BeneficiariesSmall business CGT benefitPersonal assetsBusiness buy and sell agreementInter-generational wealth transfer

Beneficiaries

Beneficiaries are the people (or entities) that benefit from the will.
Beneficiaries are identified in the will and in the absence of a will they are identified by the laws of intestate succession.
Superannuation assets are distributed by the trustees who choose the beneficiaries unless the deceased gave them a binding nomination in which case they will normally be bound by that.

Succession on death

Superannuation assets

On the death of the deceased superannuation benefits are paid to whoever is nominated in the binding nomination the deceased gave the trustees of the fund.
The fund trustees hold the benefits in trust for the deceased. Without a binding nomination they will pay the benefits to whomever they, in their discretion, decide.
Tax on death benefits from super

Life policy

The proceeds of an insurance policy on the deceased’s life are paid free of tax when he or she dies.

Business assets

Unless the deceased has a “buy and sell” arrangements in place the business assets will form part of his or her estate and be distributed according to any will. In the absence of a will the assets are distributed according to the laws of intestate succession.
A “buy and sell” agreement will ensure that the business assets by-pass the will and the estate and pass directly to the person who is buying them. The money to fund the purchase usually comes from an insurance policy on the deceased’s estate.
This has many benefits for all parties.

  • The business continues operating with the new owner
  • The money to fund the purchase is paid by the insurance company
  • The deceased’s survivors receive the cash and are not burdened with a business they may know little about

Small business CGT benefit

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Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) contains four small business concessions for eligible small businesses. A small business could be a sole trader, partnership or company.
You can apply as many concessions as you are entitled to until the capital gain is reduced to nil.

Basic conditions

  • A CGT event occurs such as the sale of the business
  • The CGT event would have resulted in a gain if not for the application of the small business CGT concessions
At least one of the following applies:
  • The taxpayer is a small business entity (‘SBE’) for the income year
  • The taxpayer satisfies the maximum net asset value test
  • The taxpayer is a partner in a partnership that is a SBE for the income year and the CGT asset is an interest in an asset of the partnership
  • The CGT asset satisfies the active asset test

The 15-year exemption

A small business entity can disregard a capital gain arising from a CGT asset if it has been continuously owned for at least 15 years if certain conditions are met. Capital losses are not affected.
Furthermore, if the company makes payments to its CGT concession stakeholders attributable to the exempt amount, the payments will not be taxable income of the company or recipient.

The main conditions are that:

  • The basic conditions for relief in Subdivision 152-A are satisfied.
  • The small business was continuously owned for the 15-year period leading up to the CGT event.
  • If the entity is an individual, the individual retires or is permanently incapacitated.
  • If the entity is a company or trust, the entity had a significant individual for a total of at least 15 years during which the entity owned the asset and the individual who was the significant individual just before the CGT event retires or is permanently incapacitated.

The retirement exemption

There is a lifetime CGT retirement exemption up to of $500,000 for a business asset. This concession is intended to help business owners provide for their retirement as many may not have been employees and received compulsory super.There is no requirement to close the business down and it can continue to operate.
If you are a sole trader or a partner in a partnership, you can use the small business retirement exemption to exempt all or part of a capital gain if:

  • the amount you does not exceed your remaining CGT retirement exemption limit.($500,000). This limit is reduced by any previous amounts you have chosen to be exempt.
  • you contribute the exempt amount into a complying superannuation fund or retirement savings account (RSA) if you are aged under 55 years just before you chose to use the retirement exemption. If you are aged 55 or more just before you chose to use the retirement exemption, you don’t have to pay any amount into a complying superannuation fund or RSA.

Basic conditions

To qualify for the small business retirement exemption you must satisfy the basic conditions that apply to all the CGT small business concessions.

The active assets 50% reduction

This concession allows you to reduce the capital gain arising from an active business asset by 50%. To qualify you need to satisfy only the basic conditions that apply to all the small business capital gains tax (CGT) concessions.
If the capital gain has already been reduced by the discount percentage, the 50% reduction under this Subdivision applies to that reduced gain.
The capital gain may be further reduced by the small business retirement exemption or a small business rollover, or both.
Alternatively, you may choose not to apply the 50% reduction and instead apply the small business retirement exemption or small business rollover.
None of these rules apply if the 15-year exemption already applies to the capital gain, since such a gain is disregarded anyway.

The small business roll-over exemption

The small business roll-over concession can deferr paying CGT because the amount rolled over is automatically disregarded.
The taxpayer must acquire one or more CGT assets as replacement assets, or make a capital improvement to one or more existing assets, or both, within the replacement period. If the taxpayer fails to acquire a replacement asset within the replacement period a CGT consequence takes place. The taxing point is deferred by up to two years.
The asset acquired or improved must be an active asset at the end of the replacement asset period.
The capital gain being rolled over must not be more than the sum of the following:

  • The amount paid to acquire the replacement asset
  • Any incidental costs incurred in acquiring the asset
  • The amount expended on capital improvement

Personal assets

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Transfer by will

A will ensures that on your death the right assets go to the right people at the right time.

The right assets

Your will can itemise assets and which beneficiary should get them. You cant pass on more rights than you you have and so cant pass on assets you don’t own or control.

The right people

A valid will can set out exactly what beneficiary gets what asset. You have a general obligation to provide adequately for your spouse or de facto partner, your children, and any other dependents. If you don’t they can bring a claim against your estate.

The right time

You can hold assets in trust where you feel the beneficiary is incapable of managing the benefit wisely.

What is a valid will?

A valid will can be executed by anyone over the age of 18 who is mentally competent to dispose of their assets and intends to do so. The will must be in writing, signed by the testator and witnessed by two people who are not beneficiaries.

Your executor winds up the estate and distributes them to the beneficiaries and trustee if one has been appointed.

Gifting

You can give away your property while you are alive. There are consequences however. For example;
  • It could trigger a CGT (Capital Gains Tax) event. If you make a gift you are taken to have received the market value of the property at the time for the purpose of CGT event. Selling it at a value below market value will probably result in the seller being assessed at the full market value for CGT purposes.
  • Centrelink allow a single or couple to gift $10,000 per financial year, limited to $30,000 per 5 financial years. The excess will be assessed as a deprived asset. This is called the $10,000 rule.

Business buy and sell agreement

A “buy and sell” agreement will ensure that on the death of the business owner the business assets will be transferred to the entity identified in the contract. This will happen regardless of the terms of the will.
The agreement must identify the owner of the interest being disposed of and the type of interest disposed of (shares, units, partnership) and who is to acquire the interest (business partners, key personnel).
The agreement stipulates who will buy back the interest of the deceased/disabled owner and what the owner, or their estate, will receive cash.

Funding the agreement

The buy/sell agreement is normally funded through an insurance policywhich can be owned as follows:

  • cross ownership, where the owners of the business hold policies on each other
  • principal ownership, where the owner holds the policy on himself/herself
  • discretionary trust, where the trustee holds the policies on behalf of all of the owners
  • company ownership, where the business holds the policies on behalf of all of the owners
If a buy/sell agreement triggers payment of a life insurance policy, it will be exempt from CGT provided the gain or loss is made by:
  • the original beneficial owner of the policy
  • an entity that acquired the policy for no consideration
  • the trustee of a complying superannuation fund

Inter-generational wealth transfer

Inter-generational wealth transfer is one of the challenges of our time.
“Baby boomers” have accumulated substantial wealth that they will need to pass on. Many of them are “asset rich but income poor” while their children are “income rich and asset poor”. Strategies need to be developed that are mutually beneficial.