As accountants and taxation advisers, we are continually assisting those clients looking to buy, sell or restructure their businesses. As a result, we are often presented with opportunities to improve the portfolios of our clients and are exposed to unique problems that require innovative solutions. We are able to assist most clients in navigating any hurdle in order to simplify and streamline their transactions while maximising their effectiveness. On the other side of things, we are occasionally exposed to businesses who did not have access to appropriate advice, and these individuals are then faced with consequences that can be quite stressful, cumbersome and expensive to rectify.
While there are many points to consider before any significant business transaction, some key considerations are detailed below:
Understand your tax bill before selling your business
If selling your business, we suggest you consider the tax implications before doing so, as any tax expense may have a significant impact on the necessary sale price, and on how any proceeds might need to be used. Whilst there are a number of tax concessions available to reduce the amount of tax payable upon the sale of a business, it is important to understand these provisions in advance to maximise their benefits.
Choose a structure that works for the future
When buying a business, choose a structure that allows you to grow in the future without incurring significant costs. The best structures will allow you to make changes to maximise asset protection outcomes while also managing the amount of tax payable as the business’ profit grows.
Ineffective structures can leave a business trapped in a higher tax environment with poor asset protection outcomes. While these structures may appear cost-effective initially, they can quickly become far more costly than devising an appropriate structure from the outset.
Understand tax concessions available for restructures
When planning your business restructure, seek advice on the small business restructure provisions that came into effect on 1 July 2016. Many small businesses are now able to move from one legal structure to another without incurring income tax liabilities. While the provisions are quite broad, there are still circumstances where these concessions cannot be accessed. Therefore, appropriate planning is important before the restructure transaction.
For larger and more complex groups looking to restructure their businesses, the need for planning becomes even more critical. While larger businesses can still access a number of restructuring provisions, the potential savings (or costs) can increase significantly, and the complexity of the applicable legislation is also increased.
Know the true value of your business before you complete your restructure
While stamp duties on business restructures have been abolished in most states, you still need to understand the value of your business in order to apply many of the ATO’s restructure provisions.
Contrary to popular belief, there is more science than witchcraft in business valuations, and the ATO will often require a formal valuation or at least proper valuation calculations in order to ensure that a restructure complies with the relevant tax rules.
Too often the ATO finds that a taxpayer has used a back-of-the-envelope calculation that is significantly different from the true business value – which can result in significant penalties. The best way to avoid such a situation is to ensure that an appropriate valuation has been conducted before the restructure, and the taxpayer can then use this valuation as a basis for the restructure.
Prepare for ATO scrutiny
When purchasing, selling or restructuring any business, there is always an inherent risk of ATO scrutiny. Therefore, we recommend that clients obtain appropriate tax audit insurance prior to such transactions. ATO scrutiny is continually increasing as policies and legislation evolves. Capital Gains Tax as well as GST events are two key areas in which considerable increases in ATO scrutiny have been identified.
Even with a well-planned transaction, an ATO enquiry could be complex and time-consuming, resulting in significant costs. Audit insurance is designed to cover such costs by providing clients with the confidence and reassurance to achieve their goals by enabling them to focus on managing their businesses and investments without worrying about the potential costs of an ATO enquiry.
Given the significant difference that can be made by conducting appropriate planning before a business purchase, sale or restructure, we encourage anyone looking to undertake such a transaction to consider the above five key areas before things are set in stone.
So if you’re looking to buy, sell or restructure your business in 2018, we recommend you contact your adviser for further guidance.