Download Have You A Plan If A Business Partner Dies?

Issue August 2006
INDEX
Are You Buying A Franchise? ................................................ 1
Are You Planning To Sell Your Business? ............................ 1
Undeducted Contributions – How Do They Work Now? ...... 2
Have You A Plan If A Business Partner Dies? ...................... 3
State or Territory Tax Audits - 10 Point Checklist ................ 3
Assistance To Commercialise New Technology................... 4
Are You Buying A Franchise?
If you are buying into a franchise: Have you reviewed the franchise systems manual?
 Have you evaluated the training and support that the franchisor will give you?
 Have you reviewed the sort of information that the franchisor requires?
 Have you contacted the franchisor to ascertain what the franchisors
requirements will be relative to the transfer of the franchise?
 Have you talked to other franchisees about their perceptions on the franchise?
 What does the vendor intend to do after the sale?
 Will the vendor sign a Restraint of Trade Agreement?
These and many other questions need to be answered about the business you are contemplating buying.
Are You Planning To Sell Your Business?
From the moment you acquire or commence a business you should assume that one-day you will want to
sell it or merge it with another business. To enable the best possible return, you should always keep the
business in a “saleable-state”. If you decide to sell your business today and want it listed for sale in 6
weeks time, most probably, you will not be giving yourself enough time to maximise the potential return.
Ideally, the best way to sell a business is over a 2 – 3 year period. This period will allow enough time to
fine tune the financial results and ensure that appropriate systems and records have been put in place to
enhance the value of the key intangible asset in the business – Goodwill.
Goodwill is an intangible asset. This means that its value is in the ‘eyes of the
beholder’. Whilst your personality, skills and marketing ability have been important
in the establishment of the business, when someone looks to buy it, they ask: Can the business function without you?
 If you are not there will a lot of the customers walk?
 If you are not there will the loyal staff remain?
 If you are not there will the suppliers continue to supply at negotiated terms?
Another key question that a purchaser will ask is “Is there a system?” Systems
mean that the business can operate without the owner. It is recommended that you prepare a detailed
summary of what happens in the business with delegation to management and staff so that the business
can function effectively, whether you are there or not. If it can, and the business is profitable then this
should mean that you could significantly enhance the valuation of goodwill in the sales negotiations.
Selling a business is very complex. There are also very important taxation and capital gains tax
implications in the sale of a business. You should seek our advice to enhance the value of the business.
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“If you are failing to plan, you are planning to fail”
Undeducted Contributions – How Do They Work Now?
In the May ‘06 Budget, the Treasurer announced a $150,000 limit of undeducted contributions to super
funds. Undeducted contributions are those made from a person’s after-tax income and where a tax
deduction is not claimed for the amount of contribution.
Subsequently, a Government press release on 13 June 2006 announced an
“averaging” concession where taxpayers can spread the cap over three years
and make a contribution of $450,000 to utilise 3 year’s worth of cap in one
year. This measure was to help facilitate larger one-off payments. We
understand that it is Treasury’s intention that this will be an ongoing measure
rather than a temporary measure.
Treasury then released a Fact Sheet on 30 June 2006 which provides further
details on how it is proposed that undeducted contributions can be made
under the transitional arrangements. Further, it is proposed that any
contributions above the cap and the earnings on those contributions will be
taxed at the top marginal rate (45%) and returned to the individual.
Currently, there is no work test for a person under age 65 who wants to contribute into superannuation.
However, once that person reaches age 65 a work test must be met. The work test is at least 40 hours in
a 30-day period. These requirements are not expected to change under the new legislation.
A person aged 64 does not have to meet any tests to be able to make contributions to superannuation, but
someone aged 65 does. The Fact Sheet states that a person who makes a $300,000 contribution at age
64 must meet the work test at age 65. If they are unable to meet the work test, the excess contribution of
$150,000 will need to be returned to them. Similarly, if you were to make a contribution of $450,000 when
you are still working at age 65 and then retire, you will need to meet the work test at age 66 and age 67.
This proposed requirement will make it extremely difficult to track when contributions are made for
members and will add to the already onerous responsibilities of trustees of superannuation funds. The
removal of the tax on withdrawals makes superannuation a very attractive vehicle in which to hold funds
for retirement. Limiting the amount of undeducted contributions that can be made into a superannuation
fund is the Government’s way of ensuring that the concessions provided to superannuation are not
abused.
In our view, the proposals that Treasury have outlined in the Fact Sheet go a considerable way to
reintroducing the complexity in superannuation that the Treasurer has attempted to remove. The
$450,000 cap is designed as a transition to retirement measure to enable people to fund for retirement
while the Fact Sheet introduces complex retrospective measures designed to frustrate the purpose of the
simplification measures.
Note that this is all based on announcements, proposals, press releases and fact sheets so we eagerly
anticipate the final legislation to see how it will operate in practice.
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Have You A Plan If A Business Partner Dies?
What would happen if your business partner died suddenly?
Indeed, what would happen if you died?
Planning for the death of a partner in a business must be looked at from both
sides of the equation. What are the needs and expectations of the survivors
in the business and the members of the deceased estate?
