06 – Start with the end in mind: selling your business

Selling the business should be the aim of virtually every business owner. And selling the business gives rise to one of the best forms of remuneration for advisers: capital gains. 

Capital gains are typically a preferred way of being remunerated. There are at least few reasons for this:

  • Capital gains are typically larger than an amount that can be received as income. This larger, lump sum amount can then be used to do things like acquire other assets with a view to providing either passive income, further capital gains, or both;
  • Capital gains can be received tax-free. You can read about how this happens in this article

In order to take maximum advantage of the CGT small business concessions, it is important that your practice is properly structured. This means choosing the right entity in which to own the practice. 

Typically, this is some form of a trust. The trust can be either a family trust (where the practice derives all or part of its income as business income) or a practice trust

But the practice is not the only way that you can access a capital gain. Another way is to own the premises from which the practice operates. With property purchases, it is even more important that the property is owned in the name of the appropriate owner (which is typically a family trust).  Practice premises are practice assets and thus the CGT small business concessions apply upon their disposal. This means that the practice premises are also a potentially CGT-free asset, as well as having provided what was probably a cash flow positive investment, distributable as business income via the family trust. 

This strategy: build up the practice and own the practice premises, both owned as efficiently as possible, is then often combined with a self managed superannuation fund. Assets within this fund will not be subject to CGT if sold after the fund commences a pension.

Finally, the practitioner buys (perhaps in his or her spouse’s name) a CGT-free main residence – their family home.  

Thus, there are four ways that the practitioner generates CGT-free wealth. Here is how a common presentation may look:

Asset

Value

Owner

CGT Status

Income Tax Profile

Business

$3,000,000

Family trust 1

CGT free

Efficient

Business premises

$2,000,000

Family trust 2

CGT free

Efficient

Home

$2,000,000

Spouse

CGT free

Income tax free

SMSF

$3,000,000

Self and spouse

CGT free

Income tax free

Total

$10,000,000

 

 

 

 

But remember: it is critical that each method of creating wealth be obtained or created in the hands of the right owner. So, start with the end in mind. 

 

The Dover Group