event A1 if tied to disposal of property or CGT event D1 on creation of right to provide know-how Can provide know-how on service agreement basis deferred assessable income for vendor and allowable deduction for purchaser Statutory licences not part of goodwill unless exclusive licence Water rights separate asset but will take CGT status from land Peter Adams Employees Annual and LSL entitlements purchase price normally reduced on assumption of liabilities but actual accrued leave transfer payments deductible to vendor if paid CGT capital proceeds take account of all liabilities assumed Key person arrangements capital account - CGT event D1 (restraint) alternatively can provide service contract Retirement allowances, gratuities generally not deductible unless in future interests of business deductible under s25-50 if attributable to past services purchaser deduction limitation Superannuation entitlements transfer to new fund, member s full actuarial reserve to be transferred Employee termination costs capital costs Peter Adams 7

8 Goodwill CGT treatment of goodwill pre-cgt status and acquisition Trade names, logos and slogans as a result of Murry v FCT no longer treated as part of goodwill CGT goodwill concessions - small businesses Restrictive covenants tax treatment CGT event D1 no 50% discount Peter Adams SBE CGT Concessions 1 16 Small business CGT Concessions: CGT 15-year asset exemption CGT 50% active asset reduction CGT retirement exemption CGT roll-over 8

9 Small business CGT concessions: methodology 17 Start with basic conditions Then consider the 4 concessions (3 of the 4 concessions have further conditions) SBE CGT Concessions 1 18 Basic conditions for eligibility to small business concessions: CGT event happens to an asset that the taxpayer owns event would otherwise have resulted in a capital gain taxpayer must either: (1) be a "small business entity"; or (2) satisfy the maximum net asset value test ($6M), and asset satisfies the active asset test If asset is a share in a company or interest in a trust, the company / trust must have CGT concession stakeholder. 9

10 Basic conditions: Step 1 19 A CGT event must have occurred in relation to a CGT asset Not relevant to: A gain/loss on a pre-cgt asset CGT event K7 occurs There has been a capital loss Step 2: CGT event 20 A capital gain must arise as a result of the CGT event 10

11 21 Basic conditions Steps 3(a) & (b): who can access the concessions? An SBE taxpayer A partner in a partnership that is an SBE taxpayer They must be carrying on a business A taxpayer that passes the $6m max net asset value test SBE CGT Concessions SBE requirement1 22 Small Business Entity (SBE) Requirement: SBE must carry on a business and satisfy a $2m "aggregated turnover" test Can be based on aggregated turnover for the previous year or the current year Aggregated turnover is sum of SBE annual turnover and the annual turnovers of connected or affiliated entities 11

12 23 Maximum NAV Test: NAV less than $6m Taxpayer Connected entities Affiliates 24 SBE CGT Concessions - NAV Calculation Sum of market values of all CGT assets Related liabilities & provisions Net value of CGT assets 12

13 25 Connected with Control of the other entity Controlled by the other entity, or both are under common control CGT Small Business Concessions (continued) Connected entity - Control (other than discretionary trust) >40% of income First entity >40% of capital 26 13

14 CGT Small Business Concessions (continued) Control of a discretionary trust Influence Test - Trustee acts in accordance with directions, control, etc. First entity Any of the 4 years before >40% distribution (can nominate up to 4 individuals as controllers)) 27 Discretionary Trust: control 28 Distribution test Influence test 14

15 29 Affiliate If they act, or could reasonably expected to act in accordance with the taxpayer s directions or wishes; or In concert with the taxpayer 30 Basic conditions step 4: CGT asset an active asset? The taxpayer has owned it for < 15 years And the asset was an active asset for a total of at least half of the test period OR The taxpayer has owned it > 15 years And the asset was an active asset for a total of at least 7.5 years during the test period Test period begins when the asset was acquired & ends at: The CGT event or When the business ceased, Whichever occurs earlier 15

16 Basic conditions step 4: what is an active asset? 31 Assets used in a business of the taxpayer, an affiliate entity or connected entity of the taxpayer Includes an intangible asset e.g. goodwill inherently connected with the business A share in a resident company or interest in a resident trust, where market value of the entity s active assets, connected financial instruments & cash is greater than 80% of the total market value of the entity SBE CGT Concessions SBE requirement1 32 Active asset requirement Used in the course of carrying on a business by taxpayer, connected entity or affiliate The following are not active assets Assets whose main use is to derive rent, royalties or FX gains recent case re holiday park Shares in widely held companies or trusts Financial instruments 16

