August is here and the wattle is in bloom, a sign that spring is around the corner. Australians will all be hoping for brighter days ahead, as we contend with rising COVID cases and sobering news on the economic front.
After postponing the Federal Budget until October due to COVID, the government released a budget update on July 23 which gave an insight into the economic impact of the health crisis. It estimates a budget deficit of $85.8 billion in 2019-20 (4.3% of GDP) rising to $184.5 billion in 2020-21 (9.7% of GDP). This would be the biggest deficit as a share of GDP since 1946 in the aftermath of WWII. The economy contracted an estimated 0.25% in 2019-20, with a further fall of 2.5% in 2020-21, the first consecutive annual falls in over 70 years.
Unemployment rose from 7.1% to 7.4% in June, the highest in almost 22 years. The jobless rate is expected to peak at around 9% in December before it begins to fall. As a result of the economic slowdown, inflation fell 1.9% in the June quarter (minus 0.3% on an annual basis), the biggest quarterly fall since 1931 during the Depression. The biggest price falls were for childcare, petrol, primary education, and rents. This was reflected in falling consumer confidence, with the ANZ-Roy Morgan confidence rating falling to a 13-week low of 89 late in the month (the long-term average is 112.8 points).
On financial markets, gold rose to a record high of US$1975 an ounce in July, reflecting its role as a defensive asset in difficult times. Crude oil prices inched up 1% in July but are down 25% over the year. And in good news for Australian exports, iron ore prices rebounded 8% in July (down 7% for the year). The Australian dollar continued to climb, closing the month above US72c.
Make selling your business less taxing
Selling a business you have spent so many years building up can be a difficult process, but getting the best price is not the only consideration. Tax has a big role to play in the financial result.
That means the ATO will be paying close attention. Selling a business is considered as disposing of an asset, so it triggers a capital gains tax (CGT) event.
If your sale isn’t handled correctly, you could find yourself on the receiving end of a hefty tax bill and a lot less profit than you expected.
Tax on sale proceeds
In most cases, planning your exit should start when you establish your business. That way you can choose a business structure that makes the most of the various tax concessions available. These are complex, so contact us for advice about which concessions may be apply to your business.
For tax purposes, selling a business is considered part of your business income, so the proceeds are taxed at the normal rate for your business structure.
For sole traders and partnerships, this can be as high as 47 per cent. Whereas small businesses operating through a company structure are taxed at the significantly lower rate of 26 per cent.
Calculating your CGT bill
Your CGT bill when selling depends on a range of factors, including how much it cost you to purchase the business, referred to as your cost base, sale price and the available tax concessions.
A decade ago, Ayumi set up a small dental practice. Over the years she has significantly grown her client base and now earns an annual salary of $190,000. Her current tax rate is 47 per cent (including the Medicare levy).
Ayumi agrees to sell the business to one of the dentists she employs in the practice for $500,000.
As she started the business from scratch, her cost base is nil, so when the sale goes through she will have triggered a $500,000 capital gain. (Her business set-up costs are not included in the cost base).
As this capital gain is added to her personal income, a potential $235,000 ($500,000 x 47 per cent) is added to Ayumi’s taxable income. If she takes advantage of some of the small business CGT concessions, Ayumi will be able to cut her tax bill substantially.
Reconsider your business structure
Your trading entity should be carefully considered when establishing your business, but it’s a good idea to review it periodically, particularly if you are thinking of selling.
With the government actively lowering tax rates for small business entities (SBE), the structure you originally selected may no longer be the most tax effective. The tax rate for SBEs operating as companies dropped from 27.5 per cent to 26 per cent from 1 July 2020 and a further cut to 25 per cent is coming in 2021-22.
Operating as a company also gives you the option to sell your business in different ways. You can either sell shares in the business or sell the business as an asset.
Exiting a business operating as a trust, sole trader or partnership is always an asset sale, but with a company structure either option can be used.
Minimise your CGT
Carefully reviewing your tax structure and negotiating the right type of sales agreement also allows you to maximise the valuable small business CGT concessions.
For example, if you operate through a company structure and can negotiate a share sale, you can access several CGT concessions that significantly reduce your CGT bill.
The concessions are also important to keep in mind when setting and negotiating your sale price.
If your sale price is over the $6 million maximum threshold, it may be worth reducing it to qualify for the small business CGT concessions.
Getting good advice
With so much at stake, professional planning and support are essential when the time comes to sell your business.
Many of the tax concessions are only available once, so it’s essential to organise your business and the sales process to maximise the available benefits.
Preparing your business for sale takes time and planning, if you would like assistance with your exit strategy please give us a call.
Understanding CGT when you inherit
Receiving an inheritance is always welcome, but people often forget the tax man will take a keen interest in their good fortune.
When ownership of an asset is transferred, it triggers a capital gain or loss with potential tax implications. So what are the tax rules when you inherit a property, or another investment asset like shares, and when you eventually decide to sell?
Tax and your inheritance
The main tax applying to the transfer and sale of an asset is capital gains tax (CGT). This is added to your tax bill in the financial year in which you sell an asset acquired on or after 20 September 1985.
CGT is not a separate tax but forms part of your normal income tax and is imposed at your marginal tax rate. It applies to the sale of assets such as residential and investment properties, shares and managed funds.
