BUSI­NESS MAT­TERS

Re­tir­ing? Real es­tate agen­cies are per­fectly po­si­tioned to take ad­van­tage of a num­ber of tax con­ces­sions when they exit their busi­nesses as long as the rules are fol­lowed. John Knight ex­plains.

Elite Agent - - CONTENTS - John Knight

It is not of­ten as an ac­coun­tant that I can tell a client they have no tax to pay on the sale of their busi­ness. For many real es­tate agen­cies, how­ever, that is ex­actly the case thanks to the Small Busi­ness CGT (SBCGT) Con­ces­sions.

It doesn't mat­ter whether you are sell­ing all of your busi­ness, part of your busi­ness, units in a unit trust, or even just shares in the com­pany that op­er­ates the busi­ness. How­ever, there are some hard-fast cri­te­ria you must meet to be el­i­gi­ble for these con­ces­sions.

These rules are com­plex, but let me share with you a sim­ple case study of a fairly typ­i­cal real es­tate agency so you can see the ben­e­fits of plan­ning ahead when you are con­tem­plat­ing an exit.

Joe and Flo started Sun­rise Real Es­tate in 1995. They have worked in the busi­ness since then – Joe looks af­ter the back of­fice and the rent roll while Flo is the lead­ing sales agent for the of­fice. They op­er­ate in a com­pany struc­ture but now want to exit the busi­ness and have agreed to sell the shares in the com­pany to their lead­ing prop­erty man­ager for four mil­lion dol­lars. They have no other as­sets, other than their house and su­per­an­nu­a­tion, and are both now 60 years of age.

Joe and Flo meet the ba­sic eli­gi­bil­ity re­quire­ments for the Small Busi­ness CGT (SBCGT) Con­ces­sions, in this case be­ing:

Sell­ing shares in a com­pany that has al­ways car­ried on busi­ness.

An­nual turnover is more than $2 dol­lars, but their net as­sets (that is, net of debt) are less than $6 mil­lion ex­clud­ing their home, su­per­an­nu­a­tion and other per­sonal use as­sets.

They have never bought non­busi­ness as­sets in the com­pany and never bor­rowed sig­nif­i­cant amounts from the com­pany.

Shares in the com­pany are cur­rently owned by a fam­ily trust, but they have al­ways dis­trib­uted div­i­dends on a 50:50 ba­sis from the trust.

Joe and Flo both plan to re­tire on the sale of the busi­ness; this sale is specif­i­cally in con­nec­tion with their re­tire­ment.

Be­cause Joe and Flo have op­er­ated the busi­ness for more than 15 years and they have met the ba­sic eli­gi­bil­ity cri­te­ria, they will pay no tax on the sale of the busi­ness, us­ing the 15 Year Ex­emp­tion un­der the SBCGT Con­ces­sions. That's $4 mil­lion tax-free.

Joe and Flo walked away from the busi­ness with a smile on their face, but let's imag­ine an al­ter­na­tive sce­nario.

Let's as­sume now that Joe and Flo only started the busi­ness in 2005, 13 years ago. Both 60, they are worn out and need a break but may still con­tract as sales agents to the busi­ness af­ter they have sold it.

In this case, tax con­ces­sions would be ap­plied as fol­lows:

Al­though Joe and Flo do not plan to fully re­tire, they can still exit the busi­ness, crys­tallise a tax-free gain on sale and are well set up for the fu­ture.

I do not want to un­der­es­ti­mate the com­plex­ity be­hind meet­ing the re­quire­ments for the SBCGT Con­ces­sions, but these rules are made for busi­nesses like real es­tate agen­cies.

You can also use the SBCGT Con­ces­sions to bulk up the bal­ance of your su­per­an­nu­a­tion as they fall out­side the nor­mal su­per-con­tri­bu­tion rules. If you are un­der the age of 55 at the time of the sale, to be el­i­gi­ble for the Re­tire­ment Ex­emp­tion you may need to con­trib­ute the amount to su­per­an­nu­a­tion if you don't want to pay tax on the sale.

There are many tricks and traps with these rules. If you can meet the re­quire­ments, great! If not, maybe put a plan in place to work to­wards meet­ing the re­quire­ments by the time you exit, be­cause the ben­e­fits are sig­nif­i­cant. There are many other vari­a­tions and sce­nar­ios which would ap­ply the con­ces­sions dif­fer­ently, so please seek ad­vice from an ex­pert to help. Please note that these sce­nar­ios and com­ments are in­tended to only be gen­eral in na­ture. You must con­sider your own spe­cific cir­cum­stances. Leg­is­la­tion may change at any point in time; there is cur­rently a bill be­fore Par­lia­ment to make some mi­nor changes to the ba­sic eli­gi­bil­ity re­quire­ments, but we still see a great ap­pli­ca­tion to the real es­tate in­dus­try.

LET ME SHARE WITH YOU A SIM­PLE CASE STUDY OF A FAIRLY TYP­I­CAL REAL ES­TATE AGENCY.

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