Business Succession Case Study #4 | How To Eliminate Or Reduce Tax Payable When You Exit Your Business
by valuescoach · Filed Under: Business Exit Strategy · Business Structure · Business Succession Book · Succession Case Studies · business exit quiz · tax implications
Business Succession Strategy Weaknesses
In a previous series on why too many business owners fail to exit their business with maximum cash flow and profits, I identified 8 business exit strategy weaknesses that may contribute to a disappointing business succession outcome for you.
My previous post in this series revealed how transparent Terms Of Sale can seal the deal for a favourable business exit
and this post outlines a powerful case study about the impact on final profits of tax payable by an Australian company at the time of business succession.
How To Eliminate Or Reduce Tax Payable When You Exit Your Business – Case Study
In March 1994 the four Cabernet brothers inherited from their father a family-owned Australian wine company valued at $5 million. They inherited equal shares of 25% each at a cost base of $1.25 million each, made up of:
- Active Asset Land Value $3.5 million
- Plant and Equipment $1.32 million
- Goodwill $180,000 [Turnover $720,000]
In November 2008, the Cabernet family decided to exit the wine business and sold the company shares, which had grown in value to $16 million (i.e. $4 million each), comprising:
- Active Asset Land Value $12.0 million
- Plant and Equipment $3.5 million
- Goodwill $500,000 [Turnover $2 million]
The disposal effectively resulted in realised capital gains for each brother of $2,750,000.
Total Australian tax was calculated (after making use of available exemptions) and due on the sale proceeds for each brother. The amount of tax shared among them was $337,500 (i.e. $84,375 per brother, not including Medicare levy, which at 1.5% would be $41,250 each, assuming they all have private health insurance).
NB. This example uses the tax rates that applied in the year the business was sold (i.e. Australian tax rates as at 2008/2009).
If the Cabernet brothers had sought specialist advice and implemented proper tax planning strategies well before the sale, they could have reduced their combined tax liability by $247,500 to only $90,000 (not including Medicare levy). That’s a reduction in tax of $61,875 each, which could have been achieved without changing any of the circumstances in the existing scenario.
Eliminating Tax by Seeking Pre-Business Exit Tax Advice
Had the Cabernet family taken prior advice and been prepared to make just a few slight changes to the scenario before signing the contract of sale, they could have actually reduced their tax liability to nil, which would have saved them $337,500 in tax.
How is this possible?
Tax laws are complex, so your options will vary depending on where in the world your business is located. To fully understand what the Cabernets could have done to achieve a better outcome, you’ll need to understand the rules that apply in Australia. Specialist tax advisers have spent years understanding how the rules can be used to your benefit, so your safer option is always to obtain advice from an expert in capital gains tax law and business transfer in your country.
You will find more specific information on how to reduce tax by choosing the best structure in Chapter 16 of my book, Your Business Succession: How To Exit Your Business For Maximum Cash Flow And Profit with specific solutions to the Cabernet family’s business exit problem.
How prepared are you to exit your business with maximum cash flow and profits?
Take the FREE Business Exit Quiz (5 minutes of your time) and find out where your business succession strategy may be letting you down, and how to improve your chances of building a business for maximum profits and cash flow.
To Your Profitable Business Exit,
Leigh Riley
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