No matter the success of your medical practice, the time eventually comes to move on from the practice – due to succession, retirement or your next adventure. When that time comes, it pays to be prepared for the sale to achieve the most optimal exit and preparations can start right from inception.
There is much to consider when selling your practice in trying to secure the best deal for yourself, your staff, and your patients. When it comes to taxation though, there are two key matters:
- what is being sold, and
- which Capital Gains Tax concessions are available
What is being sold: Structure, Business, Assets
Determining what is actually being sold can be quite the challenge, depending on the structuring of your practice.
The most straightforward circumstance is where the practice is operated in a Company or Unit Trust structure and the ‘thing’ being sold is the Shares in the company, or Units in the unit trust. Where the structure is self-contained in this way, the sale of shares can effect the change of ownership in a single transaction.
As simple as the above may be, the buyer may not wish to acquire the inherent risk of an established Company or Unit Trust structure. In addition, most other structures cannot be easily sold. In these circumstances it is the business that must be sold from within the structure. This adds a layer of complexity, as it is no longer a single transfer of shares but the transfer of a large number of assets: Desks, computers, medical equipment, the building or a lease-transfer, goodwill, and others.
While this results in many moving parts, this also provides significantly more flexibility to the transaction. Assets which may have been held by separate entities can be sold into one, or one business can be acquired by multiple buyer entities. There may also be segments of your business you wish to retain or the buyer is not seeking to purchase i.e. your cars or the business premises.
These issues could be resolved by an appropriately considered restructure which takes advantage of tax relief available and results in a favourable pre-sale position.
Capital Gains Tax (CGT) Concessions
The eligibility requirements for many CGT Concessions could alone be the subject of multiple articles. The focus below is on the key outcomes of utilising the concessions.
12-Month 50% Reduction
This concession is very straightforward. If you have owned the business for more than 12 months, you can reduce the taxable gain on the sale by 50%. The catch here is that this concession is only available for individuals or trusts. This reduction is very significant, and if the medical practice is run in a company the decision to consider is whether to:
- Sell the company shares
- Sell the business held by the company and forego the 50% reduction
- Restructure to become eligible for the concession
Small Business Concessions
These consist of four separate concessions. To be eligible, your practice must have an annual turnover of $2 million or less, or pass the $6 million net asset test. Depending on your circumstances, these concessions can provide a substantial reduction in tax payable.
- CGT Free – 100% CGT reduction is available if you have owned the practice for 15+ years, and the sale is in connection with your retirement.
- $500K CGT Exemption – A lifetime cap of $500,000 per person, so long as you are 55 or over or deposit the exempt amount into a superfund.
- CGT Deferral – Available for two years if you acquire or intend to acquire a replacement commercial asset.
- Extra 50% CGT discount – This can be applied in addition to the 12 month 50% reduction for a combined total 75% CGT exemption.
The Australian tax system provides significant CGT concessions that can be accessed when selling a medical practice. Getting the most out of these requires careful planning during the lifecycle of the business. Therefore seeking timely professional advice regarding the structure of your practice can yield positive results when the time comes to take your leave.