Capital Gains on Client Base Sale

Posted On: Thursday, April 04, 2019

I have a Corporate Client who is selling off part of a Client Base and I’m unsure of the Tax Consequences, although it does appear to be a CGT Event.

The Sale Price is expected to be $175,000.

A Cost base is yet to be established, but it will probably be between $40,000 and $80,000.

It’s all Goodwill.

The ATO have suggested that TR 1999/16 and TR 2005/16 may help me.

The Corporate Client has been operating for some 13 years.

Answer — Let’s work on the basis that the capital gain is a notional $115k.

Example 2 in TR 1999/16 indicates we are dealing with goodwill, but this would have to be determined and confirmed from the terms and conditions of the sale.

We do not see how TR 2005/16 is relevant in any way as this deals with PAYG issues.

Given the business has operated for 13 years, we are clearly dealing with a post CGT (Sept ’85) asset and the 15-year retirement exemption does not apply.

Firstly, are there any capital losses in the company? If so, then these should be offset first.

So, to be clear we are now dealing with the CGT small business concessions.

Given all the SBE CGT conditions have been met, you could apply the active asset (AA) concession (50% reduction) but the application of this illustrates the shortcomings of a company in these instances.

A trust would be effectively able to apply the active asset concession (50%) and then the individual concession (50% of the remaining balance) if the distribution was made to an individual.

This effectively deals with 75% of the capital gain.

In a company you can only apply the AA concession at company level – you then pay out this component of profit as an unfranked dividend then pay individual tax or deal with a Div7A issue.

For this reason, many people in this situation decide to apply the retirement exemption which is up to a lifetime limit of $500k per person.

If the significant individual is less than 55 years of age, then this must be paid into a complying super fund with no contributions tax.

If the individual is over 55 years of age, then there is no requirement that the capital gain be paid into a complying super fund – rather it can be accessed by the individual.



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