Hire and Rental News - February 2017

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16 HIRE AND RENTAL NEWS • FEBRUARY 2017
The seller has access to the CGT discount
Our client John Smith owned all the shares in Smith Pty Ltd.
John set up Smith Pty Ltd 20 years ago and bought the shares
he owns for $1.00. They are now worth $10 million. When
Smith Pty Ltd was set up, its assets including the goodwill of
the business were also worth just $1.00.
John wanted to sell the business and he had instructed his
broker to list Smith Pty Ltd as the vendor on the sales advice
form. We informed him Smith Pty Ltd would realise a taxable
capital gain of $10 million and after paying tax at the current
corporate rate of 30%, it would leave Smith Pty Ltd with after-
tax cash of $7 million. That would be distributed to
John as a fully franked dividend of $7 million (with
the remaining $1 a return of capital). John would
then be subject to top-up tax on the unfranked
dividend of approximately $2 million leaving John
with $5 million in cash.
However, we explained if John were to sell his
shares in Smith Pty Ltd, then after taking into
account the 50% CGT discount (under Division 152
of the Income Tax Assessment Act 1997), he would
realise a taxable capital gain of only $5 million (assuming a top
marginal rate of 50% for simplicity’s sake). The tax payable by John
would be about $2.5 million leaving him with $7.5 million cash.
The savings we could achieve by John selling his shares, rather
than Smith Pty Ltd selling the business, was $2.5 million. John’s
wife, who had been an accountant in her early years but had not
practised as such for over 20 years, argued Smith Pty Ltd could
sell the business and lend the proceeds of sale to John (forever). Of
course, we explained the proposed arrangement would attract the
operation of Division 7A of the Income Tax Assessment Act 1936
and in order to avoid the loan being re-characterised by the ATO as
a taxable dividend to John, a benchmark interest rate would have
to be charged and loan repayments would have to be made.
Non-resident sellers
What if the shares of Smith Pty Ltd were held by UKCo, a company
which is a tax resident of the UK?
One of our clients was in this very situation last month.
Smith Pty Ltd did not own Australian real property and UKCo held
the shares on capital account (ie: UKCo is not a share trader and
did not acquire the shares in the ordinary course of a business or as
part of a profit making undertaking or scheme). In this situation, no
Australian tax would be payable on the sale by UKCo of the shares
in Smith Pty Ltd – although UK tax (currently 20%) may be payable
by UKCo on that profit.
But if Smith Pty Ltd sold its business assets it would pay $3 million
in tax (as in the first example). While it could remit the after-tax
proceeds from the sale as a fully franked dividend to UKCo with no
further Australian tax payable, selling its business assets would still
leave the total Australian tax cost at $3 million.
If UK tax of more than $3 million was payable in relation to either
transaction, and a full tax credit was available for the Australian
tax, then UKCo may be indifferent as between an asset sale and
How to get the best tax outcomes on the
sale of a business
Taxes which are relevant to the selling and buying of a business or shares in a company
include capital gains tax, income tax, stamp duty and GST. If your advisor gets the
structure wrong then thousands of dollars will end up in the hands of the ATO. Leigh
Adams Business Lawyers helps business owners in the sale and purchase of their
businesses and in the sale of shares they own in their trading company. In conjunction
with your accountant, we can get the structure right for you. This generally means more
money for your superfund and your retirement. Leigh Adams discusses how he can help
reduce tax when selling businesses.
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