09/02/2017 CGT and GST Legislation and Business Sales Tax Session - - PDF document

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09/02/2017 1

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

Page 2

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.

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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

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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 5

Case Study - Introduction

►

Refer to page 1 of handout

Page 6

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?

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Sale of Business Assets

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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)

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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)

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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

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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

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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

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CGT Consequences of Sale

Page 14

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 15

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

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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 17

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:

i.

you are a ‘small business entity’ (SBE) for the income year; or

ii.

you satisfy the maximum net asset value test (NAVT); or

iii.

you are a partner in a partnership that is a SBE for the income year and the CGT asset is a partnership asset (and that other business is a SBE)

iv.

you hold the asset passively and it is used by a connected entity, 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 18

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

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CGT Small Business Relief: Small business entity summary

Aggregated turnover Previous Year

• 2

Previous Year

• 1

Current Year Likely Actual Test 1: Previous Year N/A Under $2 million N/A Can be over $2 million Test 2: Likely Test One can be >$2 million Under $2 million N/A Test 3: Actual for Current Year N/A N/A N/A Under $2 million

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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.

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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.

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CGT Small Business Relief: SBE example

► Client’s aggregated annual turnover was as follows: ►

less than $2 million in YE 30/6/12;

►

greater than $2 million in YE 30/6/13;

►

greater than $2 million in YE 30/6/14

►

anticipates annual t/o will be less than $2m for YE 30/6/15

► Is client a SBE for the YE 30/6/14 (i.e. the ‘current year’)? Page 23

CGT Small Business Relief: SBE example (cont’d)

►

To be an SBE, client must satisfy either:

• 1. Aggregated t/o for 2013 year (previous year) less than $2m
• 2. Aggregated t/o for 2014 year (current year) is likely to be less than $2m

under the likely test and 1 of the previous 2 years was less than $2 million

• 3. Aggregated t/o for 2014 year (worked out at end of year) is less than $2m

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CGT Small Business Relief: SBE example (cont’d)

►

Client will not satisfy Test 1 – aggregated t/o in 2013 exceeded $2m;

►

Test 3 failed = Client’s actual aggregated t/o in 2014 exceeded $2m;

►

Therefore, can only be a SBE if satisfy ‘look forward test’

►

If client can demonstrate that budgeted (likely) 2014 t/o less than $2m at 1 July 2013, will qualify as SBE where carrying on a business

►

This is despite its actual annual t/o exceeding $2m in the 2014 year

►

Exclusion does not apply – as the t/o for 2012 year less than $2m (i.e. not both previous years exceeding $2m)

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CGT Small Business Relief: SBE Test (case study cont’d)

Returning to case study:

►

Will BPL be a small business entity?

Page 26

Maximum Net Asset Value Test

►

You satisfy the maximum net asset value test if just before the CGT event, the sum of the following amounts does not exceed $6m:

►

the net value of the CGT assets of yours

►

the net value of the CGT assets of any entities connected with you; and

►

the net value of the CGT assets of any affiliates of yours or entities connected with your affiliates (but only certain assets included)

►

‘Net value’ is the sum of market values of assets, less:

►

Liabilities of the entity that are ‘related to’ the assets; and

►

Provisions for A/L, LSL, unearned income and tax

Page 27

Maximum Net Asset Value Test

Certain assets are excluded from the NAVT – e.g.:

►

Shares or units in a connected entity or affiliate (as these will be otherwise included)

►

Individual’s main residence not used for income producing purposes

►

reasonable calculation of value may be required if partly used for income producing purposes;

►

A right to a super fund or ADF asset of an individual;

►

Assets used solely for personal use and enjoyment of individual or affiliate;

►

A life insurance policy of an individual

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Connected Entities

► ‘Connected’ means: ► either entity, its affiliates or together with its affiliates, ‘controls’ the other;

• r

► entities are controlled by the same third party, its affiliates or together

with its affiliates

Page 29

Connected Entities

► Control ► Company ► rights to 40% of dividends, or capital or voting ► Unit Trust ► entitlement to 40% of income or capital of the trust ► Partnership ► entitlement to 40% of income or capital of the partnership ► Trust ► Looks at distributions of income / capital in last 4 years and whether

the trustee acts (or could reasonably be expected to act) in accordance with the directions / wishes of the entity

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Connected Entities

Indirect Control

►

Entities are also connected where there is indirect control

►

Indirect control applies where:

►

an entity (the first entity) directly controls another entity (the second entity)

►

The first entity is treated as if it also controlled any other entity that is directly or indirectly controlled by the second entity

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Affiliate

►

NAVT also takes into account the net assets of your CGT affiliates (but

• nly includes certain business assets)

►

An individual or company is an affiliate of yours if they act, or could reasonably be expected to act:

►

in accordance with your directions or wishes; or

►

in concert with you in relation to the affairs of the business of the individual or company.

