May 18, 2022 / News

Business Consulting

Uncover sleeper tax concession-ruiners before it’s too late

Looking ahead, but how far?

My favourite film is Titanic.  It’s a love story roller-coaster ride through the highs of emotional euphoria, to the depths of deepest sorrow.  

A bit like running a business at times, many of you might say.  

There were a number of unfortunate factors that culminated in the Titanic tragedy, providing so many “if only…” moments along the way.  One sequence of events with a direct line to the disaster started with a simple key.  Second Officer David Blair was reassigned from the RMS Titanic just before its maiden voyage.  Due to his hasty departure, he unintentionally kept the key to a locker which stored the crow’s nest binoculars.  With the binoculars locked inside, the crow’s nest lookouts, way up high on that bitterly cold night, could see ahead only as far as their naked eyes would allow them.  And, well, you know how it ended.
This story has something to offer for all business owners.

What we do for you

At Nexia, we enjoy working with business owners through their business lifecycle – start-up, growth, maturity and exit. We believe that you should be rewarded for what you do – providing value to your customers, taking on risk, and creating employment and wealth in the process. 

The many ways we help you along your business journey are embodied in three outcomes:

• Put money in your pocket
• Prevent money leaving your pocket
• Help you sleep well at night

That’s what we do for you throughout your business journey.  And make some life-long friends along the way.  

But imagine having poured all those years of hard work into your business, only to see up to 47 per cent of your just reward disappear in tax. That’s a long way from a possible zero per cent disappearing.  This can happen due to missing out on some generous capital gains tax (CGT) concessions when the time comes to exit.

Tax concessions upon sale of your business

Having advised on many business sales over the years, we have seen situations where things featured in a business years before being sold which caused a near-miss of denying one or more of those generous tax concessions.  Unfortunately, there have been some occasions that could not be salvaged.    

These near misses, and some unfortunate denials of concessions, happen more often than you might think.  The reason is that the business-as-usual kind of review of your business’s financial statements, whether annually, quarterly or monthly, serves a very different purpose.  They don’t identify these “sleeper” concession-ruining issues.  That requires a very different type of analysis; an out-of-the-ordinary kind of review, looking for very particular things, which is why it’s not part of the usual scope of work.   

The critical point is that for those business owners who did miss out on any concessions, some planning in the years before the sale of their business would have preserved those generous concessions.  But it was too late by the time of starting the exit process. 

Potential concession-ruiners

Concession-ruining features include things like having too much of non-business assets in your business over a period of time (eg, loans to related parties), or certain kinds of shares in your company’s equity structure.  Another example is the 15-year CGT exemption – which makes your capital gain fully exempt – but there is more to it than simply operating your business for 15 years.  You have to satisfy a number of conditions every year along the way. 

For a business commenced before 20 September 1985, there is the constant issue of whether it has lost its CGT-exempt status.  This can happen due to changes in the business since 1985.  You would expect any business to have changed significantly over 37 years.

There is only prevention 

There is no cure; only prevention.  Imagine if the Titanic’s crow’s nest lookouts had had those binoculars, seen the iceberg sooner, communicated that to the bridge earlier, who then could have made even the most minor course correction that little bit sooner.  If only…  

Things would have turned out differently.  

The point is that preventive measures taken early enough was the only possible way to avoid disaster.  Relying on only the naked eye, it was too late once the lookouts saw the iceberg.  It’s the same with exiting your business – there’s no fixing the situation just as you’re approaching the time of sale.    

Business Concession Review

The preventive measure is having the right kind of review of your business.  We call it our Business Concession Review.  The review analyses the particular features of a business that require scrutiny in order to uncover any sleeper issues.  We know the kinds of features that, if present, could deny you one or more tax concessions upon exiting your business – even though that might still be years away.  In short, we know what to look for, and where to look.  If any concession-ruiners are found to exist, you have afforded yourself the opportunity to implement a solution in time.  

Nexia’s Business Concession Review is that pair of binoculars, and your trusted Nexia advisors are the lookouts up in your business’s crow’s nest, communicating to you on the bridge running your business.

It works

From Business Concession Reviews we’ve undertaken before, some have revealed concession-ruiners that were then able to be redressed.  Those clients could sleep well at night due to knowing they’d averted an unpleasant shock down the track, and that we had prevented money leaving their pockets.  Other reviews have revealed no concession-ruiners present, or at least a low enough level such that no remedial action is required.  So, although no further action was required, those business owners can also sleep well at night because of the peace-of-mind from simply knowing that any sleeper concession-ruiners in their business are comfortably minimal.

Ideal time to have the Business Concession Review

It is worthwhile having Nexia’s Business Concession Review done at any time, no matter where you are in your business lifecycle.  However, it is especially time critical to have it done if you anticipate exiting within 10 years.  That’s right – 10 years.  There are two main reasons why we pinpoint this critical time frame:

• Our deep knowledge of the rules providing for the various tax concessions; and
• Past experience in undertaking these reviews. 

If you anticipate exiting your business within 10 years, there is a heightened risk of being unable to redress identified concession-ruiners.  The difference could be hundreds of thousands of dollars, maybe even millions, staying in your pocket.  That’s a lot of sleep-well-at-night comfort.

You hold the key that will unlock the binoculars, the tool needed to look far enough ahead to avert any potential disasters.  Talk to your trusted Nexia Edwards Marshall advisor about undertaking our Business Concession Review for your business to identify any sleeper concession-ruiners, and sleep well at night.

The material contained in this publication is for general information purposes only and does not constitute professional advice or recommendation from Nexia Edwards Marshall. Regarding any situation or circumstance, specific professional advice should be sought on any particular matter by contacting your Nexia Edwards Marshall Adviser.