Over the last two years the number of business and investment property sales and purchases has increased dramatically. This has caused problems for some tax payers in relation to the unexpected tax they may incur upon sale of an investment property or other asset.
If you are looking at selling a property or any other asset it is important that you discuss the implications of the additional tax with your Accountant before you sign the Contract. A major issue for a majority of taxpayers is that the gain is recognised in the financial year the Contract is signed and not in the year where Settlement occurs.
Other issues which are important to examine when purchasing a property or business are:
1. GST Issues
If you are selling or purchasing an asset are you required to be registered for GST? If you are registered for GST is there GST in relation to the transaction? Do you satisfy the necessary criteria for the transaction to be exempt from GST? It is important that Contracts are reviewed in relation to GST as the incorrect GST status could end up costing you money. The ATO is targeting transactions involving asset sales and we have seen cases where the ATO has enforced a 25% penalty on the entity for incorrectly claiming GST. When you are dealing with these large transactions it can be quite costly.
2. Which Entity is the best Entity to own the asset?
Superannuation Funds, Trusts, Companies and Partnerships all have different legislation in relation to the tax treatment of assets within the entity. It is important that when purchasing an asset it is in the correct entity as you may be adversely affected by the:
- Tax on the Income (you may not be able to stream the income to taxpayers in a lower income bracket or may not be able to claim the loss)
- You may not be able to utilize the most effective tax concessions on the gain upon sale of the asset.
- It may effect asset tests for other entity requirements (i.e. for people in the building industry assets in a Trust are not included for BSA requirements).
- The entity may not be able to own or purchase the asset (i.e. Superannuation Funds have strict rules as to what assets they can and cannot own and how they are able to acquire these assets).
3. What is the Best Tax Effective method to purchase the asset?
A major issue for some clients is how much of their capital they should use to purchase an asset or whether they should keep their capital and borrow to purchase assets. It is important always to keep in mind what debts you have and whether or not they are tax deductible debts.
As you can seeing buying and selling an asset is not always straight forward. If you are looking at purchasing or selling and need some advice please feel free to contact one of our Accountants anytime to discuss any issues and to achieve the best outcome.