Page 32

Definition of ‘Affiliate’

►

Important points:

►

• nly an individual or a company can be an affiliate

►

an individual or company can only be your affiliate if they are carrying on a business in their own right

►

An entity can only be your affiliate if the entity conducts an actual business and, in the conduct of that business, they act in accordance with your directions or wishes, or in concert with you.

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Definition of Affiliate

►

Spouse or child not automatically your affiliate

►

The following factors will have an influence on whether a spouse is acting in concert:

►

family or close personal relationships

►

financial relationships or dependencies

►

relationships created through links such as common directors, partners or shareholders

►

the degree to which the entities consult with each other on business matters

►

whether one of the entities is under a formal or informal obligation to purchase goods or services or conduct aspects of their business with the

• ther entity

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Active Asset Test

►

Further basic condition that the CGT asset disposed of must be an ‘active asset’.

►

a CGT asset is an active asset where it satisfies either of the following conditions:

►

it is used or held in carrying on business carried on by you; or

►

it is used or held in carrying on a business by your affiliate or a connected entity; or

►

it is an intangible asset inherently connected with business carried on by you, a connected entity, or affiliate (e.g. goodwill)

Page 35

Active Asset Test

►

Active asset includes an asset you own that is used in a business carried on by your affiliate

►

Although the individual does not carry on a business, the premises owned by the individual is an active asset

►

Spouses or children can also be deemed to be affiliates where they use an asset of the taxpayer in their business (therefore asset may be ‘active’ even though not used in business of the taxpayer) Individual Affiliate Owns premises Carries on a business from premises

Page 36

Case Study

►

Returning to case study:

►

BPL is selling business assets (and is therefore the taxpayer)

►

Q: Do David and Victoria’s assets need to be included in the calculation for NAVT purposes?

►

i.e. are they connected entities or affiliates of BPL?

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Case Study

► NAVT ► BPL’s net asset values, net of included liabilities, are $3 million (refer to

handout);

► David & Victoria’s assets are their main residence & personal use

assets, which are not included for the purpose of the NAVT.

► Plus investment property ($450,000) and shares ($3,000) ► ∴ NAVT of BPL and its connected entities (being David & Victoria) is <

$6 million. NAVT satisfied

Page 38 ►

Active Asset Test

►

asset disposal giving rise to capital gain is the goodwill ($2m capital gain);

►

goodwill (an intangible asset) is capable of being an active asset;

►

Inherently connected with the business carried on

►

Needs to be an active asset (i.e. used in a business) for at least half of the period of ownership, or 7.5 years (if asset owned for more than 15 years);

►

the goodwill was internally generated has been owned for more than 7.5 years during the period from the date goodwill was acquired to date sale contract signed Goodwill satisfies the active asset test Therefore, basic conditions are satisfied

Case Study

Page 39

Case Study

►

Once basic conditions are met, there are 4 exemptions that can reduce the CGT payable.

• 1. 15 year exemption (for company)

►

basic conditions are met

►

goodwill (the CGT asset being disposed) must be continuously owned for 15 years - yes

►

BPL had a ‘significant individual’ for at least 15 years during which the goodwill was owned Yes – David and Victoria have both been significant individuals for over 15 years as they have a greater than 20% shareholding in BPL;

►

Significant individual just before the sale of the goodwill must be 55 or

• ver and the sale happen in connection with their retirement ??

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Case Study

• 2. Small Business 50% reduction

►

no additional conditions – applies where basic conditions satisfied

►

means that capital gain can be reduced by 50% Note – 50% CGT discount applied before the 50% reduction

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3. Retirement exemption:

► basic conditions: satisfied; ► company must have at least one significant individual: satisfied; ► amount of gain to be reduced must be rolled into super if under 55.

