By Simon Prowse, Director of Accounting Navwealth.

Very rarely do we consider the end date of a business when we are starting a new business. That time when the business is no longer yours and now belongs to someone else. Starting with the end in mind should be part of your game plan.

Did you know that with the right planning and structure in place, you could sell your dental practice and pay little or no tax on the proceeds of the sale?

Getting the structure of your dental business right from the start will give you choice and put you in a better position when managing not only the tax implications when it’s time to say goodbye to your business but also the ongoing (annual) taxation imposts.

Choosing the Right Structure

There is no one size fits all approach to establishing the right business structure for you when getting started. The key is identifying the appropriate structure to suit the commercial and your personal requirements.

Our key principles and considerations are:

• KISS: Keep the structure as simple as possible to accommodate the needs of the business participants and their desired outcomes.
• Understanding: Our clients should know and understand their structure, its reasons, and how it works.
• Asset protection: It is essential that if valuable assets are being used or generated within or outside the business, these assets should be segregated and protected.
• Retention of Profits: Using related entities and/or holding companies can help retain and protect retained profits from trading activities. These retained profits should be optimally paid to the business owners or used to fund the business.

In Australia, there are four main types of structures that you can consider for your situation. Whilst there are several hybrids or different subversions of these structures, these are the four fundamental classes of structure that exist:

1. Sole Trader
2. Partnership
3. Company
4. Trust

Structuring for Success

Meet Dr Swan – Setting up the right structure

Dr Swan is married and 40 years of age and is a qualified dentist working as an employee of Incisor Pty Ltd for several years. His wife has a job but is currently on unpaid maternity leave and may not return to her former employer. All their private assets are held jointly, including a family home of $800,000 and a share portfolio of $150,000.

Dr Swan has been offered to purchase the dental practice from the current owner, who is looking to move interstate for $500,000, including plant and equipment. Dr Swan intends to own the practice for a minimum of 15 years and hopes to grow its value.

 

Key things to note: The structure must protect the family assets, including the house, and if possible, shares Equity in their property can be accessed to purchase the business Looking for tax efficient options in respect of profits and capital Initial up-front investment into the setup will result in some one-off costs Initially one administrative employee but aim to grow staff numbers including a locum dentist over time Consider the opportunity to purchase the business property in future years

Outcome

Several alternatives exist to undertake the business venture, but in the case of Dr Swan, the following best catered to his immediate and longer terms needs:

We would assist Dr Swan in establishing a company to own and operate the practice and establish a family trust with a corporate trustee to hold the share capital in the trading company. The couple’s share portfolio would be transferred to the trust. Money for purchasing the business and shares would be borrowed through the equity in the house and loaned to the company as secured debt.

Choosing the right structure from the start will allow Dr Swan and his wife to maximise opportunities in the future and minimize the tax implications as they move forward.

What’s next…

Selling Your Small Business

Fast forward from the day you open your new dental business to the day when you are ready to step into the process of selling your business. One of the most important considerations when selling any business is the impact of Capital Gains Tax (CGT).

Small Business CGT Concessions

These CGT concessions are significant; however, there are many pitfalls and traps in correctly applying the concessions.

Four main CGT concessions are available to small businesses: a business with $2 million or less annual turnover or $6 million or less net assets. You should check with your accountant if your business meets these criteria.

The concessions include:

1. 15-year exemption: The entire capital gain is tax exempted if you meet this exemption. You must have continually owned the active business asset for at least 15 years, be aged 55 years or over and retire or be permanently incapacitated.
2. 50% Active Asset Reduction: 50% reduction of gain for active business asset
3. Retirement Exemption: Exemption up to the lifetime limit of $500,000 if under 55 and money rolled into super or retirement saving account
4. Small Business Roll Over: Allows the deferral of capital gain. The capital gain crystalizes if a replacement asset is not acquired within 2 years. The exemption or deferral applies until a replacement is later disposed of.

If the conditions are satisfied, taxpayers can apply one or all of the above concessions until capital gain is nil.

Note – If the retirement exemption applies, you can disregard the entire capital gain. Several conditions must be satisfied to meet the exemption criteria. These include determining active business assets, and identifying business affiliates, connected entities and concessional stakeholders, to name a few.

Dr Swan – It’s Time to Sell

Let’s assume Dr Swan is considering selling his business after many years of operation. He wants to know the likely tax implication (CGT) when selling. His business, previously valued at $500,000 when purchased, is now valued at $4,000,000.

Key things to note: The business has been owned and operated for 14 years Dr Swan is under 55 years of age Retirement is a consideration, but he is looking at other options The business premises, currently valued at $1,500,000, is owned by Mrs Swan, and she is considering options around utilizing a self-managed super to purchase the property and take over ownership.

Outcome

 

Working closely with our team throughout the past 14 years, Dr and Mrs Swan have successfully purchased an investment property valued at $800,000 net of debt and have shares and cash totalling $600,000

With Dr and Mrs Swan, we are now assessing suitable options before a business sale, considering the couple’s plans, and a strategy would be put in place to achieve these and mitigate taxation.

Before starting your business, you should first engage with a trusted business adviser and accountant to work with you to establish the right structure for you. These are complex strategies, but they can be implemented to your advantage. By knowing your unique situation and considering your end game together, you are more likely to achieve the end result you want to achieve.

Book a complimentary Discovery Session with our Navwealth Business Advisory and Accounting team here.

We are a professional service business with over 30 years of experience, delivering an integrated approach to our client’s financial service needs. With years of working with clients, including medical and dental professionals, our experienced team of accountants, financial advisers and consultants work closely with our clients to help them develop a comprehensive plan to achieve financial success.

Whether you are just starting out and want to understand what structures you should have in place to run your business successfully, right through to preparing for your retirement, we can help you every step of the way.

Disclaimer:

Navwealth Accounting Pty Limited ABN 53 197 267 463 is a CPA Practice. Liability limited by a scheme approved under Professional Standards Legislation.
Important Information: This brochure contains information that is general in nature. It does not consider any particular person’s objectives, financial situation or needs. You must consider your financial situation and needs before making decisions based on this information. Please contact us if you want more information.