17 SBE CGT Concessions SBE requirement1 33 Active asset requirement The 80% rule is a look through test to ensure interests in companies and trusts meet the active asset test Market values of active assets and financial instruments (cash) inherently connected with the business - must exceed 80% or more of the market value of all assets of the trust Basic conditions step 5: CGT asset is a share in a company or interest in a trust 34 CGT concession stakeholder Small business participation percentage of 90% or more 17

18 CGT concession stakeholder 35 Significant individual in the company or trust; OR The spouse of a significant individual in the company or trust Calculating small business participation percentage 36 Consider both the direct & indirect participation percentages: sec

19 CGT Small Business Concessions (continued) Significant individual s are a subset of the concession stakeholders CGT Concession Stakeholders Participation % must be > = 20% Significant Individual Spouse of significant Individual 37 CGT Small Business Concessions (continued) XYZ Unit Trust Mr A 20% Mrs A 5% Mrs B 20% Mr B 5% Mr C -20% Mrs C -5% MrsD -20% Mr D -5% 8 concession stakeholders 38 19

20 SBE CGT Concessions1 39 Direct interest for discretionary trusts is smallest of any of the following: % of income actually distributed during the current year % of actually capital distributed during the current year Can be all capital or all income. If both, the % is the smaller of the two If no distributions made of income or capital there will generally be no significant individual, but trustee can nominate up to 4 individuals as significant individuals year asset exemption Small business CGT concessions Has priority over the other concessions 50% reduction Can choose not to apply Additional to the general CGT discount available to some taxpayers Retirement exemption Capped to $500,000 lifetime limit Rollover relief Can be applied before the retirement exemption Defers capital gains 20

21 15 year asset exemption 41 Priority over all the other concessions. Where the conditions satisfied, the whole capital gain is exempt from tax Taxpayer does not have to apply capital losses against the capital gain before using this concession There is no limit on how many times a taxpayer can access the 15 year exemption. 15 year asset exemption: conditions 42 The CGT asset is owned continually for at least 15 years The CGT asset is owned by the individual, or a company or trust that has a significant individual for at least 15 years; and The individual is 55 years old or over & the CGT event happened in connection with retirement or permanent incapacity 21

22 43 Retirement: Special terms Significant reduction in hours or change in present activities Not a permanent & everlasting retirement from workforce Permanently incapacitated: Ill health Distribution of the 15-year CGT asset exemption amount 44 Must make the payment within 2 years of the CGT event Made to a CGT concession stakeholder Must not exceed a certain amount Not classified as a dividend Does not erode the cost base Not included in the assessable income 22

23 45 50% reduction Optional No additional basic requirements 46 Impact of this concession Company may have insufficient franking credits CGT event E4 Assessable to the shareholder as an unfranked dividend 23

24 Small business retirement concession 47 Capped to a $500,000 lifetime limit Can further reduce or eliminate a capital gain Capital proceeds form the CGT asset must be used for retirement (actual retirement not required) Used with the other CGT concessions 48 Does not apply where the 15 year asset exemption applies Applies only to the balance of any gain remaining after applying the general CGT discount 50% reduction applies before the retirement exemption, although the taxpayer can choose to not apply the 50% reduction (esp for companies & trusts) The retirement exemption can apply to all or part of the gain 24

25 Retirement exemption eligibility conditions 49 CGT events J2, J5 & J6 Contribution requirement for individuals less than 55 years of age Individuals aged 55 and over are not required to make this payment Payment requirements for CGT concession stakeholders of companies & trusts Consequences of choosing small business retirement exemption Entity Element Consequence 50 Individual Capital gain Capital gain equal to CGT-exempt amount is disregarded (i.e. not included in assessable income) Company or trust Capital gain Capital gain equal to CGT-exempt amount is disregarded (i.e. not included in assessable income) On-payment by company or trust to the CGT concession stakeholder Is non-assessable non-exempt income in the hands of the stakeholder On payment cannot be deducted by the company or trust from its assessable income On payment is not a frankable dividend by a company & is excluded from the deemed dividend provisions in Div 7A 25

26 51 Small business CGT rollover relief Allows a taxpayer to roll over the capital gain Does not apply where the 15 year asset exemption applies 50% reduction applies before rollover relief, although the taxpayer can choose not to apply the 50% reduction May be applied in conjunction with the small business retirement exemption 52 Eligibility conditions Replacement asset Must be an active asset 26

27 53 Consequences of rollover relief Capital gain is disregarded: Crystallisation of the gain: to the extent that it does not exceed the cost base of the replacement asset Where no replacement asset acquired (J5) Where replacement asset changes status (J2) 54 Where no replacement asset acquired CGT event J5 Deemed capital gain arises The capital gain may be eligible for the small business retirement exemption 27

