Sean Walsh 24 July 2014 Miller Harris in Business

Common trading vehicles Sole Trader Partnership Company Trust

Issues of priority What is the nature of the business to be acquired? How will the transaction proceed?

Asset Sale -v- Share Sale  Buyer - Liability Seller – CGT 50% Discount Miller Harris in Business

Shares

For Jen and Joe Asset Sale No CGT base leads to $465, in tax Share Sale No CGT base leads to $232, in tax Miller Harris in Business

For Michelle No stamp duty No GST Transaction seamless However, exposure to liability remains Miller Harris in Business

Is consolidation the answer? Miller Harris in Business

Sole Trader Simplicity Availability of CGT concessions Little room for tax planning Exposure to liability Miller Harris in Business

Partnership Partnership at Law Section 5, Partnership Act v- Tax Law Partnership Section 995-1, Income Assessment Act 1997 Miller Harris in Business

Partnership (continued) Objective test to determine existence – TR 94/8 Formal agreement not determinative Miller Harris in Business

Partnership (continued) Pros and cons tied to nature of partners Joint and several liability Need for formal agreement Miller Harris in Business

Companies Understanding Limited liability Asset protection Tax rate Entry / exit Flexibility of distributions Losses Capital gains Miller Harris in Business

Trust Limited liability Asset protection Tax rate Understanding Entry / exit Losses Capital gains Miller Harris in Business

CGT concessions CGT is relevant to choice of structure Time to deal with that is prior to acquisition / start up Miller Harris in Business

The general discount – Subdivision 115 Only individuals, trusts and superannuation funds CGT event on or after 21 September 1999 No indexation Ownership for at least 12 months Miller Harris in Business

The general discount – Subdivision 115 (continued) Companies excluded Date of agreement (not settlement) relevant to 12 month rule Indirect application to underlying interests Note CGT event E4 and unit trusts Miller Harris in Business

Small business concessions – Subdivision 152 Basic conditions for relief: CGT event Resultant capital gain At least one of the following applies: Taxpayer is small business entity Taxpayer satisfies maximum net asset value test CGT asset satisfies active asset test Miller Harris in Business

Particular concessions The 15 year exemption – Subdivision 152-B Need for a significant individual 15 year requirement 55 or older Miller Harris in Business

Particular concessions The 50% reduction – Subdivision 152-C Misnomer Elective relief No need for significant individual Miller Harris in Business

Particular concessions The small business retirement exemption – Subdivision 152-D One off $500, deduction Significant individual test applies Miller Harris in Business

Particular concessions Small business rollover – Subdivision 152-E Deferral of capital gain Miller Harris in Business

Critical concepts to understanding the small business concessions What is a small business entity? What is the maximum net asset value test? What is the active asset test? What is a significant individual? Miller Harris in Business

Small business entity $2 million aggregated turnover test (division 328) Connected entities included Tests for control Miller Harris in Business

Maximum net asset value test Connected entities included (same rules apply) $6 million net asset test How to calculate “net” assets Bell -v- FCT (2012) AAT A45 FCT -v- Byrne Hotels Qld Pty Ltd (2011) FCA FC127 Miller Harris in Business

The active asset test Use in business or inherently connected with it Minimum ownership periods for shares or trust interest: Company or trust an Australian resident At least 80% of all assets are active Miller Harris in Business

Significant individual Small business participation percentage relates to the “smaller of” problems with differing share classes Miller Harris in Business

Asset protection and discretionary trust In the matter of Richstar Enterprises Pty Ltd -v- Carey (No. 6) (2006) FCA 814 Kennon -v- Spry Spry -v- Kennon (2008) HCA 56 Miller Harris in Business

Sham structures Take note of the personal services income regime Miller Harris in Business

Due diligence Marketing material What is important to the buyer What has the buyer in mind Miller Harris in Business

Due diligence (continued) Critical questions What is the nature of business and how does it generate income? What assets are critical? What liabilities are intrinsically linked to critical assets? Who are the critical employees? Who are the major customers? Who are the major suppliers? Is goodwill inherently tied to any individual? Miller Harris in Business

Employees Issues with standard REIQ contract Miller Harris in Business

Sean Walsh Managing Partner Accredited Specialist – Business Law Direct phone: Secretary direct: Secretary PO Box 7655 Cairns QLD 4870 Level 8 “Cairns Corporate Tower” 15 Lake Street Cairns QLD 4870 Phone: Facsimile: Miller Harris in Business