Right off the bat, I think it’s important that I make a clear distinction, especially if any of those greedy, grubby ATO nerds are reading this.
When I talk about how to avoid paying capital gains taxes, what I really mean is how to minimize the tax bill you’ll inevitably get.
I’m not promoting anything illegal or dodgy here. When the Panama Papers hit in 2016, and many Australians were named (including myself), I was the only one who was clearly stated to have not been involved in any wrongdoing, as mentioned by ABC in an article about the leak. The ABC interviewer even remarked that she was curious about my perspective on being named in these papers as a genuinely clean accountant.
Wealth Safe has always been devoted to legally helping you protect your assets and legally slash your tax bill within the legal limits.
But that doesn’t stop people from asking me how to avoid paying capital gains taxes. So, before we begin, as long we’re clear, the word “avoid” DOES NOT mean skipping out on a tax bill and fleeing the country. We can all agree that to avoid your tax bill means that you’re mitigating the much too high amount that the ATO would gladly charge you if you didn’t take precautionary measures to minimize it.
It’s not like the ATO will tell you how to stop paying too much taxes. And that’s why it’s important to speak to someone who doesn’t work for the ATO but first and foremost looks after the interests of their clients. That’s what we’re about at WealthSafe, legally and significantly helping you lower your capital gains tax bill.
If you own a company or make investments, you will likely encounter this nasty tax when it’s time to sell up. This is what the ATO guys call a “CGT Triggering Event”. It’s really just greed-speak for “this is when we get paid”.
One of the best ways to avoid paying capital gains taxes is to be an individual or a trust because you’ll get access to the capital gains tax general discount. That means that if you make a million in capital gains from the sale of your business’ assets or an investment, you can lower the reported gains to $500,000.
The number one thing to remember is that this discount is NOT available to companies. The distinction is very clear come tax time.
Let’s say that I’m operating my business and I’d like to move on to greener pastures, sell up, and maybe live out my retirement years in peace. The only problem would be if I don’t own the business; I set up a company, WBB Pty Ltd, that owns the business. If I sell Wealth Safe to you for $5 million, I won’t get the 50% capital gains discount. I have to report the full $5 million to the ATO, whose mouths will start salivating at the thought of all that tax money I owe them.
But if I own my business as an individual, I don’t have to report that $5 million. Instead, I let the Australian Tax Office know that I made $2.5 million, and I get to keep the other half unsullied by those mouthbreathers in Canberra.
The other option I have to sell a business is to sell shares to the business. That might work out well for me, especially if I own the business as an individual, but you might not like the idea. If you buy shares and find out after the sale that I’ve kept some huge tax bills and pending lawsuits have hidden from you, they’re now your responsibility while I abscond to some private beach in Jamaica or Belize.
Sometimes, you don’t have the option to own a business as an individual. Maybe you have business partners. Maybe you have some complications where you have to share the ownership of your business with a collection of people.
There are ways to still avoid paying capital gains taxes, even as a company. One of my favorite tax structures is a unit trust.
A unit trust is very much like a company, but some key differences for tax purposes. A unit trust has a fixed entitlement to the trust asset and profits. In a company, you have shareholders, someone who owns a portion of that company. With a unit trust, you have unitholders, the beneficiaries who receive payouts from the trust.
If the company acts as a trustee, with you and your partners as unitholders for that trust, any proceeds from a sale are distributed to the beneficiaries, individuals who can claim the capital gains tax general discount.
Not only can you protect your assets with a unit trust, but you can minimize the capital gains tax bill that you would otherwise accrue.
Now, I can take one step further. Besides the immensely valuable capital gains tax general discount, there is a further 50% active asset discount that could apply.
(I’ll explain how this works, but you should consult with Wealth Safe on how this can apply to your circumstance.)
Active assets include any asset that is actively used in the running of the business. This could be the goodwill you have in your industry, your client list, or some intellectual property that you use to run your business. If you sold those assets, they would attract a further 50% discount on top f your general discount.
How does this work?
Let’s say that I run Wealth Safe on my own and I want to sell the assets of my business to you. I calculate the assets to be worth $1 million. But my assets, my client list, Wealth Safe’s reputation, and my intellectual property (all my financial products and content) are actively used to sustain my business. When I sell the assets to you, I don’t have to report $1 million to the ATO. I don’t have to report $500,000. I only have to tell the ATO that I’ve had a capital gain of $250,000.
That’s a HUGE saving from your initial capital gains tax bill. What would you do with an extra $750,000 in untaxed gains? I have a few ideas…
Now, this might be beyond the scope of this article, but let’s go one step further, just to show you how to avoid paying capital gains taxes even more.
Let’s say that I’ve got that $250,000 capital gains after my double 50% tax reductions. I can either put that on my income tax for this year. Or I could not.
I could instead choose to roll over those capital gains with one of two methods. Again, consult with us at Wealth Safe to see how this applies to your situation.
● I set up a Self-Managed Super Fund (SMSF) to deposit the $250,000 proceeds. This option allows me to defer paying the capital gains tax, not avoid paying it altogether. I delay my paying until I decide to withdraw that amount for my retirement or to push into an investment later on. (NOTE: We are not a licensed superannuation agent with ASIC. This limits us from any kind of advice for your situation, whether general or specific.)
● I use an asset rollover plan where the proceeds of the sale of my investments or business to use for my next investment/business. In doing so, I avoid paying the capital gains for now, at least until I sell my next major asset. I love this option because instead of paying capital gains taxes twice, one from the sale of each business, I halve my reportable tax bill by half, only paying once for the sale of both assets.
Since I spent a decade of my life working for the ATO, I have devoted my time and energy to helping people like you protect your assets and legally minimize their tax bills. Wealth Safe does so much more than just help you avoid paying capital gains taxes. We advise on trusts and companies, and efficient tax structures, and even help you become a legal non-resident of Australia for tax purposes.
Talk to us today to get a free strategy session for your business and what you can do to protect yourself from giving unwanted donations to the Tax Office.