You and Harvey
You can’t stand Harvey. He’s an accountant in the same suburb, and you have some mutual clients. Harvey’s rude, arrogant and full of a sense of his own importance. He has little respect for lawyers generally and seems to think himself a superior person to you. In the past you have lost clients where Harvey has said bad things about you.
Charlie and Chloe and the business succession
Now you have instructions from Charlie to act for him on the sale by his family company of a surplus business building for $750,000. Charlie tells you he is winding down and handing over his business to his daughter Chloe. You ask Charlie if he has taken accountant’s advice and your heart somewhat sinks when he tells you that yes, Harvey has talked to him about it and everything is under control.
Working with Harvey
Then Harvey calls to confirm that Charlie is his client so do not finalise the transaction without consulting him. With gritted teeth you say you will write this down in your diary.
But then things go awry
But when the time comes you find that Harvey has departed on what you are told is a very prestigious golf tournament and is not to be disturbed. You ask if Harvey left instructions about Charlie’s matter but told no.
You can’t delay settlement so go ahead. The property is subject to a mortgage, so you organise with the bank to pay it out from the sale proceeds.
Charlie had said he could organise something else – that Harvey mentioned something about organising something else – but you said why bother? It’s too easy.
Sometime later you get a call from Harvey – he’s back – and angry. Why on earth, he splutters, did you pay that mortgage off like that? I told Charlie he should sell some shares to do this. You’ve cost Charlie thousands in tax – you’ll be hearing from his lawyers about this!
You say what on earth are you on about and for goodness sake calm down – and anyway you were meant to leave instructions, but you didn’t!
Your first sting
It turns out that the debt secured by the mortgage was a personal debt of Charlie so that the payment of $750,000 to the mortgagee was effectively a payment to Charlie and therefore a dividend under section 44 ITAA 1936.
Your second sting
You also find out that Charlie qualified for the 15 year small business CGT relief under Division 152 ITAA and that the capital gain – $500,000 – could have been paid first to Charlie tax free and secondly into his super fund which could then pay him a tax free pension from tax free investments.
There are significant hoops to jump through to qualify for the 15-year small business CGT relief, including that the sale must be “in connection with” the relevant person’s retirement. Which, in Charlie’s case it was. Harvey was quite proud of his specialised knowledge in the area.
How bad was that, you gloomily reflect, even if it was really Harvey’s fault.
It’s Harvey’s turn to be stung
Although Charlie won’t talk to you any more Chloe is a bit sympathetic and keeps in touch enough to tell you that Harvey arranged for Charlie to transfer his shares in the same company to Chloe and how clever he is because no stamp duty!
You point out that’s not “clever” because duty on share transfers has been abolished since 1 July 2016 (section 34) and ask her what value of real estate does the company still own? Still over $5 million, she replies. That’s good, you reply, and did Harvey happen to mention you’d have to pay duty at normal property rates because landholder duty still applies?
For a bit Chloe is unsure what you mean but when she absorbs it her colour changes and she storms off in a fury – to make the obvious call.
When Harvey calls it is obvious he has no idea about landholder duty. When he calms down a bit you explain that under Chapter 4 of the Duties Act, the transfer of a majority shareholding in a private company owning land valued in excess of $2 million is subject to duty at normal property transfer rates – so that the transfer of all the shares from Charlie to Chloe will attract landholder duty of $235,500!
The phone goes down with a bang. And you feel a bit better.
- Solicitors and accountants should be friends.
- Every transaction involving a company has potential tax issues.
- Landholder duty remains an issue under the Duties Act.