Business succession planning for advisers is currently a major focus for the financial advice sector. Consistent with the broader Australian demographic, the average age of principals is increasing, with a high percentage looking to retire within the next 10 years.
The current turmoil in financial markets has resulted in a reduction in revenue for all advisers, but with no less effort — and many would argue more — required to generate it. Principals are therefore focusing on ways of reducing costs to maintain profitability.
It follows that sharing costs with other principals, on whatever business model — be that via merger or association — shifts the focus to succession planning arrangements.
In my experience, advisers encounter a number of fears and uncertainties in the succession planning process, such as:
- what is it going to cost for professional advice?;
- the tax and stamp duty costs will be prohibitive;
- I don’t have time to focus on this;
- who will I sell my practice to, how, and for how much?; and
- where do I start?
The key message for advisers is not to be scared off by the tax and other costs of the succession planning exercise. You should focus on the commercial aspects of your succession planning and let your advisers worry about its revenue implications. In reality, capital gains tax (CGT) is not likely to be a major hurdle to any succession planning exercise now because of the availability of CGT rollovers and small business concessions (outlined below).
This article focuses on planned succession rather than unplanned succession resulting from death, disability or trauma. One would hope that financial advisers have the appropriate insurance and risk management strategies in place to deal with these unplanned events.
Some alternatives
There are a number of different ways to structure a succession transaction:
- an outright sale of the business to other financial advisers;
- a merger with another practice, possibly as the first stage to an exit arrangement;
- introducing employees to equity as part of a staged exit strategy;
- a buyer of last resort for some dealer groups; or
- an association (discussed below).
Association of practices
Under this association of practices model, each principal retains their own business. All costs are incurred by an entity — such as a company or unit trust — in which the principals can have equity. The ‘back-office’ entity enters into commercial arrangements with each principal and operates as a standalone commercial business.
There are many benefits to such a model. For example, many advisers are reluctant to enter into partnerships for fear of incompatibility — a failed partnership is like a failed marriage, and divorce is never pretty.
The shared back-office can be a convenient ‘engagement’ for advisers wishing to get to know each other while offering the benefits of shared expenses, increased marketing and practice development resources, specialisation and so on.
The engagement may ultimately lead to marriage — but it does not have to.
Start planning now
The best laid succession plans are made several years in advance of the actual transaction. Financial planning is a long-term exercise to build wealth. Similarly, succession planning should be a long-term plan for succession. Advisers who may wish to implement a succession plan some time in the future should commence the process now.
For example, business and personal asset holding structures should be reviewed to ensure they are appropriate, and to ensure maximum access to available concessions at the time of a transaction.
A process
The succession planning process can be addressed using the following steps:
other legal issues;
Consider the existing structure of the business — for example, a sole trader, partnership, company or trust. Is the existing structure designed to allow maximum access to the small business CGT concessions and provide asset protection?
If the business is operated by a family trust it is not possible to introduce other equity holders into that vehicle, so it will be necessary to restructure.
For example:
Capital gains tax concessions
It is a common misconception that ‘half of anything I get for the business will be lost in CGT’. This is seldom, if ever, the case.
All taxpayers, other than companies, are entitled to a general 50 per cent CGT discount on the sale of a business as long as the business has been held for 12 months or more. Companies may be significantly disadvantaged by not being able to access the 50 per cent CGT general discount if the small business CGT concessions don’t allow for a similar outcome.
The small business CGT concessions have been expanded considerably since their introduction around 10 years ago. While the situations where the concessions can be accessed have increased dramatically, providing a significant potential tax saving for small businesses in Australia, the complexity of the provisions has increased proportionately, such that there are often a number of intricacies to be aware of, and conditions to be satisfied, to access the concessions.
For example, if a succession transaction involves a sale by a family trust of shares in a company, it is important that all distributions of income and capital in the year of the transaction are structured so as to ensure that the trust can access the concessions.
Advisers are urged to seek advice on the requirements that may need to be satisfied well in advance to ensure maximum access to the small business CGT concessions.
A critical threshold issue for accessing the small business CGT concessions is whether the net value of the business assets of the relevant adviser and their ‘family group’ are less than the $6 million threshold. The test looks at the taxpayer, ‘connected entities’ and ‘affiliates’.
The rules for determining who is a connected entity or an affiliate are quite complex. In some cases, taxpayers who may be close to the $6 million threshold may need to determine which entities are and are not connected. That may have a critical bearing on access to the concessions, hence the need to take advice on the concessions well in advance.
A recently introduced alternative to the $6 million net assets threshold is the $2 million turnover threshold. In general terms, if the turnover of the financial advice business is less than $2 million in the relevant financial year, the business entity qualifies as a small business entity, gaining access to the small business CGT concessions regardless of the net assets of the taxpayer and connected entities and affiliates.
This turnover test allows a much larger group of small business taxpayers to access the concessions.
Conclusion
Smart advisers have already devised a business succession plan and have sought advice on the legal and revenue implications of the different ways of achieving their plans. They have discovered, to their pleasant surprise, that the CGT implications of the restructure are generally less than they thought — and are certainly not such as to be prohibitive.
Smart advisers don’t procrastinate — they consider their alternatives, obtain advice, and implement a plan that provides maximum benefit to them.
Peter McKnoulty is a partner at McCullough Robertson Lawyers.