David and Victoria are both under 55 years and thus the payment must also be rolled over into superannuation; Therefore, retirement exemption conditions all satisfied. The remaining capital gain may be reduced by a further amount of up to $1m ($500k lifetime retirement exemption x 2).

Case Study

Page 42

Case Study

$ Capital gain (sale of goodwill) $2,000,000 Less: 50% small business reduction (1,000,000) Less: retirement exemption payment (1,000,000) Net capital gain Nil

Summary of application of SBR:

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Extraction of Sale Proceeds

Page 44

Case Study - Balance sheet after sale of business

Book value $ Market value $ After sale $ Payment to D&V $ After retirement payments exemption $ Cash at bank 200,000 200,000 3,400,000 (1,000,000) 2,400,000 Trading stock 200,000 200,000

• Debtors

100,000 100,000 100,000 100,000 Plant & equipment 1,000,000 1,000,000

• Goodwill
• 2,000,000
• Other liabilities

(500,000) (500,000) (500,000) (500,000) NET ASSETS 1,000,000 3,000,000 3,000,000 (1,000,000) 2,000,000 Issued capital 10 10 10 Ret earnings 999,990 2,999,990 (1,000,000) 1,999,990 1,000,000 3,000,000 2,000,000 Page 45

Case Study - Extraction of sale proceeds

Q: How can the $1,999,990 be accessed? (Hint – two methods available)

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Case Study - Extraction of sale proceeds - Dividend

David $ Victoria $ Total $ Dividend 999,995 999,995 1,999,990 Gross-up: franking credit 428,569* 428,569 857,138 1,428,564 1,428,564 2,857,128 Tax (top marginal rate) 699,996** 699,996 1,399,992 Less: franking credit (428,569) (428,569) (857,138) Top-up tax payable 271,427 271,427 542,854

*Assumes a 30% corporate tax rate – noting the corporate tax rates are subject to change. Also assumes sufficient franking credits exist to fully frank a dividend (this is not likely to be the case) ** Assumes a top marginal rate of 49% inclusive of Medicare Levy and Budget Repair Levies Page 47

Case Study - Extraction of sale proceeds - Dividend

David $ Victoria $ Total $ Dividend 999,995 999,995 1,999,990 Less: Top-up tax (271,427) (271,427) (542,854) Net after-tax proceeds 728,568 728,568 1,457,136 Amount in super 500,000 500,000 1,000,000 Total after-tax funds 1,228,568 1,228,568 2,457,136

Page 48

Option 2: Sale of entity

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Sale of Entity – CGT Status of Shares or Units

►

Taxpayers in this case are David and Victoria (not BPL)

►

CGT concessions should be considered on the basis that:

►

The taxpayers are individual shareholders (not the company)

►

The assets being sold are shares in BPL (not assets of BPL)

Page 50

Sale of Entity – CGT Status of Shares or Units

►

Sellers should consider whether any shares or units were acquired pre 20 September 1985

►

In some circumstances, sale of pre CGT shares can trigger a capital gain (CGT Event K6)

►

Applies where market value of post CGT property in the company or trust is 75% or more of the net value of the company

►

All post CGT shares in this case (1994 FY)

Page 51

Sale of Entity - Accessing Small Business Relief

►

If the CGT asset is a share in a company, or interest in a trust, you must satisfy either of the following additional basic conditions:

►

you must be a CGT concession stakeholder in the company or trust (you must be an individual); or

►

CGT concession stakeholders in the company or trust have a combined small business participation percentage (SBPP) in you of at least 90%

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Significant Individual - Small Business Participation Percentage

►

A CGT concession stakeholder in a company or trust is an individual who is:

►

a significant individual in the company or trust; or

►

a spouse of a significant individual in the company or trust, provided the spouse has a small business participation percentage (SBPP) in the company or trust greater than zero

Page 53

Significant Individual - Small Business Participation Percentage

►

An individual is a significant individual in a company or trust if the individual has a SBPP in the company or trust of at least 20%

►

The 20% SBPP in another entity is the sum of:

►

the entity's direct SBPP in the other entity; and

►

the entity's indirect SBPP in the other entity

Page 54

Significant Individual - Small Business Participation Percentage

►

An entity's direct SBPP in a company is the smallest of the following:

►

percentage of the voting power;

►

percentage of dividend entitlement;

►

percentage of capital distribution entitlement

►

An entity's direct SBPP in a unit trust is the smallest of the following:

►

percentage entitlement to income

►

percentage entitlement to capital

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Significant Individual - Small Business Participation Percentage

►

An entity's direct SBPP in a discretionary trust is the smallest of the following:

►

if the trustee makes a distribution of income during the year, the percentage distributed to the entity

►

if the trustee makes a distribution of capital during the year, the percentage distributed to the entity

►

If trust does not make a distribution, look to the last year in which a distribution was made.

