Question:
Scenario: The seller has been in practice as a sole trader for over 27 years, just turned 60, and starting to prepare for semi-retirement.
A colleague has had discussions about buying 50% of the business and eventually owning 100% down the track so are putting this in place intending to buy in on 1July 2021.
The buyer does not hold a tax agents’ licence at this stage but is in the process of getting this organised. A consultant has been engaged to assist with agreements etc. during this transition.
The colleague already has a Company and Discretionary Trust which could possibly be a shareholder in a new company with both involved.
What is the best structure going forward also do you have any advice on how to minimise CGT issues on the sale of 50% and then down the track the further sale?
Answer
Consider selling as a sole trader, the 50% interest in the firm would qualify as an active asset.
The seller could then roll over their partnership interests into a company.
Note, we suggest doing this immediately after the sale.
We would recommend against using a partnership of individuals, as partners can be jointly and severally liable.
CGT on the sale will be covered under the small business concessions, by the active asset 50% discount, followed by the individual 50% discount along with the retirement exemption to cover the balance.
Given the seller is over 55 years of age, they do not have to have to place the funds for the retirement exemption deduction into a super fund – they effectively have a choice.
If a rollover is correctly done into a company, then they will enjoy the existing concessions.
When retiring, they will be able to sell the shares in the business and enjoy the abovementioned concessions or the 15-year exemption.
The incoming partner will have his thoughts, and these will need to be considered.