[EP 281] Deal Team Dynamics: How the Right Advice Saved $2 Million in Tax!

Transcript below!

Note: This has been automatically transcribed so will be full of errors! We are not providing it to you as a word-perfect version of the podcast but just as an easy way to provide you with a different way to be able to scan for information that might be relevant to you.

Joanna Oakey [00:00:24]:
Hi, it’s Joanna Oakey here. And welcome back to The Deal Room podcast, a podcast proudly brought to you by our commercial legal practice Aspect Legal. Now, in today’s chat, you’re going to hear from chartered accountant Charles Yuan, a self proclaimed tax geek. He actually says, I love tax at one point, I think so. Charles is from Prosperity Advisers. And in this episode, we dig into a recent case study where, although not initially recognised as a critical factor, tax very much became a central part of the deal, in fact leading to a saving of more than $2 million, which I think anyone will label as a success. We break down how a trust structure created all sorts of issues during a sale, some conditions and asset tests small business owners should be aware of, and we really stepped through how a collaborative relationship between deal team members is absolutely critical at exit. Now, let’s jump right in.

Joanna Oakey [00:01:32]:
Charles, a huge thank you for coming today to join us on The Deal Room Podcast. It is so good to have you on the show.

Charles Yuan [00:01:39]:
Yeah, it’s great to be here. And I love tax, and tax is just such a big part of any business. And I guess what I really want to let everyone know is you don’t involve your tax advisors at the end of the deal, you involve them at the start. And I think we worked on a deal recently where that was clearly delivered a great advantage to the clients. So I think that’s something we can discuss today.

Joanna Oakey [00:02:07]:
Yeah. And I really wanted you on the show because I think this is a great example. I always talk about the benefit of the deal team working together, and I just think this matter is a classic example of how that really works. Two things, actually. I always talk about the importance of making sure our sellers are properly informed and prepped before they sell. So we’ll talk about that in a second and also talk about the importance of that deal team working together. And like, in this particular matter, just feeling, I love having someone that I can just call and say, hey, I’ve just thought of something. How are we going to deal with this? And I really love this in working in this matter with you and the client.

Joanna Oakey [00:02:49]:
And most of our clients are the same. They really enjoy being able to have their advisors talk to each other properly, like really?

Charles Yuan [00:02:58]:
Absolutely. Exactly. That’s what you said. The deal team. It’s in the name team.

Joanna Oakey [00:03:04]:
Yeah, indeed it is. And because the reality is, any of these matters that come up quite often, there’s different components and different thinking that different people can bring to the table and different, each of us as advisors can bring together the table. And it’s so good just to have that kind of relationship together where you can bounce things together. You can quickly call someone without it being, we’re going to have to sit down for a formal meeting to go through something. Those formal meetings are great as well, but just the, sometimes transactions just really run at a fast pace. And I must say we have another transaction together, not this one that we’re going to talk about today, where you were just like above and beyond in being available to talk about some of those things. So I just want to say every.

Charles Yuan [00:03:52]:
Day it’s all about the client and just working out what, what would deliver the best result for the client. How can they resolve that problem? Because in deals m and a deal, there’s always curveballs up in there. You think you plan. This is exactly how it’s going to run. And there’s a curveball right at the end. Yeah. Having this deal team that we work together for months on this deal, we know each other, and it just so important to have that relationship so that you know exactly how each other think.

Joanna Oakey [00:04:25]:
Yeah, exactly. And one other thing I want to add to that before we actually get into the specifics of this and some of the sort of interesting elements I think is there’s nuances, isn’t it? Like nothing’s in from a legal or tax perspective, is like, absolutely black and white. There’s a lot of nuance in things as well. And I guess it just shows that importance of creativity in how we deal with the nuances together as well.

Charles Yuan [00:04:54]:
Exactly. I think this deal was a great example of finding that nuance and go on face value. At this point in time, it may not work, but if you tweak things a little, change your way of thinking, plan out ahead and go, let’s just restructure the business slightly. And then suddenly everything fits in perfectly. And that’s where it’s important to come in early, have all your advisors sit at the table and discuss things before you put pen to paper. A lot of time. I find once you put pen to paper, it’s too late. It’s a done deal.

