Strategies Combining Business and Property that Potentially Produce Huge After Tax Wealth Opportunities
We don’t just like property to help fund and secure your business’ future. Paired together, your business and your property investment can be combined to provide a hugely tax effective wealth building strategy.
Business & Property – Strategy 1
In a previous edition of The Q Review we introduced “The single BIGGEST LIFE CHANGING tax concession that could be the difference between retiring in LUXURY or wallowing in self-pity and REGRET!”
That was the Small Business CGT Concessions.
But many business owners are not aware that these concessions need not just apply to their business. They can also potentially apply to property you own that is used in connection with the business!
It means an opportunity exists to realise two substantial long-term profits on two separate assets with potentially very favourable tax outcomes, even possibly tax free.
As is always the case, qualifying is the hard part and as previously discussed this can be a moving target.
However if your business qualifies for the concessions and you also own the real property from which the business is operated, you stand a good chance of being able to apply them to both assets.
Joe owns a successful auto-mechanic business via his company Joe’s Autos Pty Ltd. The company has no assets other than the business itself. When Joe decides to retire and put the business up for sale he achieves a sale price of $1 million. Joe plans for the sale of his business with his Accountant and as a result is able to ensure he qualifies for the Small Business CGT Concessions. Therefore, instead of potentially paying as much as $470,000 in tax (in the worst case scenario), Joe actually pays NO TAX on his $1 million. If Joe also owned a separate investment property which was NOT connected to his business and he decided to sell it at the same time. He would pay capital gains tax on the sale of that investment property. HOWEVER, if instead of owning a separate investment property, Joe owned the premises from which his business operated, with some further planning the sale of that premises could also qualify for the Small Business CGT Concessions. Therefore, he could also pay NO TAX on the sale of that asset as well!
The idea is further illustrated below…
Business & Property – Strategy 2
In the above example, the property must qualify as an “Active Asset” which generally means it is being used in connection with the business. Sometimes qualifying as an active asset can be difficult. This is particularly the case where you sell your business, but chose to keep the property as a passive investment (ie. You lease the property to the new owners of the business). Generally when you finally do sell the property, it will fail the active asset test, and hence you will pay capital gains tax on it.
To get around the active asset requirement, an alternative strategy is to own your business premises via a Self-Managed Superannuation Fund.
At worst, Self-Managed Superannuation Funds pay tax at 15% which is far better than any tax rate you can achieve outside of the superannuation environment.
However, with some careful planning any eventual capital gain on the property owned by your fund can also be tax free, even if the active asset requirement is not met!
Best of Both Options
The great thing is you can have your cake and eat it too. By that we mean you can initially implement Strategy 1. But if you later decide to change your mind, there is scope to switch to Strategy 2 with minimal cost to do so.
Whichever strategy, or combination of the two, works best for you, it is clear to see that when a business and property ownership are combined, they really can become more valuable than the sum of their parts, particular on an after-tax basis!
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