►

The indirect SBPP is worked out by multiplying the successive direct SBPP through a chain of entities

Page 56

Small business participation percentage - Impact of different classes of shares

►

For an entity to hold a direct SBPP in a company at a particular time, it must have:

►

voting power in the company; or

►

an entitlement in respect of any dividends payable; or

►

an entitlement in respect of any distribution of capital

►

Redeemable shares are not taken into account

►

If the voting, dividend and capital entitlements are different, then you are required to select the ‘smaller or smallest’ percentage

►

Care should be taken if a company has dividend access shares on issue – may need to cancel before sale

Page 57

Case Study - Accessing Small Business Relief

►

David & Victoria have 50% voting, dividend and capital entitlements

►

This means that their SBPP each is 50%

►

SBPP is at least 20%

►

Therefore David & Victoria are both SI’s David & Victoria are both CGT concession stakeholders

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Case Study - Accessing Small Business Relief

►

David & Victoria seeking relief

►

Basic condition:

►

SBE [not applicable as neither David or Victoria carry on a business]

►

NAVT

►

Need to consider the net asset value of:

►

David and Victoria;

►

Entities connected with David & Victoria;

►

Affiliates of David & Victoria

Page 59

Accessing Small Business Relief - NAVT

►

Net asset value of connected entities

►

BPL

►

Affiliates – none

►

Therefore, sum net asset value of David, Victoria, BPL

Page 60

Accessing Small Business Relief - NAVT

Assets Net Value $ Included NAVT $ Main residence 1,730,000

• David’s boat

180,000

• Investment property

450,000 450,000 Shares in BHP 3,000 3,000 Victoria’s Mercedes 250,000

• Superannuation

1,200,000

• BPL

3,000,000 3,000,000 6,563,000 3,453,000 NAVT satisfied

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Page 61

Accessing Small Business Relief - Additional Basic Conditions

►

If the CGT asset is a share in a company, or interest in a trust, you must satisfy either of the following additional conditions [s 152-10(2)]:

►

you are a CGT concession stakeholder in the company or trust (i.e. you must be an individual); or

►

CGT concession stakeholders in the company or trust have a combined small business participation percentage (SBPP) in you (i.e. the shareholder/unit holder) of at least 90%

►

‘CGT concession stakeholder’ is a ‘significant individual’ (SI)

►

SI is a person who, generally, holds at least a 20% interest in the company

Page 62

Accessing Small Business Relief - Additional Basic Conditions

►

David & Victoria are both significant individuals

►

Therefore they are both CGT concession stakeholders

Page 63

Accessing Small Business Relief - Active Asset Test: Shares

• r Units

►

A share or unit can be an active asset but requires you to look through to the entity's underlying assets

►

Broadly, where 80% of the entity's assets were active assets, the share/unit would be an active asset

►

Financial instruments (such as loans, options) are expressly excluded from being active assets – they do not count towards the 80% threshold

►

Where these assets, including cash, are inherently connected with the business the entity carries on, they count towards satisfying the 80% threshold

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Accessing Small Business Relief - Active Asset Test: Shares

• r Units

►

A share or unit is an active asset at a point in time if [s 152-40(1), (3)]:

►

the market value of the active assets of the entity; and

►

the market value of any financial instruments inherently connected with a business the entity carries on; and

►

any cash of the entity that is inherently connected with such a business is 80% or more of the market value of all the entity's assets

►

For example, cash at bank holding working capital funds will count towards satisfying the 80% threshold

►

Note that surplus cash, or amounts held in a term deposit, would not count

Page 65

Accessing Small Business Relief - Active Asset Test: Shares

• r Units

►

The assets of BPL are used or held ready for use in the course of carrying on its business;

►

The cash is inherently connected with such a business

►

Therefore, 100% of the assets are active assets i.e. >80% Active asset test satisfied for shares

Page 66

Case Study - Accessing Small Business Relief

15 year exemption [Subdiv 152-B]

►

Basic conditions are met

►

Shares continuously owned for 15 years: ??