28 55 Where the replacement asset changes its status: CGT event J2 The replacement asset stops being an active asset: e.g. the taxpayer disposes of the asset or stops using it in their business The replacement asset becomes trading stock GST Considerations Sales of GST-free going concerns - requirements the sale must be for consideration buyer must be registered or required to be registered for GST seller and buyer must have agreed in writing that sale is of a going concern under the agreement, the seller carries on the business until the date of sale, and the seller supplies the buyer with all of the things necessary for a business's continued operation

29 GST Considerations (continued) Separate land and business transfer as part of business GST-free Sale of buildings GST free if tenanted GST increasing adjustment if subsequent to GST-free going concern supply ongoing input taxed supplies are made MBI Properties case Sale of partnership business GST free but not partnership interest Sale of franchise GST-free but not new franchise Sale of shares - financial supply input taxed Sale of farmland GST free if farming business carried on Forfeited deposits GST treatment Assumption of liabilities GST treatment statutory liabilities 57 GST & Real Property Specific real property transactions GST-free Going Concern Supply of an enterprise as a going concern is a taxable supply under the general GST rules. However Subdivision 38-J of the GST Act entitles the vendor and purchaser to treat the arrangement as GSTfree if certain conditions are met. 29

30 GST & Real Property Specific real property transactions GST-free Going Concern For GST-free treatment, following conditions must be met: 1. supply of the going concern is for consideration 2. recipient is registered, or required to be registered, for GST 3. parties have agreed in writing that the supply is of a going concern 4. supplier supplies to a single recipient everything necessary for the continued operation of the enterprise GST & Real Property Specific real property transactions GST-free Going Concern Where particular premises are necessary for the continued operation of an enterprise, these premises must be sold or leased to recipient for the supply to qualify as a GST-free going concern Where enterprises are run from leased premises, then it may be necessary to supply the lease either by assignment or by surrendering the lease and facilitating the grant of a new lease - this must be done by the day of the supply if the premises are necessary for the operation of the enterprise 30

31 GST & Real Property Specific real property transactions - GST-free Going Concern Sale of a leasing enterprise to a third party will normally be a supply of a going concern eligible for GST-free status if all the things necessary for the continued operation of the enterprise are supplied ATO view is that a building that was tenanted and is temporarily vacant will still be supply of a going concern if new tenants are being sought at time of supply Supply will still be eligible even if parts are not being actively marketed if they are being repaired or refurbished. However, where building has never been occupied it cannot be regarded as a going concern ATO considers that going concern principle cannot be used on sale of a property to a sitting tenant GST & Real Property Specific real property transactions - GST-free Going Concern Sale of a part interest in leased commercial premises can qualify as a sale of a going concern. GSTR 2004/6 states that where a property is used in carrying on a joint activity from which income is received jointly (such as leasing), it will be a tax law partnership that carries on the enterprise regardless of how the property is held ATO considers that where a co-owner in a tax law partnership sells its interest in a leased commercial property, the sale results in a supply by the tax law partnership. ATO states that this supply can be the supply of a going concern as ATO accepts that a leasing enterprise can be carried on in relation to each co-owner's interest in a leased commercial property. 31

32 GST & Real Property Specific real property transactions GST-free Farmland supply of farmland Certain supplies relating to farm land and Crown land are GST-free. If farm land is sold as a going concern, the transaction will be GST-free as a going concern However, the supply of farm land is also GST-free if the recipient intends to carry on a farming business on land on which a farming business has been carried on for at least 5 years Payment and contractual issues Timing issues CGT event A1, CGT event B1, CGT event E1 Warranties and indemnities clawback clauses recoupments reduce cost base and capital proceeds Prepayments and apportionments reimbursement assessable (generally or under s20-35) and deductible to purchaser Price adjustment clauses not acting at arms length If sale price renegotiated before settlement then sale price is renegotiated price Forfeited deposits CGT event H1 no 50% discount Payment by instalments full taxable capital gain upfront Earnout clauses CGT event A1 capital proceeds is cash + market value of right existing treatment New Legislation 64 32

33 Tax Update - Legislation Tax and super LAM No 6 Bill - CGT and earnout rights Capital gains and losses in respect of look-through earnout rights (LTERs) will be disregarded. Payments received or paid under LTERs will affect the capital proceeds and cost base of the underlying assets to which LTERs relates. Assessments can be amended up to four income years after income year in which last potential financial benefit under LTER was due to be paid. Capital losses arising from relevant CGT event cannot be used until they cannot be reduced by future financial benefits received under LTER Amendments will apply to earnout arrangements on or after 24 April 2015 ATO released details of administrative treatment of these measures Conclusion Wrap up Questions Thank you 66 33