Succession planning for SMEs doesn’t have to be a sad tax story

Given that millions, if not billions, of dollars are going to be changing hands very soon, SMEs had better start taking succession planning seriously. By TERRY HAYES of Thomson Legal & Regulatory.

By Terry Hayes

Much is being, and has been, written about the need for businesses, especially small and family businesses, to have in place an effective succession plan.

The research suggests that many SME owners want to get out in the next few years, but are not prepared for the exit. In fact, the research says that fewer than 25% of family businesses have a documented succession plan.

Succession planning involves a wide range of issues including tax, staff and management issues, estate planning, the structure of the business, selling the business, and managing the succession. It’s a major issue with the expected transfer in the next few years of millions, maybe billions, of dollars of business wealth from baby boomers to others.

It’s a mistake to focus on only the tax issues, although tax and superannuation are important considerations that must be planned out.

It’s extremely important for SME owners to consult their accountant or financial adviser when planning for the succession of their business. In the area of tax, there are many issues to consider and careful planning can ensure a profitable result. Here are a few of those issues to consider.

• If the business is sold, capital gains tax (CGT) is likely to have a major impact. Being able to utilise the CGT small business concessions can save tax. But remember that the tax office will have a keen interest in the sale of a business, or part of a business, so it’s vital to get the tax issues right.
• The general 50% CGT discount is attractive and it generally applies to the sale of assets such as shares, goodwill and property that have been held for at least 12 months. In essence, if this concession applies, only 50% of the capital gain is included in the taxpayer’s taxable income. However, remember that this concession is not available to companies.
• The four small-business CGT concessions, which I discussed in my 12 April column, must always be considered. They are: the 15-year exemption; the 50% active asset reduction; the retirement exemption; and the rollover for replacement assets. In certain circumstances, the last three tests can be used in combination with the general 50% CGT reduction for individuals and trusts to produce significant tax savings; but again, professional advice should be sought.
• The sale of the assets of a business, such as trading stock, may not give rise to a CGT liability, but may instead be included in the owner’s ordinary taxable income and be taxed at his or her marginal tax rates. SME owners need to be aware of such possible tax effects. Decisions need to be made whether to sell the business itself or only the assets of the business, as there are different tax consequences.
• GST issues also play a part. If a business is sold as a “going concern”, the sale is GST-free. There are a number of conditions for this exemption to apply including that the vendor must carry on the business until the date of sale, the purchaser must be registered (or required to be registered) for GST, and the vendor and purchaser must agree in writing that the sale of the business (or “supply” in GST terms) is the supply of a going concern. There is a major tax ruling on this point (GST ruling GSTR 2002/5) which SMEs should take advice about.

With the ageing of SME owners, questions of succession planning also lead to questions surrounding estate planning, especially in family businesses. Issues that might be considered here include:

• If the SME owner’s beneficiaries are young or otherwise not able to run the business, at least immediately, the executor of the owner’s estate may need to run the business for a time. This needs careful planning to ensure continuity of the business.
• If the SME owner has a self-managed super fund that includes business assets such as property, it may be necessary to seek specific advice on how to deal with the superannuation benefits under the owner’s will.

The message is clear – think ahead and plan. Succession planning is too important to ignore. And don’t forget that it covers a range of issues that an SME owner might not think of, including tax, super, GST, finding the right people to succeed you, managing that succession, selling the business, valuing the business correctly, and more.

Terry Hayes is the senior tax writer at Thomson Legal & Regulatory, a leading Australian provider of tax, accounting and legal information solutions; www.thomson.com.au

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