►

Sale happens in connection with retirement of a significant individual who is 55 years or over - both under 55 years: ??

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Case Study - Accessing Small Business Relief

50% active asset reduction [Subdiv 152-C]

►

No additional conditions

►

Capital gain can be reduced by 50%

Page 68

Case Study - Accessing Small Business Relief

Retirement exemption [Subdiv 152-D]

►

Basic conditions are met

►

If CGT concession stakeholder under 55, CGT exempt component to be rolled over to superannuation: satisfied

►

Amount to be paid into superannuation is the amount of capital gain being reduced (50% each to David & Victoria)

Page 69

Sale of Entity - CGT Computations

Enterprise value

►

Estimated market value of the company is $3m (refer to handout)

►

This is the price shares will be sold for (capital proceeds)

►

Allocation of capital proceeds for shares:

Shareholder Number

• f Shares

Capital Proceeds $ David 5 1,500,000 Victoria 5 1,500,000 Total 10 3,000,000

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Page 70

Sale of Entity - CGT Computations

CGT computation:

David $ Victoria $ Total $ Capital proceeds 1,500,000 1,500,000 3,000,000 less: cost base (5) (5) (10) Gross capital gain 1,499,995 1,499,995 2,999,990 Less: 50% CGT discount (749,997) (749,997) (1,399,999) Less: 50% small business reduction (374,998) (374,998) (749,997) Less: retirement exemption (374,998) (374,998) (374,998) Net capital gain

• Tax
• Page 71

Sale of Entity - CGT Computations

Net after-tax position:

David $ Victoria $ Total $ Capital proceeds 1,500,000 1,500,000 3,000,000 less: CGT on disposal of shares

• Less: rolled over CGT exempt amounts

in super (374,998) (374,998) (749,997) Net cash position 1,125,002 1,125,002 2,250,003 Add: CGT exempt amts in super 374,998 374,998 749,997 Net cash and super position 1,500,000 1,500,000 3,000,000

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Summary of After-Tax Outcome - Sale of Assets v Sale of Entity

Sale of shares produces the optimal after-tax outcome for David and Victoria

Cash $ Super $ Cash & super $ Net saving compared to dividend $ Option 1 (Dividend) 1,457,136 1,000,000 2,457,136 n/a Option 2 2,250,003 749,997 3,000,000 542,864 ►

NB the tax difference would not be as material if the sellers did not want to immediately access all of the cash from the sale

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CGT Small Business Relief - Planning

Page 74

Planning Opportunities

►

Clients contemplating selling their business may be eligible for CGT relief

►

Strategies that could be considered to assist with meeting the NAVT include:

1.

Making contributions to super

2.

Acquiring personal use assets

3.

Selling ‘included’ assets and using the proceeds/gains to pay down private debt (i.e. mortgage on main residence)

4.

Making a donation NB borrowing money to acquire an ‘excluded’ asset may not be beneficial

►

Consideration should be given to whether any such strategy breaches the ‘anti avoidance’ rules

►

Timing?

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Planning Opportunities

Recommend advice always be sought – issues are complex!

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New Withholding Tax Rules

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Withholding Tax Rules

►

From 1 July 2016, acquisitions of taxable Australian property > $2 million from foreign residents will be subject to a 10% WHT

►

For acquisitions of direct property interests:

►

Purchaser must withhold 10% of the purchase price unless ATO clearance certificate is issued confirming seller’s residency irrespective of whether seller is a resident or not

►

For acquisitions of indirect interests (i.e. shares in a landholding entity):

►

Purchaser must withhold if they know or have reason to believe, the seller is foreign resident

►

Sellers will need to obtain clearance certificates from the ATO (annual certificates can be obtained)

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Questions?

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Buying/Selling Businesses - GST Considerations

Page 80

Sale of a Business - Potential GST Treatments

Asset Deal

►Taxable ►GST-free going concern ►Other (e.g. farmland)

Share Deal

►Input Taxed

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GST-Free SOGC – Advantages / Disadvantages

Buyer Seller Advantages

►

Does not need to

• btain additional

funds to cover GST

►

Stamp Duty savings

►

GST cash flow

►

Recovery of input tax credits Disadvantages

►

Self-imposition of GST if used to make input taxed supplies

►

Prima facie liable (for GST, penalties, interest) if ineligible

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GST-Free SOGC - Requirements

GST-free treatment if all of the following requirements are satisfied:

1.