Charles Yuan [00:05:32]:
Anything you want to fix, it becomes unfixable.

Joanna Oakey [00:05:37]:
You are absolutely right. So in that, let’s get into this matter and let’s talk a bit about what happened. So this was a sale of business, and the client came in. To me, one of the first things that we always do is I always say, have you had tax advice? What does that look like? And in this particular instance, I felt that there was a bit of risk here, that there might be a transaction that we’re looking at that could perhaps have a tax outcome that really needed to be looked at closely. The client engaged you, Charles, to help with. I think it was a second opinion on the tax side. And can you talk us through what some of the issues were that you saw and some of the things that you were dealing with here and ultimately how you resolved them?

Charles Yuan [00:06:23]:
Yeah. Yeah. Thinking back on this deal, when I first spoke with the client after it was referred by you join, first thing I looked at is, what’s the value of the deal? And that sort of gauges whether we’re looking at a small business or a larger business. Because, you know, I don’t like to use the term family business because family business could be small or large. There’s really wealthy family businesses and there’s tiny list of companies. Right. So it’s more about what is the value we’re talking about here. And it was, I believe, circa five to $6 million deal, which fits right in with the small business CGT concessions.

Charles Yuan [00:07:10]:
And for those of you that don’t know this term, the government obviously recognises the importance of small business in the economy. And there’s been, over the decades, many tax concessions targeting small businesses. And this specific one, it’s a capital gains tax concession for businesses that has, for example, under $2 million turnover or less than $6 million net assets of the owners. And that’s where I found the hook and go. That’s because the deal is worth less than $6 million. What’s the likelihood that we can get everything under that $6 million threshold to get the concession for the client? I guess where we came early. And the benefit of that is we say, okay, at this point in time, do you satisfy the criteria? And the answer was no. Right.

Charles Yuan [00:08:10]:
And maybe that his existing advisor would have formed the same view and then just written it off as you’ve got to pay tax, it’s a done deal, move on. But because we’re not independent to the day to day advisory, we can look at it more holistically and strategically to say, is there something we can do to make it under $6 million? There are nuances, like you said in the legislation. How are certain things defined, whether certain things are included or excluded. And through that we found a strategy to exclude some of those assets that was bringing over the $6 million mark. Other strategies to reduce the company value by taking out the retained profits and revaluing assets so that the market value is less than the book value. And the outcome of all that is, I think it took almost six months to get to the end. But we were able to create a strategy where the client brought their total value of the business of all the assets from about, I think, $11 million down to just under $6 million. And if we really want to go aggressive, we could have gone in further down to maybe just over five.

Charles Yuan [00:09:43]:
Right. So through that strategy, we were able to get the clients the CET concession where on face value at first they wouldn’t have. And why is that important? Because with the CET concession, this client paid zero tax.

Joanna Oakey [00:10:04]:
And that. Isn’t that just such a fantastic outcome? But, and Charles, what would, if, you know, perhaps the matter had have just run. No one had looked at it properly. There had been an assumption or that the business didn’t qualify for the small business CGT concessions, or none of that preparatory work done in order to ensure that they did comply with the provisions relating to the CGT concessions. What would have that tax potentially look like? What were we talking about there?

Charles Yuan [00:10:39]:
Yeah, so that was what I looked at. So what is your position if you didn’t do anything? The calculation I did, that was about $1.2 million of company tax and then a further half million dollars to get that money out of the company so he can use it personally. So you’re looking at almost $2 million out of that $5 million just going to the government by not thinking strategically and planning ahead.

Joanna Oakey [00:11:12]:
And isn’t that. I just feel like we just need to emphasise that we’re talking here about potentially a tax saving of circa around about $2 million. $2 million. That’s that amount of money for someone who’s at that point of retiring, that can be a life changing difference.

