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We can talk about our services, and how significantly they assist your client’s outcomes, all day. But the proof is in the proverbial pudding. With that, we thought we’d share a recent case study that saw the use of the small business 15-year exemption produce an incredible tax saving.
Deferred Sale to Satisfy the 15-year significant individual test
The premise:
Our founder, Garth Drinkwater, worked with the accountant of a small business owner.
The problem:
The business’s real property was being sold from one unit trust and the business itself was being sold from another unit trust. The basic conditions to access the Small Business CGT Concessions were satisfied, including the CGT Small Business Entity test (aka the $2,000,000 turnover test). The small business 50% reduction, the small business roll-over and the small business retirement exemption were also available. However, the small business 15-year exemption was not available.
Both the real property and the business were owned for greater than 15 years, but due to a complex ownership structure involving family trusts with varying trust distributions year on year, the 15-year significant individual test was failed.
The available concessions were not going to fully shelter the capital gain at the unit trust level, and there would have been additional income tax payable as the gain was distributed from the unit trust to the ultimate individual owners. But we had a solution.
The solution:
The small business 15-year exemption would be far more tax-effective – sheltering the entire capital gain at the unit trust level, while also allowing the capital gain to be distributed from the unit trusts to ultimate individual owners without additional income tax. The prima-facie capital gain was approximately $9,000,000.
After distribution to ultimate individual owners, the total income tax would have been approximately:
$2,115,000 after applying the general 50% discount for discount capital gains; or
$1,645,000 after applying the general 50% discount for discount capital gains and after applying the small business 50% reduction (which would have been largely clawed back on distribution from the unit trust under CGT event E4), the small business roll-over and the small business retirement exemption for two individuals; or
$Nil after applying the small business 15-year exemption.
The additional income tax savings from being able to access the small business 15-year exemption was around $1,645,000 (when compared to only being able to access the other Small Business CGT Concessions).
Knowing this, we were able to provide a solution to access to the small business 15-year exemption by deferring the sale by two years and managing the family trust distributions for the intervening years, ensuring the requirements for the exemption (including the 15-year significant individual test) were satisfied.
The result:
The business owner implemented the solution and obtained around $1,645,000 in additional income tax savings.
Overall, the Small Business CGT Concessions provided a total income tax saving of approximately $2,115,000.