Dear Fellow Trustee
We trust you are well and prospering.
As we head into the final few working weeks of the year, we implore you to seek our advice when selling a business or dealing with any Trust assets.
We are often approached by clients after a business, property or Trust asset has been sold or bought to find that if a different strategy, method or process had been adopted there could have been major tax savings or less onerous conditions or better net results achieved.
However, the agreements have been signed, the deal has been done and it is in most cases too late to change the course of action to achieve a better outcome or result.
SO, to use the old clichés; a stich in time saves nine! Failing to plan is planning to fail!
As the Independent Trustee we are here to assist you with your structure, assets and businesses to ensure that you obtain the optimal outcome and results and tax efficiencies when you buy or sell any assets.
We set out below an example of ill-considered actions that may cost you a fortune in losses or taxes:
Example: A Trust is the owner of all the shares in Company “A”. The client is approached by a potential buyer to purchase the business. The offer is substantial and without obtaining any advice the clients accepts the handsome offer for the sale of the business and signs an agreement prepared by the buyer.
So far so good, however a number of gremlins lie in wait for the ill advised, namely:
1. Paying too much tax.
2. Agreeing to onerous conditions.
3. Having the purchaser slip out of the deal on a technicality from a trust law perspective.
4. Having the deal set aside due to non-compliance with the provisions of the Company’s Act.
On the Tax Component:
The tax planning component of a deal is vital. There are a number of possible outcomes which can result, based on the circumstances of the transaction.
Outcome One: The Business is sold from Company “A” to the purchaser
The tax position will be as follows:
• The capital gains tax consequences will be 18.6% of the gain for Company “A”, PLUS
• a further 15% dividends tax for the shareholder before the receipts flow to the shareholder (assuming there are no shareholder loans).
This amounts to just under 31% in overall taxes!
Outcome Two: The shares of Company “A” are sold to the purchaser
The tax position will be as follows:
• a maximum of 26.67% in the Trust or
• a maximum of 13.3% in the hands of the donor of the shares to the Trust in terms of the attribution principles, (this allows for the funds to remain in the trust but the individual is taxed) or
• by utilizing the conduit principle the capital gains tax may be zero to a maximum of 13.3% when the gains are attributed to the beneficiaries.
It would seem therefore, that outcome 2 would be the most tax efficient solution. This, however, may not always be the case.
Outcome Three: The Company has a high base Cost and the shares, a low base cost
In this instance you would sell the asset from Company “A” to the purchaser as this will result in lower taxes even though the capital gains tax rates combined with the dividends tax are higher, as the shares have a low or no base cost and may result in higher taxes even though the capital gains tax rates of the Trust and or beneficiaries are lower.
As is noted above this can be a minefield!
On the legalities:
It is amazing that sellers will allow the purchaser or other party to draw up the contract and then wonder why there are a host of nasty conditions lurking in the agreement once these conditions become apparent or transpire!!
SO, the bottom line is, if you are the seller, you drive the agreement to protect your rights and set the deal out as you understand it. Many a seller has been caught unawares on this very simple principle.
On the Trust law issues:
It is vital that the Trustees attend to the necessary resolutions and ensure that they are correctly drafted and in place to ensure that the deal cannot be invalidated on the basis that the party representing the Trust is not duly authorized. Countless deals have fallen through due to this very simple oversight. The legal position is simple, the Trustee representing the Trust must be duly authorized and act within the scope of the authority bestowed on them failing which a transaction can be invalidated.
On the Company Act issues:
On the event that a Company sells a major asset or it business, the shareholders of the Company must authorize the transaction. As a Trust ordinarily holds the shares of the Company this will require a resolution by the Trust to this effect. It is critical that this provision of the Act is complied with failing which a purchaser can invoke the non-compliance of the law as an easy way out of the deal. Many an unsuspecting seller has been caught out by not ensuring the legal formalities have been complied and have lost the deal, staff, confidential information and other opportunities.
SO BE WARNED!! It is not always as simple as shaking hands on the deal.
Let’s us HELP you to ensure that you do not encounter the problems and pitfalls listed above!