Charles Yuan [00:11:33]:
Absolutely, absolutely. And with the tax saving that we found by accessing this concession and not having to pay this tax, I think the client ended up buying a bigger boat. Right. And a luxury car that he always wanted. And he said, you know what? I’m going to give the rest back to my employees. So everyone wins in this deal. The clients have here. The employees are happier, the new owners makes no difference to them because that’s what they’re paying anyway.

Charles Yuan [00:12:07]:
And all it took was a little bit of forward planning conversation certainly didn’t cost them too many dollars to get that advice.

Joanna Oakey [00:12:21]:
I love it. Oh, look, this is, this really just is one of those good news stories. And I find that it really backs up. I find quite regularly, I feel justified in our absolute insistence right in the beginning that our clients really think clearly about how detailed they have been in understanding that tax outcome. But this really shows, and I just think one of those things, one of the things that I talk about a lot from a legal perspective is that lots of lawyers do commercial law in general practice, but not many specialised, say, business sales and share sales day in, day out. But it’s the same from a tax perspective. Right. So many people think that their everyday compliance accountant should be all across the tax implications of a business sale or share sale.

Joanna Oakey [00:13:15]:
But the reality is this is not something that they deal with that a normal, everyday compliance accountant deals with on it, on an average, on a daily basis. Right. And so there are nuances that perhaps, you know, could easily be missed by someone that just doesn’t deal with this day in, day out. What’s your thoughts on that, Charles?

Charles Yuan [00:13:38]:
Yeah, and that’s, I guess, what I try to always deliver value to people I work with, and that’s both clients, business owners and their advisors. So for me, it’s not about funding the compliance work or to win the accounts of a particular business. It’s about thinking the owners, what do they really want, right. They will be happy with their accountants that they work with for 20 plus years. I don’t want to take that relationship, but I want to make sure everyone wins in the end by looking at more holistically. And for me to say, I’m giving you completely independent advice, I’m an expert at doing deals. I’ve looked at this type of thing hundred times, and here are the areas that I find you can exploit an opportunity, and in this case, I guess, was unique in the way that it was a $2 million saving and it turned what seemed to be an unworkable solution into a completely workable solution. And I don’t think, unfortunately, many compliance accountants out there would see that.

Charles Yuan [00:14:56]:
Maybe they will have that knowledge at the back of their head, but it’s not something that deal with day in, day out. So it’s easily missed. It’s easy to just look at the face value and go, it is what it is. But that’s where, I guess, the value is to get a second opinion.

Joanna Oakey [00:15:15]:
Yeah. And look. And the thing. And what happened in this matter, but traditionally happens when we start asking these questions, becomes clear. Maybe it’s useful to get really specialist tax advice on something. I find what works really well and what worked really here is we’re still a deal team. We have the tax advice lawyer and compliance accountant. The everyday accountant still is really important in the deal, even if we have extra specialization looking particularly at that certain areas, say for example, that tax aspect, because the everyday account is still super important in the deal, in many aspects of the deal.

Joanna Oakey [00:15:59]:
But the thing is that we’re all working together as that deal team, but working in our sweet spots, the areas that we really are fully across and totally understand. And I think that’s the point of, that’s the important point, number one, for buyers and sellers to know, to be alerted to the fact that there is such a thing as specialisation in each of these areas. And there is the role of a general Sander specialist in a deal which doesn’t have to kick your generalist out, right. But also it’s a reminder and a warning for the generalist, like a general accountant, compliance accountant that works with buyers and sellers of businesses. You don’t have to know all the answers, but what you have to know is when you’re in an area that isn’t your specialisation and when you should be looking to get someone else in with that expertise. Because I think that’s where we make sure together we’re getting the best outcome for the client.

Charles Yuan [00:17:02]:
Absolutely. That’s why I love being part of a deal team. I love doing deals. It just being laser focused on the strategy of making sure the deal works in a way that delivers the best outcome for the client, whether our client’s the buyer or the seller, there’s different intentions and different goals, but just being so focused on a particular area and making sure that works and then saying to everyone else around you, do you agree? Do you agree? And you have a complete answer that way. Like you said, you don’t need to know everything yourself, but you just need to know what you’re really good at and who else around you is really good at the other things that’s needed in the deal.