The tax is calculated based on any increase in the value of the asset between the time you acquire or buy it and when you eventually sell.
Inheriting an asset
Fortunately, when someone dies, a capital gain or loss does not apply when an asset passes to the deceased person’s beneficiary, their executor, or from the executor to a beneficiary.
This means if you inherit a property, shares, or an interest in an investment asset, the capital gain on the asset is disregarded by the tax man.
There are also exemptions for personal use assets you inherit that were purchased for less than $10,000. This includes furniture, household items and the like.
Generally, CGT is not payable if you inherit collectables such as art, jewellery, stamps or antiques, provided their market value is $500 or less.
Selling your new asset
Although there is no CGT when you inherit a property, that’s not the end of it, as there may be a tax bill when you eventually sell. If the asset is a dwelling, special rules such as the main residence exemption apply in part or full.
Generally, if you sell an inherited property within two years of the person’s passing and it was either purchased before September 1985 or was the deceased’s main residence at the time or just before their death, and in most cases, not rented being at the time of their death, CGT does not apply.
The two-year period relates to the time from the date of death to the settlement – not exchange – of the sales contract. In some cases, it’s possible to apply to the ATO for an extension to this two-year period.
Special tax rules may also apply if the property was not the deceased’s main residence but it was purchased prior to 20 September 1985. This may result in a full or partial exemption from CGT, so it’s important to talk to us about your particular situation.
After the two-year deadline
If you decide to sell your inherited property after the two-year exemption period has elapsed, you will generally have to pay CGT on the capital gain on your property unless it has become your main residence.
The amount of CGT you pay is based on the increase in your property’s value from the date of the deceased’s death to the date of the sale.
When working out the capital gain on an inherited property asset, CGT is calculated based on the sale price less the cost base of the asset. In most cases, the cost base is equal to the market value of the asset at the date of the deceased’s death, although this will depend on when the home was purchased (before or after 20 September 1985).
If CGT applies when selling an asset, you normally receive a 50 per cent discount on the amount of tax payable if the asset is owned for over 12 months.
CGT is a complex area of taxation, especially as it applies to inheritance, so if you would like help with handling the tax matters relating to an inherited asset, contact our office today.
Building resilience to spring back stronger than ever
Our resilience has been tested of late and continues to be, with the ongoing situation of the coronavirus pandemic throwing challenges our way.
Resilience has certainly become a now frequently used buzzword, but what does it actually mean? According to the Oxford dictionary, the word resilience means “the ability of people or things to recover quickly after something unpleasant, such as shock, injury, etc.”i It also relates to the ability to return to the original form or position after being bent, compressed or stretched.
Not just recovering, but improving
What makes someone resilient? We often use this term to describe someone who can bounce back from a difficult situation or who takes challenges in their stride. Perhaps it’s a person who receives the news they didn’t land their dream job and is able to be pragmatic about it, or someone who receives a frightening health diagnosis and is able to calmly consider the next steps.
Resilience tends to be thought of as something that keeps us going as we were. But what if we instead think of resilience as not simply returning to the original form, but changing shape and improving? Not bouncing back, but moving forward in order to become stronger and better able to deal with the next challenge that comes your way.
Modelling yourself on resilient people
One way to improve your own resilience is to model yourself on resilient people. Studies show us that resilient people use positive emotions to recover and find the positives in stressful situations.ii As resilience can mean different things to different people, we can look to those we perceive as resilient to model ourselves on. Have a think about the resilient people in your life, or even in the public eye – what characteristics do they have? What is their perspective on the challenges they face? How do they dust themselves off and keep going when things aren’t easy?
The good news is that it’s never too late to build resilience. Look for opportunities to face, rather than avoid, your fears – you can start small and build your confidence. Perhaps you struggle to have salary conversations at work or ask for that promotion. You mightn’t put yourself forward for new opportunities as you worry about being rejected. By instead putting yourself out there you do risk disappointment, but learning to manage any frustration or let-down is part of honing resilience.
Reframing the narrative is also an important factor of resilience. If you see yourself as someone who can’t handle challenges, it’ll be difficult to build the confidence needed to do so. It’s worth also looking at how you deal with stress and what you may be adding to stressful scenarios – do you make a drama out of unexpected events? If so, how can you better react to them to minimise stress? Use difficult scenarios as a learning process and an opportunity for improvement, which will help you see them in a different light.
It’s much easier to be resilient when you are supported by a strong network of people. Studies have found that people with positive social relationships are less likely to struggle with depression, which can be a factor in low resilience. Friends and family often fill this support role, but there are other forms of support you can draw on, such as a coach, psychologist or online forums and groups.iii
While difficult times and situations challenge us, they can also propel us forward. They give us the opportunity to strengthen our resilience and not just ‘re-form’ into the person we were before, but become an improved version of ourselves.
Life isn’t always an easy path and some situations may present more of a challenge than others, so it is important you reach out if needed – you don’t need to deal with difficulties alone, so speak with your GP or mental health professional if you need some help.
This Newsletter provides general information only. The content does not take into account your personal objectives, financial situation or needs. You should consider taking financial advice tailored to your personal circumstances. We have representatives that are authorised to provide personal financial advice. Please see our website www.evogroup.net.au or call 02 9098 5055 for more information on our available services.