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Capital gains tax when transferring a business to a family member

WRITTEN BYJames Price | JPAbusiness

Young man and older man together in a workshopThe key CGT issue when transferring assets in a non-arm’s length transaction (i.e. the sale price may not be at fair market value) is the market value substitution rules.

These rules basically mean when you’re selling assets and the transfer is deemed to involve parties not acting on an arm’s length basis, then the CGT rules impose what would be a fair market value on the transaction.

[This information comes from our eBook: Capital Gains Tax 2.0 – Issues to consider when selling your business.]

For example:

Mum and Dad have shares in a company with a business in it.

Mum and Dad give the shares to Junior for $Nil consideration.

The market value substitution rules then apply, which means the Tax Office would impose a deemed market value on the disposal.

Mum and Dad would then pay CGT on the deemed proceeds of the transfer of the shares to Junior.

The Office of State Revenue for NSW would also be interested to ensure the parties are dealing at fair market value, because they want to collect stamp duty on the transfer.

When transferring business assets to family members you can structure the deal to allow for progressive buyouts over a period of time, thus spreading out the tax burden.

For primary production businesses in NSW, inter-generational transfer stamp duty relief provision can be applied (i.e. the family farm exemption) to the transfer of an interest in primary production land and associated farming equipment, either directly to a relative or to certain trusts and companies involving relatives.

For information on other CGT-related issues, download our free eBooks: 

 

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The information contained in this blog is general in nature and should not be taken as personal, professional or taxation advice. You ought to make your own inquiries and seek independent, professional advice before taking action or relying on any information in this blog. As Capital Gains Tax legislation is subject to change, we cannot guarantee the timeliness of the information provided.
Last updated November 2019.

 

About James Price | JPAbusiness James Price has over 30 years’ experience in providing strategic, commercial and financial advice to Australian and international business clients. James’ blogs provide business advice for aspiring and current small to mid-sized business owners, operators and managers.