look both ways before crossing! business acquisitions – some tips and traps for the unwary

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Look both ways before crossing! Business acquisitions – some tips and traps for the unwary Sean Walsh 24 July 2014 Miller Harris in Business

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Look both ways before crossing! Business acquisitions – some tips and traps for the unwary. 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? - PowerPoint PPT Presentation

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Page 1: Look both ways before crossing! Business acquisitions – some tips and traps for the unwary

Look both waysbefore crossing!

Business acquisitions – some tips and traps for the unwary

Sean Walsh24 July 2014

Miller Harris in Business

Page 2: Look both ways before crossing! Business acquisitions – some tips and traps for the unwary

Common trading vehicles

Sole Trader

Partnership

Company

Trust

Page 3: Look both ways before crossing! Business acquisitions – some tips and traps for the unwary

Issues of priority

What is the nature of the business to be

acquired?

How will the transaction proceed?

Page 4: Look both ways before crossing! Business acquisitions – some tips and traps for the unwary

Asset Sale -v- Share Sale

Buyer - Liability

Seller – CGT 50% Discount

Miller Harris in Business

Page 5: Look both ways before crossing! Business acquisitions – some tips and traps for the unwary

Jen & Joe Consult Co

X Co Pty Ltd

Jennifer 50%

Joe50%

Miller Harris in Business

Shares

Shares

Michelle?

Page 6: Look both ways before crossing! Business acquisitions – some tips and traps for the unwary

For Jen and JoeAsset Sale

No CGT base leads to $465,000.00 in tax

Share SaleNo CGT base leads to $232,500.00 in tax

Miller Harris in Business

Page 7: Look both ways before crossing! Business acquisitions – some tips and traps for the unwary

For MichelleNo stamp duty

No GST

Transaction seamless

However, exposure to liability remains

Miller Harris in Business

Page 8: Look both ways before crossing! Business acquisitions – some tips and traps for the unwary

Is consolidation the answer?

Miller Harris in Business

Page 9: Look both ways before crossing! Business acquisitions – some tips and traps for the unwary

Sole TraderSimplicity

Availability of CGT concessions

Little room for tax planning

Exposure to liability

Miller Harris in Business

Page 10: Look both ways before crossing! Business acquisitions – some tips and traps for the unwary

PartnershipPartnership at Law

Section 5, Partnership Act 1897

-v-

Tax Law Partnership

Section 995-1, Income Assessment Act 1997

Miller Harris in Business

Page 11: Look both ways before crossing! Business acquisitions – some tips and traps for the unwary

Partnership (continued)

Objective test to determine existence – TR 94/8

Formal agreement not determinative

Miller Harris in Business

Page 12: Look both ways before crossing! Business acquisitions – some tips and traps for the unwary

Partnership (continued)

Pros and cons tied to nature of partners

Joint and several liability

Need for formal agreement

Miller Harris in Business

Page 13: Look both ways before crossing! Business acquisitions – some tips and traps for the unwary

CompaniesUnderstandingLimited liabilityAsset protection

Tax rateEntry / exit

Flexibility of distributionsLosses

Capital gains

Miller Harris in Business

Page 14: Look both ways before crossing! Business acquisitions – some tips and traps for the unwary

TrustLimited liabilityAsset protection

Tax rateUnderstanding

Entry / exitLosses

Capital gains

Miller Harris in Business

Page 15: Look both ways before crossing! Business acquisitions – some tips and traps for the unwary

CGT concessions

CGT is relevant to choice of structureTime to deal with that is prior to

acquisition / start up

Miller Harris in Business

Page 16: Look both ways before crossing! Business acquisitions – some tips and traps for the unwary

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

Page 17: Look both ways before crossing! Business acquisitions – some tips and traps for the unwary

The general discount – Subdivision 115 (continued)

Companies excludedDate 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

Page 18: Look both ways before crossing! Business acquisitions – some tips and traps for the unwary

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

Page 19: Look both ways before crossing! Business acquisitions – some tips and traps for the unwary

Particular concessions

The 15 year exemption – Subdivision 152-B

Need for a significant individual

15 year requirement

55 or older

Miller Harris in Business

Page 20: Look both ways before crossing! Business acquisitions – some tips and traps for the unwary

Particular concessionsThe 50% reduction – Subdivision 152-C

Misnomer

Elective relief

No need for significant individual

Miller Harris in Business

Page 21: Look both ways before crossing! Business acquisitions – some tips and traps for the unwary

Particular concessionsThe small business retirement exemption –

Subdivision 152-D

One off $500,000.00 deduction

Significant individual test applies

Miller Harris in Business

Page 22: Look both ways before crossing! Business acquisitions – some tips and traps for the unwary

Particular concessions

Small business rollover – Subdivision 152-E

Deferral of capital gain

Miller Harris in Business

Page 23: Look both ways before crossing! Business acquisitions – some tips and traps for the unwary

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

Page 24: Look both ways before crossing! Business acquisitions – some tips and traps for the unwary

Small business entity

$2 million aggregated turnover test (division

328)

Connected entities included

Tests for control

Miller Harris in Business

Page 25: Look both ways before crossing! Business acquisitions – some tips and traps for the unwary

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

Page 26: Look both ways before crossing! Business acquisitions – some tips and traps for the unwary

The active asset testUse 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

Page 27: Look both ways before crossing! Business acquisitions – some tips and traps for the unwary

Significant individual

Small business participation percentage

relates to the “smaller of” problems with

differing share classes

Miller Harris in Business

Page 28: Look both ways before crossing! Business acquisitions – some tips and traps for the unwary

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

Page 29: Look both ways before crossing! Business acquisitions – some tips and traps for the unwary

Sham structures

Take note of the personal services income regime

Miller Harris in Business

Page 30: Look both ways before crossing! Business acquisitions – some tips and traps for the unwary

Due diligence

Marketing material

What is important to the buyer

What has the buyer in mind

Miller Harris in Business

Page 31: Look both ways before crossing! Business acquisitions – some tips and traps for the unwary

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

Page 32: Look both ways before crossing! Business acquisitions – some tips and traps for the unwary

Employees

Issues with standard REIQ contract

Miller Harris in Business

Page 33: Look both ways before crossing! Business acquisitions – some tips and traps for the unwary

Sean WalshManaging PartnerAccredited Specialist – Business Law

Direct phone: 07 4036 9719Email: [email protected]

Secretary direct: 07 4036 9734Secretary email: [email protected]

PO Box 7655Cairns QLD 4870

Level 8 “Cairns Corporate Tower”15 Lake Street

Cairns QLD 4870

Phone: 07 4036 9700Facsimile: 4031 1525

Email: [email protected]

Miller Harris in Business