Selling the corporate entity rather than the property itself

I've been reading an article about Mirvac buying the Harbourside shopping centre in Darling Harbour a few years ago. What is interesting is they bought the corporate entity (I presume a company as trustee of a unit trust??) rather than the property itself. This has raised my curiosity.

"The transaction involved the sale of the corporate entity controlled by developer John Beville that owned the under-performing shopping centre to a Mirvac unit." http://www.theaustralian.com.au/bus...m/news-story/961b8f86d3463c29a5a3d91981a61191

From my past readings on this forum, I was under the impression it's nearly impossible to sell the corporate entity holding the property because people & their solicitors would be worried about problems with the corporate entity eg. creditors or potential lawsuits that could occur against that entity.

1. Does purchasing the corporate entity rather than the property usually occur at the top end of town?

2. Are only purchasers & their solicitors at the bottom end of town worried about purchasing the corporate entity and always insist on buying the property itself?

3. What corporate entity do you think was involved in such a transaction?

4. What tax benefits would there be selling the entity rather than the property itself?

Interested in hearing some thoughts on this

 

Selling the company can happen and is normally for a larger transaction. We have done it a few times and the purchaser does a tax consolidation and liquidated the original entity.

It gives the seller access to the 50% cgt discount and sometimes the small business cgt concessions.

 

May also avoid having to reissue licence agreements to licensees.

 

We did this in UK for my mother's home when she downsized. Legally it was owned by a family company in which we all had shares. It was the company's only asset.

Option A was for the company to sell the property which was on the books at next to nothing (acquired 1960). It would then have been liable for Corporation Tax at something like 28% and then we would have liquidated the company with each of using being liable for CGT on the proceeds (again base cost of shares negligible).

Option B, which we proceeded with, was to sell the company - in legal terms, each of us selling our shares. Because we escaped the CT tax take we sold at a 20% discount to the property price (but the purchaser can only extract the property from the company by paying this) and the buyer only paid 0.5% stamp duty payable on share transfers rather than 5%? on a property sale. Once the deal went through we each got our share within a matter of days. No doubt for tax reasons the buyer was actually a European company owned by the nominal buyer, not an individual.

As the director of the company I had to complete a massive questionnaire (28 pages IIRC) relating to the company's past - all properties owned in the past, potential for legal claims, financials etc, sign a warranty against future claims, as well as all the usual that goes with selling a property.

 

Ive always wondered about this, but figured there was little value to the seller.
Most 'private' entities are set up with $1 shares. Assume there are 100shares issued.

If you sell the company, holding say $500k of equity for $500k. It makes each share $5000.
Doesnt CGT apply on the $4,999 profit?

Blacky

 

Yes. But you would reduce the sale price for the value of shareholder loans (or capitalise loans).

Their is a massive upside to selling the company.

 

If a company usually gets setup with 100 x $1 shares but nobody actually puts up any cash for the $100 shares anyway, what would stop someone setting up 1 million x $1 shares when the company is initially setup?

 

If there are massive advantages in selling the entity rather than the property, why doesn't everyone in the bottom end of town sell their entity holding the property rather than selling their property itself?

 

Because the due diligence cost by the vendor is very high.

 

Nothing

Unpaid calls on shares are common. Not great for asset protection of course as you owe the money.

 

Im struggling to get my head around this!

Can you give me an example?

Thanks

Blacky

 

If a company owns a house worth $$100k but it has an $80k loan how much is it worth?

 

You buy a company for $1.

You lend the company $2m. The company buys a property worth $2m.

The property is now worth $10m.

If you sell the land the company makes $8m profit and pays $2.4m in tax.

The company repays you your $2m loan (tax free) and declares a $5.6m dividend.

The top up tax on the dividend is $1.52m (assuming top marginal tax rate).

Total tax paid $1.52m + $2.4m = $3.92m

Or the purchaser lends your company $2m. The company repays your loan to you for $2m (tax free).

You sell your shares for $8m. You have a taxable profit from the sale of shares for $4m. You pay tax of $1.96m

So. Sell shares means you pay $1.96m. Sell the property means you pay $3.92m.

Selling the shares gives you access to the 50% CGT discount. Half of the profit on the sale is tax free.

Also. If small business cgt concessions applied (they probably wouldn't) the $1.96m payable on the sale might be tax free as well.

I did a deal with a property in Perth. The purchaser used Lavan Legal for tax and they charged $100k in fees. They used a big 4 for dd but only $20k as it was basically a property so pretty basic.

Anyway. The Lavan fee was high (IMHO) and I thought $35k would have done both - but not my call.

The settlement was tricky but our client saved around $1.2m

 

I have sold a entity that the sole asset was a property (as i did not repay the the depreciation)

Pm me and we can go over it on the phone

 

How big the the deal to warrant $100k in legal charges?

 

$5m

 

The other benefit is stamp duty. In NSW duty has been abolished for the transfer of shares which the company is not land rich - which generally means owning less than $2mil in land.

 

It is a lot of legal cost for such a small deal

 

Yep

 

Actually I never saw the legal fees. The purchaser was negotiating a lower purchase price because of the mess and told us he was paying 100k in legal fees and we should pay those costs.

I asked him to prove it and he refused. He might have been trying it on but my client dropped by 100k as a result.

It would not have been the first time somebody tried to blame the lawyers to get a better outcome.