The supply is of an identifiable ‘enterprise’.

2.

The supply is for consideration.

3.

The recipient is registered or required to be registered for GST.

4.

The supplier and the recipient have agreed in writing that the supply is of a going concern.

5.

The supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise.

6.

The supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as part of a larger enterprise carried on by the supplier).

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Requirement 1

The supply is of an identifiable ‘enterprise’.

►

Can be an entire business or a part of a business that can be operated independently.

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Requirement 1 - Example

Example 1

►

Barry’s Bakeries (“BB”) is a chain of retail bakeries conducted by Pastries Pty Ltd (“P”).

►

P sells the bakery operating in Perth to Pies & Things (“P&T”). Can the sale of the single bakery be a ‘supply of going concern’ for GST purposes?

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Requirement 2

The supply is for consideration.

►

Something provided in return.

►

It can be monetary or non-monetary (or both).

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Requirement 3

The recipient is registered or required to be registered for GST.

►

If the recipient is not required to be registered for GST, but chooses to voluntarily register for GST, the requirement will not be satisfied until the GST registration is processed (i.e. if the application is pending, it is insufficient in a voluntary registration scenario).

►

The effective date of the GST registration must be on or before the date of the supply.

►

The recipient’s GST registration status is usually confirmed in the sale agreement. Example clause: The Purchaser warrants that it will be registered or required to be registered for GST at the date of the supply.

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Requirement 3 - Example

Example 2

►

Western Go-Karts (“WGK”) intends to sell its go-kart racing business to Eastern Racers (“ER”) for $200,000.

►

WGK will transfer to ER all of the things necessary for the continued

• peration of the enterprise and will carry on the enterprise until the day of the

supply.

►

ER is a newly incorporated company. It is not currently registered for GST.

►

ER expects to generate $10,000 per month from customer sales across the next 12 months.

►

The parties will agree in the sale contract that the supply is of a going concern. Can the sale of the go-kart racing business be a ‘supply of a going concern’ for GST purposes?

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Requirement 4

The supplier and the recipient have agreed in writing that the supply is of a going concern.

►

The agreement must:

►

Be made by the supplier and the recipient.

►

Be explicit.

►

Be made on or before the date of the supply.

►

The agreement can be made in a separate document from the sale agreement.

►

Simply having the clause does not mean that the sale qualifies as a GST-free SOGC.

►

Example clause: The Vendor and the Purchaser agree that the supply of [enterprise being supplied] pursuant to this Agreement is the supply of a going concern for the purposes of section 38-325 of the GST Act and that the supply is GST-free for the purposes of GST law.

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Requirement 5

The supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise.

►

A thing is considered necessary if the enterprise could not be operated by the recipient in the absence of the thing.

►

Necessary assets (e.g. premises, plant and equipment, trading stock, raw materials, goodwill, contracts, intellectual property, restrictive covenants, licences and permits etc.)

►

Operating structure and processes (e.g. ongoing advertising, promotion, manuals etc.)

►

The ability of the recipient to provide some of the necessary things is not a relevant consideration.

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Requirement 5

►

In some circumstances, it may not be possible for a supplier to transfer or convey some of the necessary things.

►

The thing can be brought into existence on the day of the supply.

►

There is generally a clause similar to the example clause below included in the sale agreement. Example clause: The Vendor will supply to the Purchaser all of the things necessary for the continued operation of the operation of the enterprise.

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Requirement 5

Premises

►

Where particular premises are necessary for the continued operation of an enterprise, the premises must be supplied.

►

Where an enterprise is necessarily conducted from premises, but particular premises are not necessary, then suitable premises, or the right to occupy such premises, must be supplied.

►

In limited circumstances, an enterprise may not need to operate from premises and therefore premises are not one of the things necessary for the continued operation of the enterprise and do not need to be supplied.

►

Many enterprises operate from leased premises. The supplier may supply the lease either by assigning the lease or by surrendering the lease and facilitating the entry by the recipient into a lease or agreement to lease the same premises by the day of the supply.

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Requirement 5

Staff

►

Employees are not ‘things’ capable of being supplied.

►

Employment contracts are personal contracts and are incapable of assignment.

