Business sale structuring

Say the buyer wants to buy the business, but is nervous about buying the operating entity due to skeletons in the closet (e.g. a future tax audit). The seller is really keen on doing a share sale, instead of an asset sale, because tax advantages.

So we have an impasse - the seller wants to sell the shares - the buyer wants to buy the assets not the shares.

Does the following workaround work?

1. Seller makes a new entity N, N buys all shares of operating entity O at the arms length commercial price (say, $10,000). Seller enjoys CGT discount, active assets discount etc. Great.
2. N then takes all of O's assets, puts it into N. This step is a bit fuzzy - what is required here for asset transfer from subsidiary to parent? can the ATO's small business restructure rollover be used?
3. N then sells these assets to the seller as an asset sale, for $10,000. Now, in N's books, it paid $10,000 for shares, and it received $10,000 for sale of assets it extracted from O.
4. Cleanup stage: the owner of N (the original seller) winds up N, and no tax is payable at this stage since it paid as much as it received.
5. Part IVA considerations - the structure isn't to avoid tax, since the seller was entitled to cgt and active assets discounts anyway, it's really to present the buyer with his preferred structure. Right?

Is this possible?

 

Depends on what you are trying to work around.

 

Trying to give buyer what he preferred in the first place, whcih is to buy business assets, not an entity with potential future tax audit.

 

Would they accept such an arrangement?

 

To them they are buying assets from a clean entity with no history. What are some things they need to be concerned about?

 

They should seek legal advice as even new companies can have liabilities - present or future.

 

But they're buying assets not the entity - what liabilities could go with an asset?

 

in that case they would need to consider the clawback provisions of the conveyancing acts and the bankruptcy acts, succession acts, family law act, personal properties securities act etc

 

Interesting

but generally what are the chances of any of these clawbacks happening if all transactions are arms length and properly priced at each transfer, and there's no occurrence of bankruptcy, divorce, death?

 

I see you intend to use small business CGT concessions, really you need to pay for specific advice. ATO is all over this stuff these days. You won’t get what you need here for free....and if you did, I wouldn’t rely on it for such an important transaction. CBD based small-medium CA firm, dealing with predominantly with private business / owners is a good starting point, you’ll want to meet the principal/partner to discuss options.

 

And pay a few thousand as well

 

Absolutely. Happy to pay a few thousand or more. The main maybe right now is whether the buyer will accept this. I've got an important phone call tomorrow, but if I can sell this idea to them, then my next step is to pay a few thousand for proper advice. But before I can even attempt to sell them this idea, I need to know, roughly, if this is possible in principle. Hence my post here, hoping you helpful bunch can assist. Sort of a chicken and egg situation, but please don't get me wrong, I'm not trying to save money here.

 

ANything is possible. But you need to consider the consequences and ramifications of structuring the transaction different ways.

 

Thanks very much. I'll take it as a "yes, but...". I'll push for this structure and if they agree in principle I'll seek advice. If anyone has anything further to add, or even a more efficient way of achieving what I want, I'm all ears.

 

You will fail on the safe harbour provisions for the small business restructure provisions.

Genuine restructure - safe harbour:

Bill provides a safe harbour which deems a SBE to satisfy genuine restructure requirement where, for three years following roll-over:

- there is no change in ultimate economic ownership of assets of the business (other than trading stock) that were transferred under the transaction
- those significant assets continue to be active assets; and
-there is no significant or material use of those significant assets for private purposes.

Why not use the other small business cgt concessions. Dont think the small business restructure provision is appropriate for your situation.

Why dont you sell the assets from the current entity an apply the small business cgt concessions (assuming they apply) to that sale.

You say there are tax advantages for selling the shares but without understanding how the small business cgt concessions (not the small business restructure provisions) apply means you might be making things more complex for the purchaser than necessary. There may be no tax advantage from an alternative. Without the advice you wont know.

 

Thanks for this. I was really unsure when I linked that provision whether it even applied.

But do I even need any provision here though? If N buys O for $10000, O's owner gets the CGT discount + active asset discount, which is the goal. N then transfers O's assets out of O and into N, for the transfer price of whatever, say, $9999. N records this as a loan from O to N, or it actually pays, doesn't matter. N then sells the assets onto the buyer, for $10,000. N also sells the shares of O (now empty) to someone, e.g. the original seller, for $1. So here are the accounts:

seller: sold O to N for $10000. bought O for $1. Gets benefit of CGT discount and active assets discount.

N: bought O for $10000, bought O's assets from O for $9999. Sold O for $1. Sold O's assets for $10000. Capital gain on assets of 10000-9999=1. Capital loss on O of 10000-1=9999. Net capital gain = 0.

O: sold assets for $9999.

Ok here's where I'm stuck. O and N would then be wound up at this point. How do I get the $9999 out of O?

 

O would ned to pay a dividend, wage, or a div7A loan to a shareholder to get the money out.

 

there are rules within the small business CGT concessions as to how amounts paid out of a company or trust are treated. many of them tax effective. and no he doesnt need to pay any of those to get it out.

 

why only the active asset concessions. there are other concessions. the 15 year retirement exemption and the retirement exemption. you may decide to not even apply the active asset concessions

you know evough but not enough for this to be very dangerous.

 

Are there any state law interactions that are material to this situation? reason I'm asking is I'm very likely to need to pay someone for advice but you're in VIC and I'm in NSW