Question

Peter Russell proposes to sell his business to Tim Jones for $800,000. The business assets to be acquired include:

• trading stock $70,000
• debtors $40,000
• plant and equipment $150,000, and
• premises $400,000.

The balance, $140,000, represents goodwill.

It is proposed that the transfer of ownership will occur on 15 June 2020.

After the sale Peter Russell intends to retire.

Tim Jones is married with two teenage children, aged 14 and 17. Jones’ wife will work part-time in the business. Jones has $600,000 in cash and a house valued at $200,000, on which there is a $100,000 mortgage.

Required:        Advise Peter Russel as to the tax planning considerations involved in the disposal of the business. Please consider three or four issues, including any small business relief effective from 21 September 1999.

Please support your answer with any relevant case law or legislation.

Answer 1

1. Trading Stock - The sale of Russell's business will result in a disposal of trading stock not in the ordinary course of business, so Russell will bbe assessable on the market value of the stock on the date of disposal and Jones will be deemed to have acquired the stock for that value. Market value may not be the $70,000 agreed to by Russell and Jones.

2. Debtors - It is undesirable for Russell to sell his debts to Jones. It is recommended that Russell either collect the debts himself, or ask Jones to collect them for him for a fee as his agent. This approcah would result in Russell being entitled to a deduction for any bad debts and for the collection fee.

3. Plant - The tax consequences will depend upon the adjusted value of Russell's plant and equipment, and the date of acquisition of each asset.

The assests which are sold after 21sep 1999, capital gains tax can be calculated as 50% of the nominal gain provided the assest has been held for 12 months. However, if the asset was used 100% for income producing ppurposes and if the asset is realised below its adjustable value, Russell would be entotles to a tax deduction of the residue.

4. Premises - If building used for income producing purposes commenced after 19Jul1982, then the ITAA97 Div 43 deduction allowable to Russell will pass to Jones.

If the building was acquired by Russell after 19 SEP 1985, and the sale price exceeded its indexed cost base, a capital gain would arise. THis gain is assessable to Russell unless he has capital lossess to offset against the capital gain.

Alternately as the bulding qualifies as an active assest, Russell can avail himself of the CGT samll business concessions of the 50% discount, the 15 year exemption and the 50% active assest reduction.

5. Goodwill - If Russell acquired before 20SEP1985, the sum attributed to goodwill is a tax free capital gain. If the business was wstablished post CGT, then a 50% exemption for the disposal of active assests by small business taxpayerrs may apply.