►

Some entities have key personnel whose skills and knowledge are so unique and integral to the continued operation of the enterprise that the enterprise could not be conducted without the services of the particular employee. In such a case, the supplier must take all reasonable steps to facilitate the transfer of such skills and knowledge.

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Requirement 5 - Example

Example 3

►

Ben (“B”) conducts a mobile mechanic business.

►

He has a specially fitted out van which carries all his tools and equipment.

►

B travels widely through the metropolitan area and carries out repairs at clients’ premises. B does not have a workshop of his own where repairs can be performed.

►

B enters into an agreement with Pistons (“P”), a company that owns several motor repair workshops and has a number of vans, to sell his business.

►

Under the arrangement, B supplies his client list, the business’ mobile telephone number, goodwill and equipment and tools. Will B be supplying P with all of the things that are necessary for the continued

• peration of the enterprise?

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Requirement 5 - Example

Example 4

►

George (“G”) is a computer programmer with TechSolutions (“TS”), an entity that conducts a software business.

►

G developed TS’ best selling software and is the only person capable of updating the software and debugging it.

►

G’s skills and knowledge are integral to the operation of the enterprise.

►

TS is selling its business to DigiData (“DD”) for $250,000.

►

G will not become an employee of DD. However, prior to the sale, G prepares a manual of how to update and debug the software.

►

The parties agree in the sale agreement that the transaction is a supply of a going concern. Will TS be supplying DD with all of the things that are necessary for the continued operation of the enterprise?

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Requirement 5 - Example

Example 5

►

Gone Fishin’ (GF) is selling its commercial fishing enterprise to Fresh Seafood (FS).

►

GF has the necessary fishing licence from the State Government.

►

The fishing licence is not able to be transferred to another entity.

►

Prior to the sale, GF surrenders its fishing licence and asks the State Government Authority to reissue it to FS.

►

It is highly probable that the State Government Authority will reissue the fishing licence to FS. Will GF be supplying FS with all of the things that are necessary for the continued

• peration of the enterprise?

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Requirement 6

The supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as part of a larger enterprise carried on by the supplier).

►

‘Day of supply’ – the date when the recipient assumes effective control and possession of the enterprise.

►

The recipient does not need to carry on the enterprise after the date of supply.

►

A brief interruption in some activities will not always be regarded as ceasing the operation of the enterprise.

►

The activity of leasing a building which has previously been leased to a tenant remains an enterprise of leasing during the period of temporary vacancy when a new tenant is being actively sought by the building owner.

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Requirement 6

►

Where a building has not previously been leased to a tenant, but is being actively marketed, an enterprise of leasing is not operating until the activity of leasing commences.

►

There is generally a clause similar to the example clause below included in the sale agreement. Example clause: The Vendor will carry on the enterprise until the day of the supply.

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Requirement 6 - Example

Example 6

►

Western Properties (“WP”) enters into a contract to sell a large commercial building which it has leased out for several years.

►

At the time of sale, the building has only one tenant which occupies a part of the available floor space.

►

The balance of the floor space was previously tenanted but is currently available for lease and the trust has engaged a leasing agent to find new tenants.

►

What is the ‘enterprise’?

►

Would WP be considered to be carrying on the enterprise until the day of the supply?

►

To what extent?

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Requirement 6 - Example

Example 7

►

Eastern Properties (“EP”) enters into a contract to sell a large commercial building which it has leased out for several years.

►

All floors have been previously tenanted, but at the time of sale, the building has no tenants.

►

A number of floors are available for lease and the company has engaged a leasing agent to secure tenants for those floors.

►

The remaining floors are being refurbished and these floors are neither tenanted nor actively marketed.

►

What is the ‘enterprise’?

►

Would EP be considered to be carrying on the enterprise until the day of the supply?

►

To what extent?

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Other Considerations - GST Contract Clauses

►

Define the enterprise.

►

Definition of GST.

►

Terms used in the GST clause have the same meaning as the GST law (unless otherwise defined).

►

Agreement by the supplier and the recipient that the supply of the enterprise is of a going concern.

►

Warranties

►

GST registration status of buyer.

►

The supplier will supply to the purchaser all of the things necessary for the continued operation of the enterprise.

►

The supplier will carry on the enterprise until the day of the supply.