Contingency plans for the death of a business partner can be incorporated
into a Buy/Sell Agreement. A properly drafted Buy/Sell Agreement with
appropriate insurance covers should ensure that there is sufficient cash to
enable the deceased partner’s estate to be paid out. What you need to do is periodically update the
Buy/Sell Agreement. Make sure it reflects the current value of the business and try and get insurance
covers on the partners that reflect the value of their share in the business. It is very important that a
commercial solicitor drafts the Buy/Sell Agreement, checks the company documentation and Wills, to
ensure that, in the unfortunate event of a premature death, the business will be able to survive and the
deceased partner’s estate to be paid out.
As part of forward planning, business people should consider making an Enduring Power Of Attorney. An
Enduring Power Of Attorney provides the documentation relating to the appointment of a power of
attorney to be enacted if the person subsequently loses their mental powers or is in capacitated.
Normally, an enduring power of attorney is made in favour of a spouse, relative or friend, and gives the
power to act for you if you can no longer act for yourself.
How long is it since you reviewed your Will? Indeed, do you have a Will?
There is also some basic information that you should be summarising to assist in the administration of
your affairs in the unfortunate event that administration is required. This would relate to trade secrets of
the business and agreements reached with key suppliers that might not be fully documented. Writing
down many of the business issues will assist the successor in running the business.
It is very important that business people implement proper plans to ensure that, if something does happen
to them, due to death or permanent incapacity, there is a structure in place that will enable the business to
continue. We recommend that you consult your commercial solicitor for a review on these matters as part
of an annual legal check-up.
State or Territory Tax Audits - 10 Point Checklist
The issues that auditors focus on when conducting a State or Territory Tax Audit include ensuring:
1. that taxable wages for pay-roll tax purposes include:
 wages;
 bonuses;
 allowances;
 superannuation;
 FBT; and
 directors fees;
2. that payments to contractors are subject to pay-roll tax where there is no exemption applying (or
where the contractor can be argued to be a common law employee in jurisdictions where there are
no specific contractor provisions);
3. that only one Australia wide threshold is claimed where entities are grouped for pay-roll tax
purposes because of :
 a corporations law grouping;
 common control;
 the use of “common employees”; or
 common beneficiaries of trusts (in some jurisdictions);
4. that pay-roll tax is correctly paid on wages in the relevant jurisdictions and that thresholds are
correctly apportioned between jurisdictions;
5. that duty is correctly paid in respect of transfers of dutiable property, hiring charges and leases;
6. that grouping of commonly controlled companies is recognised for land tax purposes;
7. that penalties and interest are applied in instances where underpayments are detected.
(continued over)
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In NSW there is specific legislation covering additional aspects as follows:
8. that trust distributions are recognised as wages where a beneficiary works in the business
conducted by a trust and a wages shortfall occurs;
9. that wages includes an amount for the grant of shares or options where appropriate;
10. that wages include payments to or by third parties where appropriate.
It is possible that other jurisdictions will adopt the NSW provisions in light of discussions on a uniform
approach to what constitutes wages for pay-roll tax purposes.
Assistance To Commercialise New Technology
Do you have a technology and need some assistance to commercialise it? Developing a new technology
can be a lonely and costly affair.
The Australian Government wants to encourage Australian inventors/entrepreneurs to develop their
technology in Australia and for this reason has developed a unique product called COMET
(Commercialise Emerging Technology). COMET is an Australian-wide competitive programme whereby
applications are judged on two components, Eligibility and Merit. To be eligible, the technology must be
under 5 years old with a turnover under $4M.
AusIndustry, on behalf of the Federal Government, administers the COMET Programme and has
appointed 15 private contractors as Business Advisors who are located in all capital cities as well as
Townsville, Gold Coast, Sunshine Coast and Newcastle.
The Business Advisor will assess whether your technology is likely to be successful in a COMET
application and will then assist you in the application process. If you are successful, the Federal
Government will supply initial funds up to a maximum of $64,000 on an 80% grant basis. There is a
possibility that you might be able to apply for a further $56,000 on a dollar-for-dollar basis.
The money is used to engage consultants to prepare the documentation that you will need to attract
investors to your company. Documents that are funded by the COMET Programme include:
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Market Analysis and Research including a Marketing Planning;
Export Market Research;
Market Validation;
Management Team Organisational Structures and Training;
Intellectual Property Strategies including analysis of patents, trademarks, etc;
Independent Reports;
Assistance to complete prototype;
Business Plan incorporating budgets & cashflow forecasts; and
Business Valuation and Information Memorandum.
The COMET Business Advisor acts as a mentor and coach to assist you in
working with the consultants and in training you to become “investment ready”.
COMET statistics are quiet interesting. The COMET Programme has been running for 5 ½ years. 1,237
companies Australia-wide have been admitted to the COMET Programme.
Capital raisings of
approximately $380m by 445 companies.
If you would like further discussions about the COMET Programme we would be happy to introduce you to
a COMET Business Advisor or you can log on to www.ausindustry.gov.au to obtain further information.
An Important Message
While every effort has been made to provide valuable,
useful information in this publication, this firm and any
related suppliers or associated companies accept no
responsibility or any form of liability from reliance upon
or use of its contents. Any suggestions should be
considered carefully within your own particular
circumstances, as they are intended as general
information only.
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