Joanna Oakey [00:17:51]:
Yeah, love it. So maybe let’s have a talk about some of the specifics, because I think this is, it’s just fabulous talking about it conceptually. And the warning, go and get specialist advice right at the beginning so that you understand what the tax will be out of your deal or if you need to change anything leading into the deal or about the deal structure itself. Because that’s sometimes the answer isn’t it the deal structure itself, whether it’s share sale rather than a business sale or whatever, might be an element that creates a massive difference in a. But let’s talk about this one, because this one stayed as a business sale. So we’re talking about a business sale here, not a share sale. And we’re able to get to a zero tax environment notwithstanding that it was a business sale, because lots of times we’ll talk about this and people think that it has to be a share sale in order to properly utilise some of these concessions. Let’s talk this through.

Joanna Oakey [00:18:49]:
What are some of the things that became quite important here?

Charles Yuan [00:18:53]:
Yeah, so one of the most important thing I looked at is obviously whether it’s satisfied with it or the conditions for this concession. And the thing like you said, if it’s a share sale, it’s the shareholder that makes the capital gain, but if it’s a business sale, it’s the company that makes the capital gain and then you have to extract that out to the shareholder and there’s tax when that happens, which is why it’s so important for me to find a way to make sure that concession works. Because this concession, it’s called the 15 year exemption. It has many criteria that needs to be met, but if we’re able to satisfy that, we can essentially bypass the company and the capital gain, capital proceeds that’s received can be delivered straight out to the shareholder without having to pay tax along the way. So that was the single most important goal of this deal. How do I make sure the client can get this 15 year exemption? Everything around that then is about how do we restructure the assets of the company? Is there any assets that need to remain? What does he do with the company after business solve it’s empty shell. There’s no more business, but there’s still liabilities, accounts receivable, accounts payable. How do we deal with that? Empty it out? Is there a way to liquidate the company at the end and take whatever’s remaining back out tax free? It’s, you know, it’s not, I guess, just about getting to the point of the completion.

Charles Yuan [00:20:40]:
There’s always a little bit of post work afterwards to make sure what is being. Everything’s been cleaned up properly.

Joanna Oakey [00:20:51]:
And so when we. So let’s look at a couple of components here. There’s that maximum net asset value test. So let’s talk about maybe a few things that in this instance were relevant and then maybe weren’t relevant in this instance, but are in other instances. So talk through. I’ve got a few questions that are commonly asked, so I might throw these in as well for you, but talk us through what that means and why that’s so relevant.

Charles Yuan [00:21:22]:
It’s relevant because it’s one of the conditions that you have to satisfy in order to get access to the whole suite of small business CDT concessions. And the other condition you could meet in lieu of the maximum net asset value test is the $2 million turnover test. In this day and age, I don’t think that’s applicable to most successful businesses. So it’s much more likely, and probably 80% of my advice is around the maximum net asset value test. What does it mean? It means that you have to look at the entity that’s selling the asset in question and then every entity or persons that’s connected to this particular entity and say, what is the total net asset value of this whole group? And yeah, it’s usually not that relevant to giant corporate groups. Right. It’s much more relevant to family owned businesses where it’s one family and usually one individual that owns the business. What do they own? What does the company own? Anything else in the group and you have to bring all that below $6 million.

Charles Yuan [00:22:51]:
The primary exclusions are main residence, superannuation and any other personal assets or chattels. Take all of that. What is the market value of all that? If it’s below $6 million, you get a tick, you can move on and potentially get access to the concession.

Joanna Oakey [00:23:14]:
And so one of the questions that I often hear ask is, so what are those sort of associated entities or connected entities that might be brought into this test? And at what point is it that assets held by, say, for example, a spouse of the founder, the main business runner. At what point? Business owner. Sorry, at what point are they included? Maybe you can talk us through that element.