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Other Considerations - GST Contract Clauses

►

GST gross-up clause (requires the recipient to provide an additional amount

• f consideration to the supplier in respect of GST in the event that the supply

is subject to GST).

►

Indemnities

►

Recipient indemnifies the supplier for any interest and penalties if it is later determined that the supply is subject to GST.

Page 102

Case Study 1

►

Jessica Smith (“JS”) operates a pharmacy in premises she leases from ABC Co.

►

JS is a director of ABC Co.

►

JS intends to sell the pharmacy business to Gary Jones (“GJ”) (who is registered for GST) for $150,000.

►

The parties will agree in the sale contract for the supply to be of a going concern for GST purposes. What ‘things’ would need to transferred by JS to GJ for the transaction to be eligible to be supplied as a GST-free supply of a going concern? What other GST-related clauses should JS look to incorporate into the sale contract? What would be the case if JS paid a commercial rate of rent monthly in advance, but did not have a formal lease agreement in place with ABC Co?

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Case Study 2

►

Tim Bell (“TB”) operates a deli from premises that he owns.

►

TB intends to sell the deli business to Sarah Nelson (“SN”) (who is registered for GST) for $120,000.

►

TB will retain ownership of the business premises.

►

The parties will agree in the sale contract for the supply to be of a going concern for GST purposes. Can the sale of the business be a GST-free supply of a going concern?

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Case Study 3

►

X Co owns a property on prime riverfront land.

►

The property is leased to a family who operate a restaurant.

►

X Co intends to sell the property to Y Co (who is registered for GST).

►

Prior to the sale, X Co arranges for the lease to be assigned to Y Co with effect from the date of supply.

►

After a year, Y Co intends to demolish the restaurant, subdivide the property and develop 3 houses which it plans to lease.

►

In the contract, the parties agree for the sale to be of a going concern for GST purposes. Can this transaction be a GST-free supply of a going concern? Would it be in the buyer’s interests for the transaction to be a GST-free supply of a going concern?

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Examples - Solutions

Example 1

►

• Yes. As the Perth bakery is part of the larger enterprise conducted by P and is operating as an

independent enterprise, it is capable of being supplied as a going concern for GST purposes. Example 2

►

• Yes. Although ER is not currently registered for GST, it is required to be registered for GST. The date
• f effect of the GST registration will need to be prior to the date of the supply.

Example 3

►

• No. The business is a mobile mechanic business. The van would be considered to be something

necessary to the continued operation of the enterprise. It does not matter that P has other vans that it could use. Example 4

►

• Yes. G’s specialist skills and knowledge would be considered to be something necessary to the

continued operation of the enterprise. These skills will be transferred to DD as they will be documented by G prior to the supply.

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Examples - Solutions

Example 5

►

Likely Yes. The fishing licence would be considered to be something necessary to the continued

• peration of the enterprise. There was a statutory impediment to the transfer of the licence. The

surrender of the licence, request for its reissue to FS and probable likelihood that it will be reissued to FS is likely to be considered sufficient. Example 6

►

Leasing enterprise.

►

Yes.

►

Wholly – a lease remains in place for some of the floor space and the vacant floors have previously been tenanted and are being actively marketed. Example 7

►

Leasing enterprise.

►

Yes.

►

Wholly – the vacant floors have previously been tenanted and are either being actively marketed or

• refurbished. Refurbishment of floors is one of the activities of the enterprise.

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Case Studies - Solutions

Case Study 1

►

Relevant ‘things’ would include: stock, plant and equipment, licences, premises etc.

►

Relevant clauses would include:

►

GST gross-up clause.

►

Indemnity for interest and penalties.

►

Warranty of the buyer’s GST registration status.

►

Would be ok provided the periodic tenancy at the date of supply has not terminated and will continue. Case Study 2

►

Yes – provided TB makes the premises available to SN. Case Study 3

►

Yes

►

Probably not. The leasing of residential premises is input taxed for GST purposes. As such Y Co’s intention for the property, it would likely need to self-impose GST on the supply of the enterprise, that it may not be entitled to recover.

Page 108

Questions?

►

Emma Barns

►

Senior Manager, Ernst & Young

►

(08) 9429 2468

►

emma.barns@au.ey.com

►

Peter Dolzadelli

►

Senior Manager, Ernst & Young

►

(08) 9429 2267

►

peter.dolzadelli@au.ey.com