Transition To Retirement for Business + Commercial Property Owners
Written by: Samantha Butcher | Canny Advisory
Retirement marks a significant milestone in one’s life, especially for business and commercial property owners. There are a number of reasons why you may be considering retirement. Perhaps it is your age, your health, a change in your personal or business relationships, or perhaps you have had an offer too good to refuse!
Regardless of your reason, the transition into retirement entails careful planning, strategic decision-making, and a comprehensive understanding of financial, legal, and emotional aspects.
Do not underestimate that last point, the emotional aspect. For individuals who have invested their time, effort, and resources into building and managing businesses and properties, stepping away and retiring may be more difficult than you expect!
Retiring When You Own a Business +/or Commercial Property
Business and commercial property ownership often intertwine, with many individuals diversifying their portfolios by owning both.
However, as retirement approaches, you will need to consider whether you sell both the business and the property associated with it, or whether you sell the business but retain the office space/factory/workshop.
You will need to consider your total assets, any liabilities, and future goals. Owners must evaluate the market value of businesses and properties, considering factors such as location, condition, and potential for growth or redevelopment. Additionally, understanding the legal and tax implications of divesting assets is crucial in formulating an effective retirement strategy.
As a business and commercial property owner, you will have unique challenges you will need to consider as you transition to retirement, including (but not limited to):
- Succession Planning: if you would like to sell your business (as opposed to winding it up), identifying and preparing successors or finding suitable buyers for the business and properties is essential. When choosing a successor, you will need to consider family dynamics and the business acumen of the prospect(s).
- Financial Security: can you afford to retire? How much will you need year on year to fund your retirement? Do you have enough capital to sustain this income need? The answers to these questions may help you decide if you sell the freehold, or take on a tenant (for example).
- Taxation + Legal Matters: structuring your transition to retirement in a tax-efficient manner and navigating legal complexities such as property transfers, leases, and contracts demand expert guidance. Consulting with financial advisers, lawyers, and tax professionals is integral to mitigating risks and maximising benefits.
- Emotional Preparedness: as stated earlier, this may be one of the most difficult of challenges you will face, and therefore should not be underestimated. Owners must mentally prepare themselves for the emotional aspects of retirement, finding fulfilment in new pursuits and hobbies.
In the end, everybody has retirement on the horizon, so why not make sure you’re planning for it? You can fin everything you need to know about preparing for retirement planning in another of our articles; Everybody Retires… So Why Do I Need To Plan For Retirement?
Mitigating Risks + Planning For Your Retirement
So, what can you do to help mitigate some of these challenges?
- Start Early: planning for retirement should commence years in advance, allowing ample time to address any gaps in savings, succession planning, or legal arrangement.
- Property Valuation: get a professional valuation of your commercial properties to understand their current market value.
- Exit Strategy: develop a clear exit strategy for your business and commercial properties. Regardless of whether you decide to sell the property, transfer ownership to family members or business partners, or lease to an outside party, you must have a solid exit strategy. Notify all parties that are listed in your exit strategy, so everybody knows where they stand.
- Tax Implication: understand the tax implications of selling or transferring ownership of your properties. Consult with a tax adviser to minimise tax liabilities and take advantage of any available strategies that are specifically targeted towards retirees. For example, there are four capital gains tax (CGT) small business concessions that companies can utilise upon the sale of assets; the small business retirement exemption is one of them. For business owners who are considering retirement, this can be quite a lucrative option.
Tax Implications To Keep In Mind
Capital gains from the disposal of active assets may be disregarded up to a lifetime limit of $500,00 per individual, or CGT concession stakeholder for a company or trust. It is important to seek professional advice to see if you qualify for the small business retirement exemption.
The Australian Tax Office states an asset passes the active asset test if it has been an active asset of yours for at least:
- 7.5 years during the test period (if you’ve owned it for more than 15 years); and
- Half of the test period (if you’ve owned it for 15 years or less).
The test period begins when you acquired the asset and ends at whichever occurs first:
- The Capital Gains Tax (CGT) event relating to the asset; or
- The business ceases or is sold, if the CGT event occurred 12 months or less after this.
Interestingly, to select the small business retirement exemption, you do not need to obtain actual capital proceeds from the CGT event. This might occur, for instance, in non-arms-length transactions or in the event that an active asset is gifted and the proceeds, if any, are below market value. The market value substitution rule would be applicable in this situation.
Small Business Retirement Exemption
Needless to say, there are other eligibility criteria that need to be met in order to qualify for the small business retirement exemption. The team at Canny Group, including our accountants who specialise in small businesses, and experienced financial advisers and lawyers, will be able to help determine a) if you are eligible and b) if this course of action is right for you.
- Diversify Investments: beyond business and property ownership, diversifying investments across asset classes such as shares and fixed interest can provide stability and income during retirement.
- Seek Professional Guidance: engaging with financial advisers, estate planning lawyers, and business brokers with expertise in retirement planning can offer valuable insights and ensure comprehensive solutions tailored to individual needs.
- Estate Planning: update your estate plan to reflect your retirement goals and intentions for your business and commercial properties in the event of your incapacity or death. Consider creating a will, establishing trusts, and nominating beneficiaries.
- Embrace Change: embracing retirement as a new chapter in life, filled with opportunities for personal growth, leisure, spending quality time with family and friends, can ease the emotional strain of letting go of the familiar.
Canny Advisory + Retirement Planning for Business Owners
Retiring as a business and/or commercial property owner is a significant life transition that requires careful planning, foresight, and adaptability.
By addressing challenges, considering key considerations, and implementing strategic measures, you can navigate this journey with confidence and peace of mind. Ultimately, retirement marks not just the end of an era but the beginning of a new adventure, filled with possibilities and fulfillment beyond business and property ownership.
Seeking financial advice prior to retirement provides you with the knowledge and guidance needed to make informed decisions, optimise your financial situation, and increase the likelihood of a secure and comfortable retirement.
This is where Canny Advisory’s financial advisers are experts! Our advisers can look into your financial situation and provide an expert plan for your retirement that is tailormade for you and suits you best!
Get in touch with our team to find out how we can help you kick-start your retirement planning today.