Charles Yuan [00:23:44]:
Sure. So in our example, and I guess in many cases where it’s a business sale, you have a company or trust that operates the business. So the company or trust therefore makes a capital gain. And is the taxpayer, in this instance, what’s connected? The owner is generally connected, who would be the shareholder or controller of the group and any other entities that owner also controls. So the sister companies, other related businesses, and potentially the assets of the spouse or other family members, if those assets are used in the business that’s been sold. So you don’t need to look at, for example, what your uncle has or what your father does, but there’s nothing to do with your business. But it’s. You just need to be careful that you don’t miss someone just because they’re not part of the business.

Charles Yuan [00:24:51]:
Or surely this investment property is not in my name. You have to think a bit broader to capture everything and then exclude them. So that’s where I find most mistakes are commonly made in determining whether assets are included or not. You go, that’s surely not included. Without actually analysing what connected means under the tax legislation.

Joanna Oakey [00:25:18]:
I’ve seen some interesting examples over time where decisions by accountants or advisors in relation to the distribution of things like dividends or capital from trusts has had an interesting impact of extending the range of people who are considered associates, or whatever the terminology is, for being connected and having their assets considered part of this maximum net asset value test. Are there any sort of warnings that you would give accountants, number one, how can that appear? How can that happen? And what are the warnings, I guess, for compliance accountants who might be working with their clients in an annual basis and working out who to send dividends, who to send distributions to from trust. What should they be thinking about before they’re extending the range of beneficiaries under a particular trust that are getting a distribution?

Charles Yuan [00:26:27]:
Yeah, the magic number is 40%. The magic number for connected under tax legislation. So if you have any shareholding or unit holding or even distributions of income capital, anything that’s 40% or more to a particular person or entity, even if they’re not technically part of the family, thai family group, the first question you should ask yourself is this entity or person that’s having the 40% or more interest considered connected? There’s different interpretation, but tax legislation, unfortunately, is usually quite black and white about whether it’s included or not. You just have to work through the legislation. Go. Is it considered connected? Is this considered 40% holding or 40% interest? And if it is, you’re caught. So what? Family trust is very common in Australia and across Australian businesses. So family trust, unfortunately, also pulls up a lot of complexities when we’re talking about capital gain, where you have a family trust, and this is very important for the compliance accountants out there.

Charles Yuan [00:27:55]:
If you know your client’s looking to sell an asset, a major capital gain asset, always talk to an advisor if you don’t know the answer yourself about how to manage the trust distribution for the next year, because the trust distribution of that year, of the year of the game, determines potentially who will be connected.

Joanna Oakey [00:28:20]:
Fascinating. I just think that’s such a good warning because, as I say, I’ve actually seen, I’ve seen that play out and I’ve seen it create issues, tax issues for sellers before and had, they had no idea at the time. They’re just merrily sending some distributions out to kids who are adult age or whatever the case may be, without idea that they’re actually setting themselves up for this.

Charles Yuan [00:28:48]:
Well, I’ll give you a perfect example of where client reigns in trouble. So I had a client where husband owned a business in a trust that he set up. Wife owned another business that in a trust that she set up. So husband trust owns husband’s business, wife trust owns wife’s business. In some of the previous years, the wife’s trust that the wife owns, the wife’s business distributed its income to the husband and vice versa. So if they were to look in, either of them were to look into sell their business in that income year, both the husband and wife’s business would be caught and put together in that $6 million net asset test, which they would have failed. Right. So there was another classic example of the client coming for early advice before they did anything.

Charles Yuan [00:29:46]:
And we said to them, look, if you were to do this, you won’t be able to get concessions. So what do they do? They delayed it for another financial year. Next financial year, they did things differently, and they send out a two to three year, um, window before they attempt the sale again. And, you know, that’s just, like I said, classic example of getting early advice. Because if they didn’t get that early advice and just went ahead and sold their business, and guess what? A couple million dollars of tax that the government would be more than happy to collect.

