Selling Factory Units

Good afternoon,

After some info on sale of a commercial property.

A factory unit complex (three units one title) is going to sell for around $2.2m.

It was bought before 1985 and is owned by a pty ltd company.

There are two shareholders, both in their 70's.

Both self-funded retirees.

Will the sale be subject to CGT?

What is the best way to extract the money from the pty ltd company with minimum tax implications?

They have asked their tax agent these questions as well but I wanted to see what other info/advice I could get for them too from the brains trust on here!

Thank you!

Melissa

 

If the shares are pre cgt you could look at a members voluntary liquidation.

 

Ask whether the sale of the holding company would trigger the same tax issues as well?

If they're selling the entire business, there may be other tax considerations to consider and savings to be made.

 

They would like to dispose of the company too.

 

A straight sale of the underlying company can be a good strategy. You just have a few checks to make sure the shares retain their pre cgt status. Sometimes if the company is bloated with post CGT assets the shares are deemed as post CGT shares (so you could pay tax on the sale).

Depending on the property value and the location the sale of shares could potentially attract transfer duty.

 

A few different ways. All need legal / tax advice.

Q : Will it be subject to CGT ?
A : Not really. CGT is not a seperate tax. Company tax applies to its assessable income. A company will include in its assessable income the profit on sale from property. However it wont include a pre-CGT asset sale provided that the property has retained exemption. However the difficulty then is how the shareholders extract that profit. If paid as a dividend it is a dividend and not exempt. A special form of dividend that includes capital must be paid.

Options

1. Sell shares in the company to a new owner. See legal advice on whether the transfer is dutiable in the relevant state. (eg NSW land rich rules). If not, then many vendors offer to share the tax saving with the buyer. eg If $100K of duty is avoided then increase the price $50K. However sale of those shares will produce a CGT event for each shareholder. If the shares are pre-CGT that event may be exempt. Not all buyers will be eager to buy shares esp if the company has conducted other activities or had / has debt.

Note : The buyer may then acquire a pre-CGT asset as the company has a continual and maintained ownership. However as demonstrated below their CGT wont be tax free unless they can demonstrate the CGT free nature of their shares on their exit.

2. Members vol liquidation for pre-CGT interest as Ross says. Note this is often very straight forward but very procedural. The company will generally create a capital profits reserve for the pre-CGT profit amount in its accounts. The MVL will pay a special dividend of this amount to shareholders. Careful review of the past shareholding changes and property title will also be needed. Hopefully none have occurred. During liquidation "dividends" arent all alike and more recent cases support this view eg Archer Bros case. The source of the dividend is considered eg the pre-CGT sale of property. CGT tax law (s47 (1)A) ITAA36 contains a "taxable CGT event rule" in the calculation method statement which allows a exempt CGT event to effectively flow to a member (shareholder) as share capital in such cases. The dividend so received is still not exempt. It is a return of share capital. That gives rise to a CGT event for the SHARES. The shareholder ownership period must then be considered. If the shareholder has owned their shares as pre-CGT assets then the CGT profit is exempt. In more complex cases the old shares may need to be exchanged for a special dividend and new shares in the new entity that remains.

Caution : If shareholding has changed eg an adult child inherited Dads old shares then the CGT amount may merely be a discount gain and is not exempt just because the originating asset was. This is because the SHARES are the relevant CGT event. Not the property.

3. Consider if small business CGT concessions apply. If the property has ben rented for rental income then it will be a passive asset and not eleigible. However if used as part of a busienss and an active asset that chnages

4. Consider the GST issues. Determine how GST is to be calculated and determined. A valuation at 1 July 2000 may be required.

5. Also consider what is included in the sale and whether any improvments occurred after Sep 1985. Details of their cost will affect CGT matters and will be required. Eg In 1991 a new retaining wall and driveway and additional parking costing $111,000 was added. This is a post CGT improvement and may be considered a seperate asset to that of the pre-CGT part.

6. Consider the small business superannuation CGT concession which allows non-exempt CGT amounts to be added to super without effect on non concessional caps. This may be effective if some of the property is an active asset rtaher than a passive rental property. The amount is up to $1.4m each. This may be a very effective longer term strategy to allow some sale proceeds to earn tax free income.
Excess contributions tax and how funds report your contributions

7. Consider each shareholder. A non-resident shareholder may be subject to different tax issues. A trust ownership of shares different again. Spouse inheritance a issue and so on.

Q : Do I need to appoint a ":liquidator" to effect a members voluntary liquidation ?
A : No. It may be supported by a competent accountant / tax agent. However it is a formal corporatons act process and a frendly liquidator would be best used. Liquidators regularly do these jobs and may rely on the accountant to do much of the "hackwork" and they will do the formalities.

 

Thank you so much everyone. Much appreciated!