Joanna Oakey [00:30:25]:
Just like, once again being really clear, what we’re talking can be like a couple of million dollars here that’s either in your pocket or in the ATO’s pocket. Oh, gosh, just look. Just such a great, this is just such a great example of the real benefit of working so closely together as a deal team of having advisors who are looking out for those sorts of things, getting prepped before sale and making sure you’re asking the right questions. Was there anything else about this, Charles, that we hadn’t talked about that you felt we should? I feel like we’ve given it a pretty good, thorough go, but I may have forgotten something. Who knows?

Charles Yuan [00:31:07]:
Point I want to add, and it’s free advice for all the advisors out there listening. It’s in the legislation. It’s just, if you look carefully, you’ll know it when you’re looking at the net asset test. But when you’re determining whether your clients potentially satisfy all the conditions to get the small business CET concession, the net asset test is performed immediately before the CGT event. So again, that’s why you should ask your client to engage with you early, because if at a certain point in time, their assets are over $6 million, but they haven’t signed the contract yet, it’s not the end. You got time to plan and restructure the business so that it potentially could be under. And that’s exactly what we did with our case study.

Charles Yuan [00:32:09]:
And I think that’s an important point that advisors out there needs to realise is just because at this point in time, you can’t satisfy all the conditions. It’s not end of the world, it’s not end of the roads. Think about how you can plan it up until CT event date, which is the date that you signed a contract.

Joanna Oakey [00:32:32]:
That is such a good point. That. What a fantastic point. That sort of particularly important point about the calculation of that net asset value. Charles, can I just say, a huge thank you. That was a lot of fun, and it was fantastic to work with you in this deal. So excited when we’re able to get such great outcomes for our clients as well. Just.

Joanna Oakey [00:33:00]:
It’s just one of those things that sometimes really makes your job just a joy.

Charles Yuan [00:33:05]:
Absolutely. It’s a big headache for six months while you’re wondering whether it’s going to work. But once everything fits in perfectly and works at the end and you get that great results, it just. You get that satisfaction. I’ve done my part professionally, but I also made someone else’s life better.

Joanna Oakey [00:33:28]:
Yeah. And really, in a very tangible way. Look, thank you so much for coming onto the podcast. So good to work through the mechanics of how all of that worked. And, like, congratulations, bloody good outcome, and fantastic. Thanks for being so great to work with, Charles.

Charles Yuan [00:33:47]:
That’s right. I’m happy to come and talk tax anytime you want, but, yeah, I guess there are other topics I don’t want.

Joanna Oakey [00:33:57]:
To tax is boring. Right. But I think when you see the headline, here’s a way that you might have 2 million more in your pocket at the end of the day. I think suddenly it moves from boring to intensely interesting, Charles. So there you go. Love it. Okay. You have a brilliant day, Charles, and thanks for coming on board The Deal Room podcast.

Charles Yuan [00:34:16]:
All right.

Joanna Oakey [00:34:19]:
Sorry. One thing I didn’t ask is if our. If any of our listeners are looking to make contact and they want to get prepared in advance, which obviously should be the very clear message out of today’s podcast, how do they do that? How do they get in contact with you?

Charles Yuan [00:34:37]:
Yes, just search for Prosperity Advisers Group. We have offices in Sydney, Newcastle and Brisbane and find my details on the website. Charles Yuan, give me a call or email. Happy to help you out anytime. Anything tax-related, it doesn’t have to be about deals. It can be about operation or strategic restructuring-type stuff as well. So I’d love to help businesses with tax and yeah, wonderful.

Joanna Oakey [00:35:09]:
Love it. Charles, it’s been a lot of fun. Fabulous recording this. Thanks for coming onto the show. And if you missed those, those details because you are running along the beach right now or on your commute into the city or whatever, don’t worry, we’ve got it all in the show notes. So click into the show notes and we’ll link straight through to Charles there and Prosperity Advisers Group. Charles, thanks for coming on The Deal Room Podcast.

Charles Yuan [00:35:33]:
Yep, love being here. Thank you, Joanna.